Cost vs. Revenue

[Scro]

I guess as a full time business dude, and a part time game designer, I might have something to say on the subject.

First of all, the $8 revenue you make when you sell a copy isn't 'profit', per se, but rather a marginal contribution against your fixed cost. It's only after all the fixed costs are paid off that you will make any profit. We exist in such a niche market that the difference is important-- fixed costs will eat your lunch. And fixed costs are exactly what you are talking about.

The question to ask yourself is this: will this thing I'm paying for help me sell copies? How many copies?

Example: How many of my customers won't buy this book if it has no cover art? How much revenue is that? Is that more than the cost of cover art?

Chances are this means that you might or might not want cover art, and you probably don't want an ISBN.

My approach is this: zero fixed cost books. I either do my own artwork, or I trade copies and/or mentions for it. I get fairly close to designing books for free, excluding my time and freebie copies to contributors. The result is that I only have to worry about cost per copy. Since I do small run and POD stuff, I basically don't have to worry about this, because I only print books I know I can sell. Do I make a killing? No, I hardly make anything off of it. It is a hobby, and I imagine it will stay that way.

[Scro]

Ack. Somehow this ended up in its own thread. So let's make a thread of it... what do YOU think?

[guildofblades]

Profit Margin is extremely important for a business and especially important for a niche business with low overall volumes.

The Guild has always striven for the strongest possible profit margins while staying within our target suggested retail prices for the products we produce. This has meant a continual evaluation of how to produce things and the continual investment in machinery and processes that can make production cheaper (both from a pure cost basis and from a labor/time cost basis).

As a business understanding your profit margins and how they can impact your business decisions is critical. A few years back we took a very hard look at our wholesale based business compared to our e-commerce based business and found that a single copy of a game sold via e-commerce was four times as profitable as a single copy of that same game sold through the three tier distribution system. Understanding that caused us to look at the volumes we were getting through the three tier system vs the volumes we could potential get via direct sales and caused a dynamic shift in the way we market and distribute our games.

Understanding margin will help you to understand what your "true" break even point is on any new project. Its certainly never 1 item sold.

I think game retailers need to understand the impact margin has on their business. For years now retailers have continued to focus on high profile game titles in the face of shrinking discounts from the manufacturers of those games. Those discounts have been in gradual decline, but the fundamental adjustment to the retailers' margin has had a major detrimental impact on the health of their businesses. In spite of this fact (I suspect because most retailers are ignorant of the true impact of profit margins on their business), this trend continues.

When drafting the business plan for our own store, we took a hard look at profit margins and the products and services we would offer through the store. Profit margins were a key decision making factor in all things. So the copy and print elements of the store can have average profit margins of around 76%. Used games and game liquidations can provide average profit margins of 80%. The store will be buying Guild of Blades game from our manufacturing division at our standard preferred retailer program at a 60% margin (ala, 60% discount) and we're working on establishing direct purchasing agreements from other manufacturers at comperable levels. We are strategically choosing NOT to focus on D&D  or Magic (margins around 42%) or Upper Deck card games (margins around 40%) or Fantasy Flight box boxed games (margins 38%). We'll stock a small smattering of D&D and Magic and won't be touching the rest by any other means than secured special orders. Instead our store will be offering products from smaller companies at higher margins and going hog wild full line on those we can get the best margins from. We do plan to order a strong selection from IPR, but due it the low discount (42%) we'll be marking most of those games above MSRP to bring them to a full 50% margin or better.

Anyways. The point. The average game retail store these days operates at margins around 42-44%. Those margins compared to the average margins our own retail store will be attaining makes for a huge difference. For instance, on gross annual sales of $280,000, which is a bit above average for the average surviving game store, but not much, the margin difference means a gross profit after COGS but before covering overhead and all fixed expenses (like rent, salaries, etc), the store would have $176,000 vs the traditional $73,000. That is a huge difference.

Margins on the manufacturing and publishing side are no different.

