FLGS Profit Margins

[David Artman]

Splitting from a thread in which it was ignored:

Does anyone know what an FLGS expects in terms of per-book-sale profit, on a book-only RPG product?

I am thinking there's a percentage range. I ask because I want to list a book MSRP and individual-sales at a higher price than the price for dealers or if bought in bulk (10+).

[Ron Edwards]

Hi Dave,

The percentages wiggle around a bit, but here's the basic idea as it stood through most of the last fifteen years: 40%, 60%, and 100% of cover price through the three tiers.

The Manufacturer Suggested Retail Price (MSRP) is the starting point. The publisher sells the book to the distributor at 40% MSRP. So for one copy of my game Sorcerer, set at $20, I get $8 from the distributor, and I'm done, that's my money for that book. My profits are less printing; say, $8 - $6 makes a profit of $2.

The distributor then sells it to the retailer for 60% MSRP, in my case $12, making a profit for him of $4.

The retailer then sells it to a customer, getting $20, for a profit of $8.

All sorts of things modify this, including various cut-rates on bulk, minor shifts in percentages into the 9's or 7's or 3's, negotiations that concern what's decided for title X as opposed to title Y from a given publisher, and so on. These details move around all the time. Recently, the fulfillment houses often set slightly-unusual standards as a selling-point, usually favoring the retailer over the distributor.

The major issues, though, concern shipping costs, exclusivity, and buy-back. Who pays the shipping at each of the two steps, and when (before or after)? Does the distributor punish either retailer or publisher for using another distributor in tandem? Can the retailer return books that don't sell to the distributor, and/or can the distributor return books that don't sell to the publisher? These are crucial questions which get answered in different ways at different times, and how they get answered really create a sea-change for everyone involved.

I have taken my eyes off these issues for the past two or three years and cannot characterize the situation very well right now. I can say, however, that how those issues are answered, changes the publisher's best-strategy decisions profoundly.

One last point, which is kind of a major elephant in the room: in the U.S., and probably in other places, the MSRP is not obligatory. A retailer really can sell anything in his store for whatever price he wants. Sorcerer's little bar-code says 2000 ($20) on the back, but he can price it in his store at $45, $4.50, $100, $0.50, or any-damn-whatever as he sees fit. So the whole ironclad-feel of starting with the MSRP, as if it were some kind of natural law, is misleading.

Best, Ron

[iago]

One thing to keep in mind is that on that $20 book, the $8 the retailer makes isn't just to make a reasonable profit off the $20 book he sold.  It's also there -- some might say primarily there -- to cover the costs of all products that have been bought but haven't sold (and maybe won't).  So while $8 on $20 sounds hefty (it's like 40%), it's an $8 that gets eaten up very, very fast by the risk factors and other costs associated with running a store.  It ain't a cheap enterprise.

[Ron Edwards]

That's true. The publisher has his printing cost to deduct from his $8, and the retailer has God-awful costs to deduct from his $8.

In the past, the distributor has been described as the "holder of the debt," especially when they accept buybacks. That's an interesting and debatable topic that I just realized could be a threadjack on my part.

So! Anyway, back to the original question, if anyone knows about the current percentage standards and variations of the three-tier system, especially if they've wiggled away from what I described, please post about them.

Best, Ron

[David Artman]

Ah, I should clarify, I see. I am not going three-tier (yet, even if I could). This is probably all-Lulu. I want to offer a softbound and a hardbound option. The MSRP (my price at Lulu) will be X (soft) and X+cost-of-binding (hard)--in other words, a static "up-charge" or "profit" after printing costs, before shipping charges; no premium pricing of the hardbound (a bit of rounding, at most).

So I want to figure out what profit is an amount which allows me to reduce by a percentage that gives the retailer reasonable profit without stripping me of all earnings. From what I read above, it sounds like 60/40 is the way to go:
MSRP = 2 * print cost
Dealer/Bulk = 1.2 * print cost
That works out to a 40% profit for the retailer, before shipping (which ought to vary based on quantity ordered and location, so I can't really factor that... can I?).

