The Retail Game, Part 1: Profit

As recently promised, I have a backlog of opinions to eject regarding the current state of specialty gaming retail. Having been a twice-successful manager for two major gaming retail outlets, most recently EB, I speak from a position of some authority on the matter. My goal here is not to whistle-blow or take some kind of revenge against my former employers - they both treated me fairly and honestly most of the time - but to make you, the consumer, more knowledgeable about how and why your favorite gaming store transacts business with you in the increasingly infamous fashion which I regularly hear espoused. However, instead of trying to jam everything into one monstrous article, what I'd like to do is break these comments into slightly more bite-sized pieces, and so, to begin, I want to talk about the foundation from which every action retailers take is born. In short, it's all about the profit.

If one were inclined to diminish specialty retail into three laws of business, much like Asimov's three laws of robotics it would be as follows. Law 1: Associates must make every effort to turn a profit on every sale. Law 2: Associates must satisfy promotional and corporate partnerships, except where such actions conflict with the First Law. Law 3: Make the customer happy, except where such actions conflict with the First or Second Law.

This obviously contradicts the traditional and increasingly anachronistic supposition that The Customer Is Always Right. It's simply not the case anymore. That's not to say that customer service is dead - though, it certainly seems to be gushing arterial spray from a wound the size of softball - but that the maxim has been altered to The Customer Is Probably Right, Unless You Can Convince Them They Are Wrong. And, even if the customer ends up being right, then the next goal is to make satisfying the customer as profitable to the company as possible.

If it seems to you like these assumptions put customers at odds with staff, then you're right.

So, let's talk about that primary law, the law of profitability. Assume for now, and I'll go into the details later, that it is beneficial to employees and more particularly management to make every point-of-purchase sale as profitable as possible. Then the question is what constitutes a profitable sale, and what does not. First, and obviously, the most profitable items that can be included in a transaction are those where the difference between what the company pays to stock and sell the item and what the associate sells it for is the greatest. This is why, ultimately, most specialty retailers would much prefer to sell a fifteen dollar used copy of Ratchet and Clank, than a brand new, full price copy of a niche game like, say, Xenosaga II or Forza Motorsports. This is because most stores pay as little as five dollars in trade value for the copy of Ratchet, meaning that the margin on that used game is probably double or more of what it is for the new title. Even though the total sale is dramatically less, a company that deals in used games actually makes more money off the lower priced title.

With this focus on the margin, it becomes fairly obvious why stores pay as little as they do for your trades, and why the used copies aren't marked down more. The goal is not in providing a 'fair' price for your games - you can almost always sell them for far more if you do it yourself - but in offering the closest value to what the market will bear. In my personal experience, I've seen time and again customers bring in their trade, be disappointed with the values, but then, and this is the important part, trade the games anyway. Like I said, the goal is not to make you happy, but to get you to engage in the transaction regardless.

After all, and I will go into this at a later date, the informed and savvy gamer hasn't been the target market for these companies in a very long time.

This is why the corporate policy of most outlets, and the practice of many managers, is to never offer trade prices over the phone. If you've already taken the trouble to pack up your games, get in the car, and bring them in the store, then you're far more likely to just take whatever price is offered.

The actual game consoles offer an even more dramatic example of this mindset. Despite spending as much as $250 for a system (say, a PSP), the margin on these products is painfully small; as little as a few dollars. And, of course, the ends companies must go to in order to procure stock only serves to exacerbate this issue (the surprising conflict between publishers, distributors, and retailers that leave customers with the short end of the stick being a point for later discussion). But consider for the moment that we have a customer who wants to buy a Playstation 2. Given the option of selling a new $150 system that was purchased into inventory for virtually the same as the MSRP, or a used system for $130 that was purchased directly from a customer for $70 or less, you can imagine which option retail outlets prefer. It really is as dramatic as a margin of $5-$10 for a new product versus $50 for a used product, despite the lower price tag.

So, what we've got is a strict policy of providing the lowest competitive value for trades, selling as many pieces of used product as possible at the highest possible price, and all balanced against keeping customers satisfied enough that they don't shop somewhere else. Providing the customer discount card on used items - a discount card that still permits a satisfying profit margin, not to mention the opportunity to track your customer information and buying habits - to encourage repeat business is one way to get customers back in the door. Personable salespeople with skill enough to make you think you're getting a good deal is another way. But, the biggest advantage most retail outlets have is simply that people will become habitual in their purchases. They will keep shopping at the same place, simply because it is where they go.