Manufacturing costs for Guild of Blades products tend to run between 6-12% of MSRP. We configure all of our price structures on the assumption that the product will be sold via wholesale at a 60% discount, even though most are actually sold direct. So a product with a cost of 12% and sold at 40% (60% discount) would have a gross margin (after COGS) of 70%. A product with a 6% cost sold at 40% would have a gross margin of 85%.

What publishers want to try and avoid is low margin products, because as you pointed out, it just doesn't leave a lot of money left over for covering overhead and other fixed expenses, much less being able to re-invest money into the types of things that will enable you to grow your company. When possible avoid situations where your gross margin ever goes below 50%. We all sell product into a nich market and the volumes involved with such will never be able to recover from a low gross margin. As compared to the dollar store market where gross margins on some products might go as low as 10%, but where the products are sold in the millions every quarter.

Ryan S. Johnson
Guild of Blades Publishing Group
http://www.guildofblades.com
http://www.1483online.com
http://www.thermopylae-online.com

[Eero Tuovinen]

I don't know that I've ever said it, but Ryan's mini-essays on these publishing topics are both fun and educative, and illustrative of his professional perspective, which is slightly different from us demi-professionals. I think it's great that Ryan has so much to say to us even when we only rarely meet on any details pertaining to game design itself.

Anyway, go on about the actual topic. I don't have anything majorly interesting to say about it; I've generally just tried to keep my expenses on projects under one-quarter of the projected resale value of the entire print run, which has served me well enough to this date. Of course I pinch the penny just like everybody else within that frame as well.

[Ron Edwards]

Hi there,

This is a good manifesto statement. It matches well with the lessons a lot of people here have learned, and that we try to explain to newcomers all the time. At the end of the day, one's fixed costs really are the killers of a small business (at whatever size). The interesting things to me are (1) that one does, in fact, get to choose what fixed costs to accept, just as you say; and (2) that "the day" is also a bit customizable.

For instance, regarding #1, I've accepted that convention-going and printing costs are major fixed costs for the Sorcerer line of books. It ain't cheap, and I don't accept the latter for my other books, which are printed on a different model. Every publisher has to choose, but the great thing is, unlike "the industry" dogma that was shoved down our throats for so long, that there is a choice. A game doesn't physically have to be X and Y or Z merely in order to "be" a published game.

Regarding #2, here there's a lot to consider as well. What's meant by "the end of the day?" If I go to a convention and it costs me money for lodging and so forth, then the revenue from the books I sell there  probably isn't going to cover all those costs as well as the more individualized fixed costs of printing the books. What matters, though, is looking at the way books sell over the course of the whole year, and seeing the spike of sales at the con turn into more sales and major promotion for the remainder of the year. Or better, the volume of books sold at the con being considered to offset the printing costs of all books sold that year, such that the other book sales can be thought of as a cumulative, gradual way to overcome the trip costs of the con.

There's a range of choice here, too. Ultimately, for me, at the volume and type of books I sell, the "end of the day" is probably best considered the fiscal year. For others, it might be a literal day, and for others, it might be a quarter.

Finally, your post fits well overall into a point which has been made here many times at the Forge: that the definition of success is up to the individual publisher. You might be interested in the idea, usually re-stated in those discussions, that the term "this is my hobby" or "it's just a hobby" aren't very useful. I tend to think in terms of financial success in terms of pure sustainability without external funding, entirely independently of the scale of the operation. By that way of thinking, many of the most well-known RPG companies are not successful; they merely manage to impose the illusion of success via speculator or inheritance-based funding, and many of the smallest RPG companies are remarkably successful.

I call the former vanity or "just hobby" publishing, not the latter.

Best, Ron

[Bjorn]

Finally, your post fits well overall into a point which has been made here many times at the Forge: that the definition of success is up to the individual publisher. You might be interested in the idea, usually re-stated in those discussions, that the term "this is my hobby" or "it's just a hobby" aren't very useful. I tend to think in terms of financial success in terms of pure sustainability without external funding, entirely independently of the scale of the operation. By that way of thinking, many of the most well-known RPG companies are not successful; they merely manage to impose the illusion of success via speculator or inheritance-based funding, and many of the smallest RPG companies are remarkably successful.