Seems like a pretty deep discount, to me--I give 80% of the net profit on an MSRP sale to the dealer. But if that's how it works....

[iago]

Honestly most retailers will look at a 40% discount as too small.  IPR gave retailers a 42% discount for a long time and many weren't willing to take us up on it.  We increased it to 45% recently and got a lot of happiness from the retail sector as a result.

On the flipside, across the pond in Europe, a 40% discount is huuuuge.

[Thunder_God]

David, since you're working in percents you'll have to add an additional charge up for the hardcover, or as you do, work in multipliers rather than adding a fixed figure.

If a book costs say, 10 to print in softcover, and you sell it in 20, you'll get 12 from the retail.
If the hardcover book costs 15 to print, and you sell at 25, you'll get 15 from retail, which is not 5 more. (You spend 1.5 times as much, but earn 1.25 times as much).
If you sell direct through Lulu, the math looks a bit different, as they take 20% of post-printing revenue.
From the first case you'll get 18 (10 printing+0.8*10), for a net profit of 8.
In the second case you'll get 22, for a net profit of again, 8.

So the calculation differs whether you sell only through (to?) Lulu, where the earning is calculated based on figures that remove the printing from the equation, or to retail, where their figures are MSRP based.

I hope I didn't get anything wrong.

[guildofblades]

Hi All,

Retailers love to get a 50% discount on the product from their distributors. But that only happens for larger stores hitting volume orders and on certain product lines. Lines such as D&D tend to be capped at a 44-45% discount and Magic is capped lower at about 42% discount. Fantasy Flight has their mega big box board games capped all the way down to a 38% discount. By "capped", this generally means they sell to distributors at a lower than normal wholesale discount so the distributor has to in turn give the retailer a lower discount. Some distributors will play with those numbers and eat some of that loss on certain product lines to attain a market advantage, but otherwise the "average" is as listed above.

Retailers, while they have to evaluate individual games and lines by themselves, they must also watch and track to aggregate affect of discount and sale price on their overall cost of goods sold. That means that while a retailer might be getting a 45% average discount (48-50% for a lot of stuff, but lower discounts on their WOTC, Upper Deck, Fantasy Flight, etc stuff) on all products they buy, that's only 45% of MSRP. If they have rewards programs, sell merchandise on sales often, have to liquidate dead merchandise at cost or at a lost, all of that influences their true gross profit margin (defined as, profit from the sales after subtracting all costs of goods sold, but before any other expenses).

A general goal most current hobby retailers strive for is to have a cost of goods sold no greater than 60%, but once you factor sales, theft, liquidations and whatnot, its a difficult goal to achieve. I am personally of the opinion that the entire business model, as based on those numbers, is simply unsustainable for anything but the largest stores. Mod sized and smaller stores can only sustain themselves by the owners working for less than peanuts.

For instance, the bulk majority of mid sized and smaller stores are grossing only between $150,000 and $200,000 a year. Let's run some numbers.

1) Since they aren't a large store they aren't getting the best volume discounts from their distributors. So average discount may be more like 43% instead of 45%.

2) They have a smaller customer based for which to help absorb poor purchasing decisions (ala, smaller number of people that are likely to gobble up some obscure product that has no following. Or the hot collectible product that suddenly turns cold leaving the retailer with way too much inventory). This leads to more merchandise needing to be liquidated in store or sold on e-bay or gotten rid of in other means that generally net significantly less than MSRP. So while a large, strong and healthy store might be striving for a total gross margin of 40%, the bulk majority of stores are far more likely to be around 35-38%. Let's say 37%.

3) Let's assume they aren't completely floundering. Let's say they have gross sales of $200,000 per year. On those sales their gross margin is just $74,000.

4) Let's take about 2% off of up to 60% of their total sales to account for credit card merchant fees they have to pay as a cost of doing business. That's 2,000 gone. Down to $72,000.