Used product is a satisfying way toward profitability, as are the well known high-margin items like accessories and hintbooks, but the best way to make a profit is to transact a charge without providing anything tangible in return. Enter warranties and guarantees. Guaranteeing your fifty dollar new game for a year for an extra three dollar nearly doubles the profit margin on that title, and when transacted on as little as ten percent of the games sold, most stores can create thousands of dollars of additional bottom-line profit per year. Make no mistake, the Gameplay Guarantee from EB - and the recent test marketing of a similar promotions at Gamestop - will prove so profitable as to be industry standard in the coming years. With training and a sales focused staff, the promotion can easily be attached to 15% of all sales, and with a shockingly negligible return rate on these guarantees this promotion can mean hundreds of thousands or millions of dollars per year to the corporation.

But, all this is the goal designed on the corporate level, and as experience probably tells you the level of dedication to these policies on the store level is not necessarily equal to the theoretical I describe. Which is probably why I noticed such an effort toward the end of my tenure to directly tie rewards and wages for staff to the store's performance against budget. EB, for example, recently changed its bonus structure for store managers to be directly linked to the store's success in meeting and exceeding its budgeted bottom line. And, those stores that do not meet and exceed budget, well not only will the manager receive no yearly bonus, but it's very unlikely (read: nearly impossible) that said manager will receive any wage increase come review time. Not a cost of living increase, nothing. Frankly, they'll be lucky to keep their position.

Worse, you'd be surprised at how many stores operate at a loss. Even those that beat their budget, often do so at a loss, only succeeding to not lose quite as much money as expected. You might imagine that since a store has some degree of margin on virtually every sale, then virtually every store operates at a profit, but there are dozens of factors beyond the simple cost of inventory when judging the bottom line. Stores are ultimately responsible for all controllable costs, including but certainly not limited to rent (significant), mall/strip center fees, payroll, shipping, supplies, shrink (lost/damaged/stolen product), AC, lights, monitoring services, merchant fees, bank fees, and so on. As a side note, these costs are regularly much higher for mall based locations - particularly for trendy and competitive suburban mall locations - than strip centers which, is the primary reason that your favorite specialty game store is often closing up shop in your nearest mall.

So, stores must sell high margin items to mitigate the substantial costs associated with doing business. New product simply doesn't provide the dollars to offset the costs of employing a staff, shipping the product, providing a comfortable professional environment, and the inevitable degrees of loss and theft associated with retail. Take my personal performance with the Halo 2 launch for example; my store sold hundreds of copies of the game last November, and brought in a huge volume of sales. But, those hundreds of sales, even with frequent hint book purchases, only translated into an insignificant few hundred dollars of actual profit for the location. Essentially the most noteworthy gaming software launch I'd seen managed to only match the same levels of profitability as selling, perhaps, four used PS2s with a warranty attached to each.

In the end, it's all about profit and loss, and these corporations are increasingly tying compensation and even employment to the ability of salespeople and management to create a profitable location. EB rededicated itself earlier this year to essentially doubling the volume of used games sold for fiscal '06, aiming for the goal of 35% of all sales being preowned product. Further, Gamestop had already been dominating the preowned retail market prior to the announced merger, and is likely to push the joined company toward even greater volumes of trade and pre-owned sales in the coming year, while at the same time incorporating the profitable promotions of EB. Used is the ideal sale, a game at a price point lower than the "big-box" competition like Best Buy, that requires less controllable expenses to deliver (no shipping, or processing at a central location), and provides a doubled and trebled profit margin, and the only thing that makes it better is when the salesperson convinces the consumer to drop an extra couple of bucks for a protection that the vast majority of people never need or use. You should only expect stores to push harder and harder for these ideal profitable promotions and products, as it's not just the corporation's goal, but it's how employees get paid and keep their jobs.