Just out of curiosity, how do you consider time spent in this "model"? For me I tend to view any self-employed economic activity (this is not restricted to game publishing but also includes things such as SW consulting, becoming a full time poker player etc etc.) where "hourly returns" are significantly below what they could typically get on the open job market to fall short of beeing fully professional endevours. Now I realise that beeing a proffesional and beeing succsesful is not neccesarily the same thing but I'm still curious about how you view this.

I want to point that I have no problem with people designing games as a "semi-pro" (making money but at a non-comercial rate) or even as a hobby (most of what we tend to think of as hobbies cost money) but as a customer and/or outside stakeholder I tend have different expectations of them than if my dime is what's puting food on the table and a roof over their heads.

/Bjorn

[Ron Edwards]

Hi Bjorn,

I think that's another individual issue. Here's a very personalized take on it, which I really want to say, I'm not presenting for the purposes of convincing anyone. It is only my little personal notion for my own business.

Time is my most prized possession, or aspect of my life. Managing and devoting it as I see fit, as opposed to obligations from others, is hugely important to me. I see it as something I expend ... and if that expenditure is in service to someone else, I expect to be paid.

That applies quite well to my primary profession. Its key feature is that I manage my own time; I don't punch a clock or account for whether I'm at work or not to anyone. There are specific requirements, and all my employer wants is for me to do them well, not in such-and-such a way or on such-and-such a detailed schedule. All that is great in terms of freedom of management, but as it's a J-O-B job, the time is still an expenditure of my limited store, in service to others. Therefore I do get paid for it. I wouldn't do it for free.

Adept Press isn't my primary profession, and I own it. So as I see it, spending time on Adept Press isn't in service to others; I'm not expending time in the same way as I do in my job. Time spent on it, and here at the Forge, counts as something I want to do, as opposed to a few other things I could be doing. As a prof, the job takes my time (albeit in a less structured way than many jobs); as Adept Press, the activity is where I put my time. The pay for the product is a happy outcome which enables me to continue to do it. However, I don't see my time-spending on Adept Press as anything that someone else owes me for. No one demanded it or required it from me.

If I were a freelancer of any kind, or if I worked for a company called Adept Press or whatever that I did not own, that would be different. Then it'd be just like my regular job, only a little smaller, and I'd be awfully strict about how much time I spent and about getting paid for it.

Well, anyway, I don't expect that to make sense or to be important to others, but perhaps it illustrates at least one independent publisher's view toward the subject. Clearly, another one independent publisher might hold to a more traditional view, in which they count their time-expenditure as an expense with its own expected return, and their view would be no better or worse than mine - it's their business, after all.

Best, Ron

[lumpley]

Hey Bjorn.

I'm with Ron, personally - I don't keep track of the time I spend working on games. I can't imagine NOT designing games. However, absolutely don't take that to mean that we aren't making real money at it. Occasionally I like to brag about my game company, so thanks for giving me the opening, here goes!

I'll preface the bragging with this: designing and publishing games doesn't pay a cent while you're doing the work, naturally, but starts to pay when you finish doing the work and keeps paying for who knows how long after. In spring '04, Dogs in the Vineyard paid me $0.00 per hour and $0.00 per word, but now it's been paying me for 3 and a half years. Consequently I don't think that hourly returns is a great way to measure it - whatever your hourly rate winds up to be, your game disburses it to you over the course of its published life, not in biweekly paychecks.

But whatever, how much already? When I make an honest estimate of how much time I spent designing, developing and writing it, plus how much time I spend supporting it ongoing - then double that estimate, just to be sure - Dogs in the Vineyard has paid me at least $40 an hour. Realistically it's over $60, it may be as high as $85. This is after my printing & publication costs and webhosting and stuff. Dogs pays me way better per hour than my day job (but offers, of course, less security).

