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Author Topic: Channel conflict with distribution-retailers-manfacturers  (Read 7203 times)
Dav
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« on: December 17, 2001, 08:28:00 PM »

Taking the hint from Ron's last post regarding a new thread, here it is.

Without further ado, I would like to throw out a few open questions to the collective (and notably to Gareth & Ron).

In my view, the standard distribution channels (ie. Manuf. to Distrib. to Retail. to Consumer) place an enormous pressure upon the manufacturer to promote their product to every single other level of the channel.  A manufacturer may not have a problem movng the first batch to distributors, but then we, as creators, then need to interest retailers, which, in the end, means interesting consumers.  The pressure to create a downward push on product movement is held almost entirely by the manufacturer.  This strikes me as odd due to two reasons:  

1) The distributor takes title to the products purchased.  They become the distributor's property to do with what they will.  Thus, on a business level, it becomes the interest of the distributor to "move" te product down the line.

2) The distributor bite takes a significant chunk of profit on the product.  (which, admittedly, puts pressure on manufacturers to push product faster, which means we need to promote down the channel)

Now, seeing that direct sales are generally worth twice what a distributor sale is worth (2.2, but figure some marginal cost for shipping, etc.), I am left wondering:  if we, as manufacturers are marketing to end consumers anyway due to channel conflict, why do I *want* to sell to distributors?  I understand the reasoning for the "big guys", but speaking as small to mid-size press, why?  I need to move half as much product in order to break even, and my marketing campaigns can have a direct and unfiltered measurement for success.  

Further, then, if retailers take a slight mark-up from distributors, why shouldn't I split the difference with them in terms of distributor cost and retailer cost?  In effect, what the hell good are those distributors to me?

I feel as though many smaller companies have been asking themselves this same question, and thus, the distribution racket is stumbling a bit.  Good, I say.  Apophis has been contacting retailers direct and undercutting distributors' prices, mainly because we don't see that the net benefit of being in "standard" distribution has been something we wish to continue.

Are others feeling this way?  Am I insane?

Where does everyone stand on this?  

Dav
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contracycle
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« Reply #1 on: December 18, 2001, 02:54:00 AM »

Hey, it could be worse: you could be selling CD's.
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Jack Spencer Jr
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« Reply #2 on: December 18, 2001, 06:15:00 AM »

Correct me if I'm wrong, guys, but isn't Dav's suggestion what nearly killed Marvel a couple years ago?  IIRC they tried to start their own distribution company and it failed miserably, bankrupting the parent company.

Part of the reason to use a distributor is so you don't have to do that work yourself.  Just ask Ron.  He uses a warehousing service (Tundra?) that way he doesn't have to store 2,000 copies of Sorcerer in his house, take orders, pack orders, ship orders, and essentially have no life.

In this sense, distributors and other such services are a necessary evil and the publisher would do well to to figure in dealing w/ a distrutor into the cost of the game.  Just remember there are lower-cost alternatives.  SHop around.

However, if a retailer approaches you for the game, either because they cannot get products from your distributor or you distributor is sold-out, then I see no reason to not cut this guy a deal on purchasing a couple copies.  It's up to you if he's a real retailer and not just a scam artist.



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Ron Edwards
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« Reply #3 on: December 18, 2001, 08:21:00 AM »

Hello,

Time to clarify a few things.

1) As with any mass-produced object, there are many manufacturers and many retailers, and it's too damn much effort for all of them to "find" and negotiate with one another.

The wide variety of manufacturers sells their products to a few distributors, and they sell the products to the wide variety of retailers. The theory is that manufacturer gets less per-unit profit by selling to the distributor, but he sells a buttload more units to many, many more stores.

2) Thus the distributors are a functional piece of the big picture when and if they are fewer and more stable than the manufacturers and retailers. That happens not always to have been the case.

A very serious issue arises when distributors are not stable. As it currently stands, they "hold the debt" for the industry in general, by paying manufacturers while waiting for retailers' payments. If they cannot be relied upon to do this consistently, then quite a few elements of the three-tier system go all kerflooey.

2) Dav (co-owner of the Apophis Consortium) is not describing the Marvel tactic, which was pretty much to be a manufacturer and a distributor at the same time. He is simply bypassing distributors, not becoming one.