With that foundation of profitability now in place as the cornerstone of the discussion, next time I will talk about how this restrictive emphasis on preowned and high-margin sales affects customer service. Are used games actually as good as new? Are preowned systems reliable or even tested? Are the warranties and guarantees worth their price? Why won't these companies permit refunds? And, how can you get the store to remember that you, the customer, are supposed to be right?

- Elysium

Read Part 2: Policy and Method - here
Read Part 3: What's Next - here

Comments

Great article! 10 years ago, during my senior year in college, I worked at EB for a year. It was still called Electronics Boutique back then. Things were a bit different - we were REQUIRED to take games home to try them - they called it "product knowledge". You took them home overnight, brought them back the next day, reshrunk them, and put them back on the shelf. Best job I've ever had. We also reshrunk and resold any returned games on CD - we had a 30 day, no questions asked return policy back then.

We didn't have the ludicrous "guarantees" on software back then. Instead, they pushed the "replacement agreements" on the game systems. You'd buy one for up to 2 years, then if it broke, you brought it back. The corporation LOVED these, because if you returned your system, we just returned it to the manufacturer as "defective" - they have no idea when we sold it! "Replacement agreements" were pure profit for the company. And in the year I worked there, out of all the systems we sold with replacement agreements (and we sold hundreds - this was the year the Saturn, the first Playstation, and the N64 debuted), we never had a single person RETURN a system as part of the "agreement". And people paid up to $60 a pop for an "agreement" on their $300 game system. The part we as "sales associates" loved was that we earned a commission for selling the agreements - 20%. We were barely making minimum wage, and working part time, and if you sold 5 "agreements" in a week, you could double your take home pay.

Pre-owneds weren't big back then. Just a small bin in the front of the store. But you could see the corporation trying new things, though, looking to branch out to make more money. At that time, we had a rack of trading cards we were trying to sell - you know, Magic the Gathering, plus all kinds of sports cards. Right when I left the company was branching into action figures. Remember when you'd walk into an EBGames or a Babbages and find half the shelves covered with action figures from video games?

It's like you're talking about a completely different corporation. Kind of a shame, because that's what many of us remember loving about shopping there.

I think that one thing that is not being taken into consideration is the fact that the same game may be resold many times. It isn't like every game you buy used was bought new, sold back to EB or Gamestop, and then bought by you. Most of these games are on their 3rd or 4th round through the retail cycle (sans hot new releases of course.) I know that my preference is to buy used games, play them until I get tired of them, and then sell them back to the store. It may very well be that more people buy used than new, but it doesn't really matter when you take this cycle into consideration.
This same cycle also means major profits for the retail store. When you consider the amount of margin these stores make on selling a used title once, the possible profit that they can make selling the same exact copy of a game 3 or 4 times is astounding. Even if they do only mark the title up $5 each time they resell it, that is $20 total profit they are making on one copy of a game. Multiply that by 200 used games per store, 300 stores nationwide, you have quite the business going. And just imagine if they attach a warranty on it each time.
On another note, I think what Elysium is really trying to get at is not the evil practices of retail business (because, let's face it, when was big retail ever virtuous and pure?) but rather the denegration of customer service and passion. The image of your local privately-owned game store; one where you could have had a 10-minute conversation with the clerk, whom you probably knew by name, about why Game X sucked, is gone. It has been replaced with the same old corporate vision of high profits, minimal service, and the reaffirmation of the fact that a sucker is, in fact, born every minute.
My local Gamestop does, in fact, still carry a action figure section by the way. I bought a Master Chief figure the same day I bought Halo 2.

PFusion wrote:

The image of your local privately-owned game store; one where you could have had a 10-minute conversation with the clerk, whom you probably knew by name, about why Game X sucked, is gone. It has been replaced with the same old corporate vision of high profits, minimal service, and the reaffirmation of the fact that a sucker is, in fact, born every minute.

I still have this vision of opening a little second hand book/game/coffe shop some day, when I've had enough of corporate predators and want to retire. Not profit-centric, just enough to supplement my pension. I'll be the old geezer in the corner, sipping a coffee, playing chess against myself and discussing the finer points of Civ tech development trees.

Geck wrote:

I'll be the old geezer in the corner, sipping a coffee, playing chess against myself and discussing the finer points of Civ tech development trees.

The key is to get tanks as early as possible and steer clear of airplanes.