5) Knock off $1500 a month (minimum) in total property based overhead (rent, utilities, cleaning supplies, internet, phone lines, etc) and that knocks off $18,000 per year, leaving just $54,000.

6) In addition to basic property overhead, stores do have to have upkeep. New fixtures bought occasionally. Gaming tables and chairs need replacing. Software upgrades. New signage. Replacing burnt out lights, cleaning supplies, toilet paper, etc. If a store can manage all of that on an average of $50 or less per month, they are squeezing a dime out of a penny. But let's say that's what they are doing. That's another $600 gone. Down to $53,400.

7) Got to have a marketing budget. Whether its getting spent on fliers, print ads, yellow pages listings, tournament prizes to generate hypes, or whatever, if they are spending just $100 a month in total on this, I assure you, they are spending far too little. But let's with that. Another $1,200 gone. Down to $52,200.

Insurance is a must. Liability at minimum, but most likely some protection for the valuation of the stock and other assets as well. $75 a month or more. $900 more per year. Down to $51,300.

I can carry this example into the extreme because there are a lot more bills to pay yet. Lot of nickle and dime stuff that begins to add up. But the most critical point here is, while that gross has been shrinking, I haven't even talked about salaries for the owners, other employees, and any benefits for any of them. Much less an actual profit for the store.

Now, if a store's business model could capture just 10% more of MSRP and bring their gross margin to 47% instead of 37%, it would be a vastly different picture. That's another $20,000 to spread around to help cover the operations of the business and pay the staff.

Ryan S. Johnson
Guild of Blades Retail Group - http://www.guildofblades.com/retailgroup.php
Guild of Blades Publishing Group - http://www.guildofblades.com
1483 Online - http://www.1483online.com

[David Artman]

Great break-down, Ryan... but now I'm more confused. :}

So I need to do a breakdown closer to 50-50 of MSRP, to be "attractive"? OK--that's my point, after all: I want retailers to WANT to carry a copy or three, not feel like it's high risk for low payout.

I didn't know about the 20% of profit that Lulu takes... that could radically change my plans (i.e. from POD to small-press). That makes them "quasi-three-tier" (they take as much as a normal distributor) which seems to me to be utterly counter to indie publishing. *sigh*

Let's get a bit more concrete--Lulu tells me they want $16 for a 100-page, casebound, B&W interior (color cover).
I want to grant retailers their wonderous 50% of MSRP while still making, say, $5 per book. Now I'm looking at
2 * ( 16 + 5 ) = $42
42 - 16 = $26, of which Lulu wants 20% ($4.60)... which eats my measly $5. So....

2 * ( 16 + 9 ) = $50
50 - 16 = $34, of which Lulu takes $6.80, leaving me with $2.20. Wow... $2.20 if I let a retailer sell it, versus $27.20. And I got a frigging $50 brick trying to sell--LONG odds. The soft cover should be quite cheaper, but I don't know if it'll get down to the $20-ish range I think it needs to hit to be a good bang for the buck.

Hmmm.... maybe I should forget about retailers... or Lulu... or POD, in general?
----------
I found an interesting case study, just now: http://www.fonerbooks.com/pod.htm
Hmmm... what can folks tell me about Lightning Source? Seems like they can offer distribution (hence, retailer contact and profitability), which Lulu sort of lacks, from what I've seen so far. And that study above talks about nice profits all round--selling directly earns more, obviously; but they seemed to do well while still offering a 44% margin for the store. Does LS not have a "fee" like Lulu's 20%?

I got time to figure this all out--'til the end of the year, frankly (if not a bit past). But when that time comes, I need to hit a number and hit it hard, so I can begin to do a bit of pre-promoting while I deal with proofs and such.

[First Oni]

Just went to Lulu.com and i think you'll be surprised. Let's way you wanted to do a 100-page, B&W 8.25x11 Perfect bounds for 50% to the retailer.