His tactic makes use of a very important point: for most games, the number of retailers who reliably re-order the game, once sold, is few. So if you can identify them and deal with them directly, then the entire reason for having a distributor goes away - because the other stores out there might as well not exist; they aren't re-ordering your game anyway.

3) Tundra Sales Organization is not a distributor, but a warehouser/invoicer. Woody does not get title to the games and does not pay me for them initially; he collects commissions on sales. Basically, he's my "warehouse office" and "promotion consultant" as he is for several game companies (check out http://www.tundra-sales-org.com">Tundra for more info).

4) So far, this thread has wandered a tad from its point - my proposal that conflicts of interest occur in various places among manufacturer, distributor, and retailer. I am working on a large essay (bigger than the GNS one) about this, but I don't mind discussing it.

Best,
Ron
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GMSkarka
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« Reply #4 on: December 18, 2001, 09:53:00 AM »

My responses:

The distributor bite takes a significant chunk of profit on the product.

10% is "significant"?    Standard arrangement for a distributor is a 60% discount from the manufacturer, and standard terms for a retail client is 50% of MSRP...so the distributor...perhaps with some of the highest overhead in this industry (in terms of shipping, warehouse space and employees...often enough to result in higher overhead than all but the largest manufactureres) only has a 10% margin to work with.


if we, as manufacturers are marketing to end consumers anyway due to channel conflict, why do I *want* to sell to distributors?  I understand the reasoning for the "big guys", but speaking as small to mid-size press, why?  I need to move half as much product in order to break even, and my marketing campaigns can have a direct and unfiltered measurement for success.  

Well, assuming that you're talking about selling direct to the end-consumer....your reason for selling within the tiers is the maintenance of the games retailer, who represent more than just a sales outlet, but a social outlet that fosters the network of players necessary for the continuation of the hobby.  In short, good retailers offer a place to play, a place to meet other players, etc....most will NOT go direct with a publisher (for reasons I will go into below), so if you start denying them product, they will suffer, and as they suffer...so suffers the entire industry and hobby at large.

Further, then, if retailers take a slight mark-up from distributors, why shouldn't I split the difference with them in terms of distributor cost and retailer cost?  In effect, what the hell good are those distributors to me?

A couple of things.   First, retailers buy at 50%, and sell at 100% (on average).   That's not a slight mark-up.  That's the life-blood of business in this industry.  

Second...retailers will not go direct with publishers due to shipping costs, minimums and discounts.  Simply put, if you (as a publisher) are not planning on losing money hand over fist, you're going to have to set a minimum order level...otherwise shipping is a loss proposition for you.   But if Joe Retailer only needs 1 copy, what's he supposed to do?  By ordering 1 copy of 10 different products from 10 different manufacturers through the distributor, he gets around this problem.   Also, most distributors have incentive programs, increasing the discount depending upon the dollar value of the order, or offering free shipping on any order over a certain amount, etc.   In short, it makes financial sense for the retailer to get product through a distributor.

Also...even with order minimums that hypothetically are able to be met by retailers, no small or mid-size company is financially or logistically prepared to handle several hundred  seperate shipments to individual retail accounts per month.  The packaging and shipping costs alone would be more than most could bear.

I don't mean to be insulting to anyone...but arguments about going direct and assertions that there are major conflicts of interest between the tiers often are symptomatic of a basic misunderstanding of how each tier actually WORKS, and the interrelation between them.   I'm very interested in reading Ron's big essay, for this reason, since Ron doesn't often suffer from major misconceptions.   However...in this case....  well, we'll see.

Gareth-Michael Skarka
ex-distributor, ex-retailer, current manufacturer.
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Gareth-Michael Skarka
Adamant Entertainment
gms@adamantentertainment.com
Ron Edwards
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« Reply #5 on: December 18, 2001, 11:06:00 AM »

Hey Gareth-Michael,

Before all else, thanks for being willing to give me the benefit of the doubt in advance. You'll be one of the group to see the first draft.

This is a pretty tricky place to be discussing these things. Dav and I are maverick manufacturers with actual profit margins, and you are ... well, as you described in your tagline (too long to repeat). All of us have constant contact with other manufacturers and designers, distributors, and retailers, and we all know that some funky things have happened in the last month. Yet here we are, talking about this stuff in view of a lot of people who don't have those direct connections. What's "appropriate" is not easy to discern. I'll do my best.