In all seriousness, though, I work at Circuit City in the music/movies department; and the highlight of my day is when I have a 10 minute conversation on actors or movies with a really interesting customer. Oh, and if you want to get a year-long replacement plan on a cd or dvd it'll only cost you about 10% more.

I only offer it when a manager is within hearing-distance of me. Suckers.

"I still have this vision of opening a little second hand book/game/coffe shop some day, when I've had enough of corporate predators and want to retire. Not profit-centric, just enough to supplement my pension. I'll be the old geezer in the corner, sipping a coffee, playing chess against myself and discussing the finer points of Civ tech development trees"

A worthy dream sir.

Garrad wrote:

Never mind I figured it out. Who else do we knowwho is married, lives in Texas and has one child. Yeah I guessed... it's the Ducki's :-). Mind you Deva is nothing like how Bill describes Gloria( his wife). But I figure it is just a facade. ;-)

Bill lives in Austin, the Ducks flock in Dallas. Eli is on version 3.11, the DuckiPrince is 2.x. As nice a name as Gloria may be, There's no way in Hades the Deva is a "Gloria". Except for that last bit of speculation, this is all published information. Thanks for playing; better luck next time.

(Of course, this is the Intarweb, it could all be a lie. You think that's air you're breathing?)

Geck wrote:
PFusion wrote:

The image of your local privately-owned game store; one where you could have had a 10-minute conversation with the clerk, whom you probably knew by name, about why Game X sucked, is gone. It has been replaced with the same old corporate vision of high profits, minimal service, and the reaffirmation of the fact that a sucker is, in fact, born every minute.

I still have this vision of opening a little second hand book/game/coffe shop some day, when I've had enough of corporate predators and want to retire. Not profit-centric, just enough to supplement my pension. I'll be the old geezer in the corner, sipping a coffee, playing chess against myself and discussing the finer points of Civ tech development trees.

I'll move to Europe just for that.

Grumpicus wrote:

Bill lives in Austin, the Ducks flock in Dallas. Eli is on version 3.11, the DuckiPrince is 2.x. As nice a name as Gloria may be, There's no way in Hades the Deva is a "Gloria". Thanks for playing; better luck next time.

(Of course, this is the Intarweb, it could all be a lie. You think that's air you're breathing?) :D

I have to admit that I'm curious about this myself, being a former Austinite and fan of Harris's writing (I actually found this site via a link in his goodbye to GoneGold message). I fail to see the value though in his posting anonymously considering the amount of perosnal detail he shares on his own site. I mean, as cool as it is to have a secret identity, it's does seem a little silly.

Personally, I suspect he's a reader (lurker) and not a poster. After all, if wants to write, he has his own site. He may not even venture into the hive of scum an... er, the forums and just stick to the home page articles.

Bill lives in Austin, the Ducks flock in Dallas. Eli is on version 3.11, the DuckiPrince is 2.x. As nice a name as Gloria may be, There's no way in Hades the Deva is a "Gloria". Except for that last bit of speculation, this is all published information. Thanks for playing; better luck next time.

Yeah I know, I was hoping to get a response from one of the Ducki's though

The neat thing about Bill is I have emailed him a couple of times and he has replied to each and everyone of them... and even replied in a manner so as to not make my initial evaluation of the percentage weight that the Playstation line adds to Sony's bottom line make me look like a complete dunce.

Mind you if he did post, I figure Certis would just clock him with the ban stick...

There's no way in Hades the Deva is a "Gloria".

I can tell you for a fact this is true, though I will not reveal how or why I know.

Mind you if he did post, I figure Certis would just clock him with the ban stick...

Are you kidding? After our lunch at E3, I was waiting for them to make each other charm bracelets! (kidding, guys.)

DaveAlpern wrote:

Pre-owneds weren't big back then. Just a small bin in the front of the store. But you could see the corporation trying new things, though, looking to branch out to make more money. At that time, we had a rack of trading cards we were trying to sell - you know, Magic the Gathering, plus all kinds of sports cards. Right when I left the company was branching into action figures. Remember when you'd walk into an EBGames or a Babbages and find half the shelves covered with action figures from video games?

My Gamestop sells figures and collectibles. Some cool ones pass through my store sometimes. We also have Magic cards and the ever present Yu-Gi-Oh cards... I swear who ever came up with that crap is sitting on a golden toilet... about $15 for a frieking pack of painted cardboard.