Retail Royalty (how much you make):    $5.00
Lulu Fee (how much they want):    $1.25
Manufacturing cost per unit (how much it costs to print each book): $4.50
Retail Markup (how much the store makes): $10.75
Total Retail Price (how much the customer pays for it):   $21.50

That's what their calculator says at least. And i'm pretty sure it's more for hardcover.

-Oni

[guildofblades]

If case bound means the same thing as hard cover, then yeah, you face a mighty challenge trying to POD print them and still be able to wholesale the product. There are no POD printers that can do hard covers anywhere near affordably.

Perhaps you should have a regular perfect bound edition that you can sell both direct and via wholesale. Then have a special edition that is the hard cover that is only available direct from you (or direct from your Lulu store front, that is).

Lighting Source can offer distribution through the book industry. They are owned by Ingrams Book Distributors, who is the worlds largest book distribution company. That industry works on slightly smaller margins, on average, than game retailers, but they are offset by the fact they get returnability on many of the mainstream products they sell. Your POD book wouldn't have returnability (as I know) it, and hence it would largely be a "special order" item by most stores and chains. Still can lead to some sales, but its a definite restriction to broader sales. It should also be noted that very, very few game retailers order product from Ingrams or other book distributors. And typically when they do its to order some WOTC product as a hedge against broken street dates, not as a means to order small press or indie games.

Ryan S. Johnson
Guild of Blades Retail Group - http://www.guildofblades.com/retailgroup.php
Guild of Blades Publishing Group - http://www.guildofblades.com
1483 Online - http://www.1483online.com

[iago]

Agreed. Options are pretty much either give up your dreams of doing hardcover via POD, give up your dreams of selling to retail, or make your peace with selling a thin hardcover for $50.  (Though that said you MIGHT be able to get a dollar or two margin back by picking a POD provider other than lulu to print a hardcover.)

It's rough.

[Thunder_God]

David, I ran some numbers for you.

X=Final price.
Y=Print cost. The different Ys mark that the printing costs are different.
Z=Profit.

If printing via Lulu, normally:
3X-8Ya=10Z

If Printing via Lulu retail (note, they take 20% off of what you make post Retail discount, which is set at 50% flat, but their printing costs is also much much lower than what it is normally. I don't know what stipulations they make on retail, and what sort of retailer you need to be in order to apply for these orders):
4X-8Yb=10Z

If printing via someone who doesn't take from your profit directly, and you still want to offer 50% retailer discount:
X-2Yc=2Z

If you want to calculate costs while taking into account that there will be people taking a percent off of your MSRP (The X), but an unknown figure. This is basically what was done above, but not simplified:
X-[(Percent of discount*X)+Y]=Z

If you go through multiple steps, and you also go through people who take from your profit, or from your profit before selling to retail:
The Lulu Retail figures (both someone who takes from your MSRP and from your profit) are: X-[X/2+Y+0.2*(X/2-Y)]=Z
The Lulu non retail figures (as above, but they don't take your retail discount into account when calculating how much to take from you): X-[X/2+Y+0.2*(X-Y)]=Z

Hope this helps.

[David Artman]

Lulu looks better; thanks for the math, Oni and Guy.

I like the idea of soft-cover retail; hard cover "direct buy" "special edition." It prevents me from "competing" with retailers (as they wouldn't want the hard cover for low margins), still gives me a tidy profit on each sale of it, and maybe some customers will want to buy it just to get more money direct into my hands (it can happen!). The hard cover could even become the more-attractive option, given that that the price differential can remain low, if I'm not trying to pad to account for retailer gross margin.

I'll concede the observation that game retailers don't look to Lightning Source; hopefully they will get setup and deal with Lulu, if approached--I doubt there's retailers watching What New at Lulu (or whatever) for new offerings.

I reckon I've got enough numbers to go forward with a publishing plan. Thanks, everyone, for your help and advice!