FIRST THINGS
I do not speak of irreconcilable differences or conflicts among members of the tiers. However, I think the "myth of transparency" should be revealed as the denial that it is. This is the idea that commerce flows clean through the tiers in both directions, so that classic supply and demand is operating on role-playing games, between consumer and manufacturer. According to this view, retailer and distributor are merely "hands" that speed up and facilitate this process.

I think that the "transparency" idea has been used as a cover for more than one instance of exploitation by a given tier of the others (and all three are guilty, at one time or another). I also think that people who'd like to sell RPGs in any capacity would do well to admit this and take open steps to avoid it, promoting more long-term success for everyone. The painful part of my outlook is that large, short-term success for one tier is probably going to have to be diminished (or at least recognized as a specialty priority, not applicable to most games), and various people out there aren't going to like that.

My goal is to find effective compromises of potential conflicts of interest, to reconcile them at least regarding the sales of my game. About this time, you are probably rightly wondering what th'fuck I mean by such conflicts, so I'll list some: the main instances, historically.

1 - Returns ("buy-backs"). If a game ain't selling, can the retailer send it back to the distributor and get his money back? After how long? How much of the money? Then hop the same questions to the distributor-to-manufacturer.

The answers to these questions are nearly impossible to fix at a point which serves everyone's immediate interest at all times. That's what "conflict of interest" means.

Different answers to these questions at different times in the last 30+ years have screwed different tiers. In the early 80s, the manufacturers got screwed; five or ten years later, it was the retailers. The boundary between those two was the creation of GAMA (shock!). There are lot more details and possible discussion of the issue, as well as more steps between then and now, but I think this is a fair Very Big Picture of that time.

2 - Profit margin. Retailers and distributors prefer high profit margin per unit, obviously. Manufacturers, especially we small-press guys, are less concerned with that. We want profit, but not necessarily gross profit per unit so much as long-term, reorder-based, consistent profit.

Thus the reorder process creates a conflict of interest. The retailer would like big gaudy games that sell-through and then can either be ignored (if no one else wants them) or turn into sensations a la Vampire. However, some manufacturers would like to bring costs down to beat competitors, in the completely reasonable spirit of "better for less." These interests may be directly opposed.

That issue feeds into the process of reorders. How can a game "earn" its way into the automatic reorder list? Some of them have done it by being subcultural smashes for a little while, then settling into automatic reorder (D&D and Vampire, and that's pretty much it). Others have done it by mastering niches of general service to many different games (Call of Cthulhu and GURPS, both of which provide staple reference texts for people playing many, many games).

My claim is that many games fail to achieve this status NOT because they "don't sell," but because they are priced low. If such a good is very good (e.g. The Whispering Vault), people buy it and like it, but the retailer does not reorder it. Bam - consumer interest does not create retailer demand.

In conclusion, again, I do not think that these points of difference are terrible, evil things that villainize anyone; I only suggest that I and retailers and distributors admit them and compromise about them, rather than see-sawing between "I screw you" and "You screw me."

SOMETHING ELSE
I also want to speak for Dav, regarding Apophis' current tactic. Their game, Obsidian, is in a very interesting position - it's already "done the deed" in terms of the three-tier, and they rightly observe that the "spike" phase is over. Now they seek a long-term, sustainable position regarding retail outlet. Since, historically, the three-tier doesn't help much to establish this, they are bypassing it. Their tactic is store-centered, but not distributor-centered. The point is that this is emphatically not a beginning-game tactic, but phase-two tactic for a successful small-press game.

FINAL THING
One point you raise concerns the idea of the retailers as being the "life blood" of the industry. I remain skeptical. My view is that actual play is the life blood of the industry, and I (unlike anyone else I know) have no interest at all in how "big" the industry is - how many people, how much money is involved, how many units, etc. All I care about is whether people are actually playing, and the commerce involved is merely a subset of that. It's very much a Dave Sim position, although the industries are different enough that I am not emulating his precise business model. Whether stores help or hinder the actual-play value system depends on the store. I don't think it's safe to assume that most of them help it.

[Damn ... this last point is worth a whole thread of its own and I don't think I've articulated it well anyway. If it's OK by you, Gareth-M, I'd rather save it for later.]

