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

I think a little pee just came out ...

Certis better do something awesome between now and the MN get together, or I might just run away with you, Elysium. Elysia can come with if she wants.

Great, first she makes a post in her own blog about how hot it's going to be to shoot Reaper's guns and now she's going to run away with Elysium thanks to one article. This is going to be a great trip!

Articles like that are what put our site head and shoulders above anything the "mainstream" gaming can hack together.

I don't see anything wrong with EB doing that. It isn't dishonoest and I think anyone could put two and two together.

I'm can't speak for EB's policies, but I will make a clarifying statement in regards to GameStop's, which in some cases differ slightly. I currently work at GameStop, and have for nearly five years, and we certainly do give trade-in prices over the phone. In fact, we can get into trouble if we refuse. Any opportunity to aid trades is to be taken, from GameStop's point of view. If the trade-in prices sound too low, we're encouraged to emphasize benefits like the More Card (10% bonus to trades) or one of the many trade-in specials we run, such as getting an extra $10 credit for every three used games you trade in.

Also, I have no idea how you qualify Forza Motorsports as a "niche" title. It's about as niche as Gran Turismo. It's a smash hit and has sold out constantly at our store, and every store in the district. It's not exactly as if I'm not in your neck of the woods, either.

Certis wrote:

Great, first she makes a post in her own blog about how hot it's going to be to shoot Reaper's guns and now she's going to run away with Elysium thanks to one article. This is going to be a great trip!

On the upside, this leaves you able to further pursue your tryst with Mex. The marraige is legal in Canada now!

Fantastic read, though as someone pointed out, no one is putting a gun to your head and forcing you to buy the nasty nasty trade-in bits -- a topic you'll cover in the next part I guess. The article does flesh out and clarify to me why the local EBs have been sucking big time over the past 1-2 years.

Luda wrote:

I'm can't speak for EB's policies, but I will make a clarifying statement in regards to GameStop's, which in some cases differ slightly. I currently work at GameStop, and have for nearly five years, and we certainly do give trade-in prices over the phone. In fact, we can get into trouble if we refuse. Any opportunity to aid trades is to be taken, from GameStop's point of view. If the trade-in prices sound too low, we're encouraged to emphasize benefits like the More Card (10% bonus to trades) or one of the many trade-in specials we run, such as getting an extra $10 credit for every three used games you trade in.

Also, I have no idea how you qualify Forza Motorsports as a "niche" title. It's about as niche as Gran Turismo. It's a smash hit and has sold out constantly at our store, and every store in the district. It's not exactly as if I'm not in your neck of the woods, either.

Remember he said he worked for EB not GameStop (that was a while ago) so the no trades over the phone applies to EB. Forza is an example, just substitute it as Game x if you want.

Good read.

What I find disturbing is the level colusion between retailers that has developed over the last 10 years. Not only dose it foster a lack of competion, even remotely, but things have gotten down right anti consumer as far as your abilty to resolve problems as a customer (games not running etc)

I'll stay tuned to the same bat channel but when is part 2 coming along?

Fascinating, Elysium. And slightly icky. I feel like I've just paged through a copy of To Serve Man or something. It all makes perfect sense.

I'm looking forward to the next installment.

Right now I'm trying to kid myself it's not as bad here in Belgium. But even if it isn't, it will be soon.

Looking forward to the next part, great post.

Sanjuro wrote:

Articles like that are what put our site head and shoulders above anything the "mainstream" gaming can hack together.

Full ACK here!

Now the time has come that I as a regular READER but not Contributer of this great site have to post something for the first time. Please forgive me my poor english, I'm from Germany, but I have to say this is by far the best article(s) i've read in the last months, if not years.

BTW, are there more of my kind (germans) here? Maybe some of you are interested in building up a kind of german subsidiary of GWJ?

Sloopy_DE

Awesome article, Elysium... though it seems part two will be even better! I can't wait. I found your analogy of EB's modus operandi to Asimov's laws of robotics particularly sagacious. The comments about how an article such as this would never appear in the mainstream gaming press are all spot-on. IGN and Gamespot pale before your vivid writer's plumage.

Sloopy_DE wrote:

BTW, are there more of my kind (germans) here? Maybe some of you are interested in building up a kind of german subsidiary of GWJ?

Spunior and chrisg are in Germany. I'm going to start calling you guys the Continental Contingent. Welcome to GWJ!

Excellent read, Elysium - very enlightening. With a profit margin of only a few percent on new titles, I don't blame stores one bit for pushing used merchandise. As far as the consumer side goes, when I can pick up six excellent, award-winning older XBox/PS2 games for less than the cost of ONE new game, guess which way I'm going to go?

I think if you've spent any time in an EB or Gamestop lately, the points in this article are fairly clear. Still, it's a nice summary of how the world works.