On another note... they're going to be closing the only Babbages (that I know of) left in Miami to merge it with the EB in the next 2 months or so... kinda sad since I remember being like 4 and peering through the glass at all the cool new NES games.

Certis wrote:

now she's going to run away with Elysium thanks to one article.

It's fate, oh you blue eyed man-hunk! Bring the rodeo clowns! <3 >_<

Good read Elysium. I was involved in sales for a few years, in several fields, good products, high profit. Like you, I excelled in my zone and like you, at some point I bottomed out, spiritually. I went from cookware to furniture to cars. Interestly, as with games, the profit on used cars was much higher than the profit on new. The commission rate on used was slightly higher as well, some used cars even had bonuses attached. I was the queen of used car sales for a while. The male sales people said that customers trusted me because I was a girl, like I was some kind of witch, but really, I had the nack of hearing someone say what they wanted and how much they wanted to spend and taking them straight to it rather than "starting them on more car" like we were told to do: "You can always switch them to a lower priced car but you can't go to a higher priced car". Give them what they are looking for wins in my book. Even though I was following my own conscience, the pressure to excel and to use the company tactics were significant and took a toll. I guess that runs paralell with what you were going through at EB. I'm looking forward to reading more of your interpretations of the sales game.

PFusion wrote:

I think that one thing that is not being taken into consideration is the fact that the same game may be resold many times. It isn't like every game you buy used was bought new, sold back to EB or Gamestop, and then bought by you. Most of these games are on their 3rd or 4th round through the retail cycle (sans hot new releases of course.) I know that my preference is to buy used games, play them until I get tired of them, and then sell them back to the store. It may very well be that more people buy used than new, but it doesn't really matter when you take this cycle into consideration.

I dont know if this was in response to my post or not (about how when too many people buy used, the whole videogame universe will collapse), but if it is, what you describe above really doesn't have anything to do with the issues I raise.

So say a game IS sold 4-5 times... that boosts EB's profit, sure. The only person in your scenario who gets shafted is the actual GAME COMPANY who sees a decline in their own profit, can't afford to make more product, and then closes their doors. Tje entire system we have in place for games retail is dependent on enough people buying NEW games to keep everything afloat... my question still remains, then, what happens when too few people buy new games? Will this ever come to a head? Maybe not... I'd never in my life buy a new car, but ENOUGH people must that THAT industry can keep things going.

Here's another question that just occured to me-- what if it WAS illegal to sell used games. What would this mean? Would we actually see MORE budget titles get released to meet that less expensive market, or would it just be $50-60 or nothing?

just rambling...

My old Gamestop store (well technically I was only ASM, never manager), has seen a marked decline since shortly before I parted ways with them, mostly because I was the last of the "old staff" who were from the era of yore that people remember fondly about video game stores, if a game stunk, we'd say so (I can't begin to count the amount of people I kept from buying BMX XXX) we'd point out to "clueless parent #1" that GTA 3/Vice City probably wasn't appropriate for little 8 year old Johnny (the funniest part, we'd enjoy getting graphic with the beatings, random mayhem etc. which the parent was fine with, then we'd casually mention that you could pick up hookers... and suddenly little Johnny needed to find a diffrent game to buy), and warn them off seriously oddball things (like Majoras mask requiring the more expensive then the system expansion pack) that most people didn't immediately think of. We knew about Anime, PC stuff, Console games, you name it there was generally someone who has knew what it was you wanted to know. Then the changes came, not only was selling stuff required, but now you had to sell replacement plans on the systems and MST (Multiple SKU Transaction), ok I can live with that... then they also wanted us to push reservations... ok, not my idea of a great time, but I can put up with that... then they wanted us to push subscriptions... you want me to force some 10 year old kid to pony up the money so that we can (possibly illegally) get his name and home address?... er this isn't sounding like a good idea... Oh now we need to answer the phone and greet every customer with a 30 second - 1 minute spiel on why they should buy our some crap they don't want, that I don't want to sell them, and that they are just going to be pissed off at me for trying to force upon them?