Finally, again, thanks for the benefit of the doubt, and I think we're going to have an interesting time hashing things out. You'll notice that I tend to avoid point-by-point "picking" at people's posts (although sometimes quoting is necessary), and I encourage everyone to do the same, although it's not required or demanded.

Best,
Ron

P.S. (editing this in) What's your preferred form of address? Just Gareth? Gareth-Michael? I don't like using initials or codenames much, so would rather avoid "GMS" or anything like that.

[ This Message was edited by: Ron Edwards on 2001-12-18 14:09 ]
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Jared A. Sorensen
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« Reply #6 on: December 18, 2001, 11:55:00 AM »

Quote

P.S. (editing this in) What's your preferred form of address? Just Gareth? Gareth-Michael? I don't like using initials or codenames much, so would rather avoid "GMS" or anything like that.


The official term is "Garka-Skarka." Just clearing stuff up that's all.

- J
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jared a. sorensen / www.memento-mori.com
GMSkarka
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« Reply #7 on: December 18, 2001, 11:55:00 AM »

What's your preferred form of address? Just Gareth? Gareth-Michael? I don't like using initials or codenames much, so would rather avoid "GMS" or anything like that.

Gareth is fine.  The "double-barrelled" name is purely for professional credit purposes (it's actually my legal name, but nobody uses it in day-to-day life).

I'll be interested to see how this discussion develops after the essay is released....and also the seperate discussion on the "life's blood" issue.

One last thing:  maybe I was an anomaly, but during the time that I spent as a distributor and a retailer (1988-1993, off and on), there wasn't any such thing as an 'automatic re-order' on ANY product.  All orders were done on a pre-solicitation basis, and if re-orders were needed (due to sales), they were done manually, rather than through any 'standing order' or autoship method...so I'm not sure what you're referencing there.

Gareth
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Gareth-Michael Skarka
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Ron Edwards
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« Reply #8 on: December 18, 2001, 12:29:00 PM »

Oops, need to clarify again ...

By "automatic," I only mean, "by habit" or "reliably," not some kind of automated process. In other words, say I'm a retailer. The Chaosium puts out a new supplement called "Terror in the Deep" or something like that. Based on my past experience and my personal tastes and whatever else, I say, "Oh, I'll order a copy or two" without much trauma about it, if any. Same goes for whatever next supplement or revised-edition they do for the game. [This is meant to be an individual example - some retailers take this approach to Chaosium stuff and others do not.]

The other options are (1) to be in a state of serious investment about a game or line, such that I'm ordering a disproportionately high amount of it; or (2) to be in a "point and shoot" state about a game or line, in that I've ordered it, may or may not sell it, and it's probably passed from my awareness regarding ever ordering it again.

Now I'm Ron again, not the hypothetical retailer guy. My goal is to ignore the #1 "brass ring" option (which I consider to be largely misguided), and to graduate from the "point and shoot" status to the "habitual reorder status." That's the plan.

My concern is that simply relying on "good sales" is probably not enough to graduate like that, for a variety of reasons. Tactics to achieve that graduation in a mutualistic way remain a mystery.

Best,
Ron
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Dav
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« Reply #9 on: December 18, 2001, 01:21:00 PM »

Gareth (et al);

I understand your point, and agree with a deal of it.  However, for Apophis (and I will be the first to admit this may be anomalous) 80% of our distributor sales are shipped to a small fraction of our retail-client base.  (80% sales through 18 clients, I love chains)

Now, we have contacted each of them, and offered discount beyond distributor pricing to those retailers.  We do this mainly because the distributors are annoying (and I mean just that, the guy on the phone at Diamond is just plain mean).  Therefore, we decided: screw 'em.  

I agree that this tactic cannot be utilized by a "just-formed" company, but for us, entering our third year, we are established (for better or worse).  Running the costs, and cutting a few deals with our shipping agents (read Pony Express), we were able to open a great possibility for us in terms of keeping individualized shipping costs low, and profits higher (not high, but higher).  

And yes, moving in numbers of about 2000-3000 units, 10% is a big bite to us ($2.80 x 2500).  Saving $7000 is a significant increase to our operating capital for the next product.  We split that with the retailers (almost evenly), and with shipping, we increase our margins .75 per core book on average.  $1875 per book (with 3 books).  There is pre-press production costs plus a nifty bit for us.  

