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?