I'll admit I went along with it for a long while, I had started looking for another job, but I pushed the crap anyway, I pushed it harder than the rest of my store put together (there was an in store ranking system, even weighted for the hours worked I crushed everyone for nearly 3 months straight, including my manager). I need the money and the benefits at the time so I stayed, hating the job more and more each passing week. Now I am in a job I still don't really like, but it pays better and well, to be honest, people still don't like the company policies, but we're not a friendly sort of business so I don't have to try to make them like it. (I work for a towing company that does Private Property tows (i.e. you park somewhere and leave, we come out and impound the car, and charge you $225 to get it back, needless to say happy people are not something we usually see)

With all of my friends no longer running any of these stores, it might well be time for me to blow off the game store shopping, and instead rely on big box stores like Target/best buy/Walmart for my gaming needs.

I'm of two minds on used games. I mean, as a consumer, I love the fact that I can get the same game, used, for half the price or so. It's great!

But at the same time, none of the money goes to the developer. And even though it's completely legal, it's bad for independent developers, who already have a hard time surviving in the industry. I'd be really curious to find out what the statistics are like - how much of the new game sales are cannibalized by the used market?

Nosferatu wrote:

I was the last of the "old staff" who were from the era of yore that people remember fondly about video game stores, if a game stunk, we'd say so (I can't begin to count the amount of people I kept from buying BMX XXX) we'd point out to "clueless parent #1" that GTA 3/Vice City probably wasn't appropriate for little 8 year old Johnny (the funniest part, we'd enjoy getting graphic with the beatings, random mayhem etc. which the parent was fine with, then we'd casually mention that you could pick up hookers... and suddenly little Johnny needed to find a diffrent game to buy)

Aye, it's a dying breed, but there are still some of us left. My district manager doesn't like it, but he doesn't do anything because I'm well-liked by my boss/coworkers and customers.

GameStop is selling out like no other this year, as well. We're going all-out for EA (of all companies) and dedicating full gondolas and window displays to NCAA/Madden 06 this year. We also have huge banners, NCAA nametags, and we're required to wear a company-supplied NCAA football shirt as our uniform for the two weeks leading up to the NCAA release.

EA must have just shoved bucketloads of money down our CEO's throat. It's rather sickening.

Maybe I'm being naïve again, but aren't EB and Gamestop binning their unique selling proposition? The only advantage small retail stores have over big companies like WalMart and the likes is that they're supposed to know more about what they sell, they're supposed to be passionate about it, they're supposed to be able to share that passion with the customer. Heck, I even felt a little warm inside when Geck talked about his cosy-coffeshop/gamestore-idea. And I don't even like to play chess!

If EB and Gamestop give the only advantage they have over supermarkets away, they'll ultimately defeat themselves, no?

dejanzie wrote:

Maybe I'm being naïve again, but aren't EB and Gamestop binning their unique selling proposition? The only advantage small retail stores have over big companies like WalMart and the likes is that they're supposed to know more about what they sell, they're supposed to be passionate about it, they're supposed to be able to share that passion with the customer. Heck, I even felt a little warm inside when Geck talked about his cosy-coffeshop/gamestore-idea. And I don't even like to play chess!

If EB and Gamestop give the only advantage they have over supermarkets away, they'll ultimately defeat themselves, no?

no because the larger retail chains are probably not ever going to commit as much retail space as the speciality shops will to inventory. Unless of course they begin to realize how much profits are in the used game biz..

The difference between EB/GameStop and the other stores are not the employees and what you said (although it does happen) but the fact they take used items. EB/GameStop is more of a pawn shop then anything else.

Just to play Devil's Advocate (couldn't be a more appropriate term, really) for a bit here, part of the reason there is heavy margins on used titles is because stores often retain vast inventories of used product that they are stuck with. Trade-ins must be accepted on current generation games as long as some very basic requirements are met by the trader, and this includes plain cartridges of Game Boy Advance games or discs of PSX games without the case. These products are still paid for, and they end up in the black hole of unsellable games.

It is still far more profitable than the ~15% margin on new titles, which have the same problem with sell-through, though to a lesser extent. However, keep in mind when you are getting less than half of what you paid for that new title you are trading in, the store that has to sell it back to turn a profit may never do so. Of course you'll get more on eBay - the person buying your item actually wants it.