I do not disagree that retailers do form a critical portion of the gaming industry.  Lifeblood or not is not truly a debate, they are an integral organ to say the least.  We don't want to screw them, we want to give them a win-win with us.

Rolling a bit of the savings into specific promotion also helps the stores.  We will be sending them posters, shirts, scenarios, and little helpful fun specifically to our big client chains.  That way, they can boast a larger array of things that they can sell or give away, and we don't give a lick of damn what they make on it.  



--And to pblock:  we warehouse our own stuff anyway, as well as handling shipping to our distributors.  This just means changing the addresses of the recipient to us.  I don't know comics so well, and maybe we are following Marvel, but we aren't getting greedy, we are just trying to make each dollar spent have the greatest relevant impact for us.  But your warning is noted...  I will have to look at the Marvel fiasco more before I can reasonably comment on any similarities.



Dav
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joshua neff
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« Reply #10 on: December 18, 2001, 01:37:00 PM »

Quote
My view is that actual play is the life blood of the industry, and I (unlike anyone else I know) have no interest at all in how "big" the industry is - how many people, how much money is involved, how many units, etc. All I care about is whether people are actually playing, and the commerce involved is merely a subset of that.


That's exactly how I feel. No offense to anyone who works in the retail industry, but I couldn't care less if every RPG store closed tomorrow, as long as people are still creating & playing RPGs. Since they cost little to create & little to play, the only real costs are distribution. It's the playing of RPGs that is my only real concern.
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--josh

"You can't ignore a rain of toads!"--Mike Holmes
Ian O'Rourke
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« Reply #11 on: December 19, 2001, 05:12:00 AM »

Quote

That's exactly how I feel. No offense to anyone who works in the retail industry, but I couldn't care less if every RPG store closed tomorrow, as long as people are still creating & playing RPGs. Since they cost little to create & little to play, the only real costs are distribution. It's the playing of RPGs that is my only real concern.


Mmmmmm,  not sure about that one. While I personally admit to not being an industry person in any way (I seem to be one of the few 'non-game writing people' on the Forge) I would not want to see 'the industry' cease to exist. I really like my Mage 2nd Edition book, and my Adventure! book.

If they all became PDF's with the only chance of playing being an attempt to persuade generally non-interested parties then I'd give up.

Eventually, you'd just have the seriously dedicated playing - if they can find anyone. Role-playing does have a mass entertainment element to it, it's not on a Star Trek scale, but it exists. I'm one of them, would I still play if it was all no industry, get your game off a website stuff? Probably not. I think that would be the case for 90% of people.


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[ This Message was edited by: Ian O'Rourke on 2001-12-19 08:16 ]
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Ian O'Rourke
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Ron Edwards
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« Reply #12 on: December 19, 2001, 07:42:00 AM »

Josh and Ian,

I want to nip this line of response in the thread right now.

Previously, I stated that the "life-blood" issue (ie, what "the industry" depends on to exist) was off topic for this thread. Please respect that and don't discuss it here any more.

If you want to start a new thread about it, that's cool.

Best,
Ron
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Ian O'Rourke
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« Reply #13 on: December 19, 2001, 08:48:00 AM »

Quote

On 2001-12-19 10:42, Ron Edwards wrote:
Josh and Ian,

I want to nip this line of response in the thread right now.



Fine. No problemo.

I don't think we where in danger of generating into arguments though. Josh does not care for the industry, I'd probably drift if their was no 'industry'.

To viewpoints, I don't either of us where attempting to persuade the other they are wrong - as both were expressing a fact :smile:

Anyway, no problem.
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Ian O'Rourke
www.fandomlife.net
The e-zine of SciFi media and Fandom Culture.
joshua neff
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« Reply #14 on: December 19, 2001, 09:19:00 AM »

Rats. I'd actually intended to write something along the lines of "I'm not trying to derail this thread, please return to your regularly-scheduled topic" or something like that & forgot. Anyway, I never had any intention of trying to start somethin'. Everybody, go about your business. (Get it? Business? Ha, I kill me!)
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--josh

"You can't ignore a rain of toads!"--Mike Holmes
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