I think that rate per word is a better measure for RPGs than hourly returns. My game design gig is more like a writer's gig than like a job in an office, in every way I can think of. So I'll brag in those terms too:

Dogs in the Vineyard is creeping up toward $1.50 a word now (again, after my publishing costs). I used to know what The New Yorker pays for short stories - I want to say that it starts at $2.50 per word? I don't really remember. Anyhow Writer's Market would give lumpley games a $$$$ rating, its highest.

In a Wicked Age has paid me, oh, $0.15 a word now, on 23 days' worth of preorders alone. That's already real money for a writer (like, a genre fiction magazine like Asimov's or Fantasy & Science Fiction pays $0.06-$0.09 a word). It's not real money per hour yet, but it will be.

I don't have any investment in whether all this makes me a professional game designer or not. Whatever. Either way, lumpley games isn't my day job, but as Ron says, it's a thriving small business owned by me.

-Vincent

edited to italicize

[lumpley]

Crap! Do overs. Don't hold me to that $0.15 a word for In a Wicked Age. It's still under $0.05.

-Vincent

[David Artman]

I don't have any investment in whether all this makes me a professional game designer or not. Whatever. Either way, lumpley games isn't my day job, but as Ron says, it's a thriving small business owned by me.

Well, FWIW, you become "professional" at any activity once you are paid by someone to do it. Prior to that, you're "amateur" (which I suppose could include "hobbyist," for the sake of fitting in the dichotomy rather than making a continuum out of these terms and more).

As for "price per word, after all fixed costs" -- that's a great model for "profit" analysis, in my opinion. Otherwise, one runs into the common writer's situation of trying to determine what "working" means, to determine when one is working so that one can calculate pay per hour. Am I "working" while I'm on the toilet, imagining the interplay of abilities in a game? Am I "working" if I'm sitting at the bar doodling Venn diagrams and charts on napkins, to organize my thinking around needed and complimentary abilities? Am I "working" when I wake up from a dream about a game in progress that gives me a cool idea for a new range of abilities?

In short, writers "work" all the time, if thinking and plotting and scheming count. Hell, for that matter, most folks I know with even slightly stressful jobs are "working" most of their waking day--one buddy of mine talks so much about his job and chemistry and shit that I'd swear he NEVER stops "working"... and as a result only "earns" a fraction--like HALF--of what his paycheck reads for "hourly pay."

But words you can count. And, being independent publishers, those words keep on building value, with each sale (as opposed to a short story writer getting one check and done).

Dude... you're a pro, just accept it and move on....
David

[guildofblades]

Price per word may work ok for role playing games, but works out a whole less so when looking at other kinds of games.

For instance:

Our board games tend to have fairly short rules booklets. Take the Battle of Thermopylae for instance, which has rules that fit on a single sheet of paper front and back. Between first and second edition, we sold close to 1000 copies of that game so far, all but about 100 sold direct. Approximately $5,800 for two pages of writing. But that's not really an accurate representation of the work either.

I know that on the average day I spend maybe 90% of my time on business administration, marketing, web design and all varieties of paperwork pushing. I'm lucky if the rest can be spent on game design. And even then, that game design gets broken down into writing, map design, packaging design, research, alpha testing, etc.

Success can only be measured by the person undertaking the effort. To everyone else, its merely their own projection of what "they think" to be successful. For the person undertaking the effort, success will very much depend on the goals that person had set for the effort. When I started the Guild, I was intent 100% on turning it into a career. I measured each year and each project by whether it got me one step closer towards achieving that goal or not. Now that the Guild is my career, I measure projects by two standards. Return on investment and personal satisfaction the product gives me and those that play it. If I had a rewarding career in another field, I expect I could measure success entirely by that second criteria if I cared to.

Ryan S. Johnson
Guild of Blades Publishing Group
http://www.guildofblades.com
http://www.1483online.com
http://www.ms-crm-consulting.com