This is why I tend to buy games at Target or a small local record/dvd store chain that also sells games, because while they are after basically the same thing (profit) they are nicer to me while pursuing these goals.

Occasionally, I go to the Gamestop, and am willing to get reamed on trades or give them some extra margin when they have a 2-for-1 used game sale or something, because I'm too lazy to sell the games myself, and hey, 2-for-1. And that's OK, everyone gets some value in that transaction.

Excellent article Elysium, well written as always. I'm looking forward to the rest of this continuing saga.

the informed and savvy gamer hasn’t been the target market for these companies in a very long time

So I've noticed.

On the other hand, I have noticed that in the stores with good staff, if they catch on that you actually know something about this stuff they'll be very helpful. Interesting how my customer service experience gets better once they realize they can't bullsh!t me. The ones with the not so good staff might try anyway, but I usually end up leaving without making a purchase. There are a lot of options in Dallas.

Fantastic stuff. Looking forward the continuation of the series.

Is there such thing as "Gaming Journalism Pulitzer Prize"? Is that an oxymoron? You would totally win it dude.

Dollars to donuts this gets linked by DQ.

Spunior is in Germany.

As is Chrisg.

This was a fantastic article, Elysium. I've never looked that 'big picture' at used games before (specifically lack of inventory management via processing and shipping) and was a very interesting read.

Good article Elysium. I haven't been able to connect the dots yet from your first article to this one. Clearly in the first article, you felt a need to purge and my impression was that you were a bit disgusted with the business practices of your now former employer. This article details those business practices and, while interesting, none of those practices appear to me to be dishonest or deceitful in any way. I'm sure you will connect the dots in a future article and I'm interested in getting a better understanding of why you seemingly felt so repulsed by the industry and company you worked for. I know burn-out was probably a major factor but it seemed from your first article that it was much more than just that.

Great article Elysium. Certainly makes me understand why my local stores are moving the way they are.

Sloopy_DE wrote:

BTW, are there more of my kind (germans) here?

Not quite, but I speak German (born in Luxembourg, living in the UK, and moving to Austria for a year on 1 August).

The problem is: how can you expect customers to know about everything? I know something about games and computers, making the chance of getting screwed in a gamestore pretty slim. But I don't know squat about cars for instance, and it's very sad to know I'll probably somehow get screwed royally by a car salesman. It's sad to know you HAVE to be informed or they'll screw you. If you're not, they'll squeeze every penny out of you. And I resent blaming the customer for that, like some people here seem to do. Of course, there ARE dumbass, anoying, paranoid people who are begging for bad service. But in almost any case the salesman is much better informed - duh - which makes the "battle" a tad uneven imho. It's sad I have to call it a battle.

Hell, maybe I'm just not cynical enough.

Nice read El!

Disturbingly sad but true. As an area manager for a healthcare company (my region is currently $115 million in annual sales) I can assure you that these issues aren't limited to the retail gaming industry. Maybe someday when I'm feeling typish I'll let you in on the big ugly mess that the U.S. healthcare industry has become. Yes folks, your illness, no matter how debilitating, it someone elses profit margin.

Ulairi wrote:

I don't see anything wrong with EB doing that. It isn't dishonoest and I think anyone could put two and two together.

I agree this is just regular business. You need to make money in sales, period. There is no reason to sell at a loss.

I believe the problem is that a lot of people cannot see a normal business model for something that we all enjoy as a hobby. Given the predicament that publishers have put retailers in it is not a surprise that the retailers have to do everything to increase margin. If your margins are being attacked from below you have to expand them at the top.

The funny part is no one complains about the movie business in this way. Movie ticket prices have increased substantially in the past 20 years, while video game prices have actually decreased (I remeber paying ~$80 for Phantasy Star on the SEGA Master System when it came out, and the PC titles were all ridiculously expensive when I was a kid). But no one sees paying $10 a movie as a problem, meanwhile we complain about video game retailers who are making ~10% gross margin on a PC game.

Bear wrote:

As an area manager for a healthcare company (my region is currently $115 million in annual sales) I can assure you that these issues aren't limited to the retail gaming industry. Maybe someday when I'm feeling typish I'll let you in on the big ugly mess that the U.S. healthcare industry has become. Yes folks, your illness, no matter how debilitating, it someone elses profit margin. :(

You better post that in P&C, that would get ugly. Also I hope you keep your identity as secret as possible!

Mayfield wrote:

The funny part is no one complains about the movie business in this way. Movie ticket prices have increased substantially in the past 20 years, while video game prices have actually decreased (I remeber paying ~$80 for Phantasy Star on the SEGA Master System when it came out, and the PC titles were all ridiculously expensive when I was a kid). But no one sees paying $10 a movie as a problem, meanwhile we complain about video game retailers who are making ~10% gross margin on a PC game.

A recent poll found that a majority of people (can't remember the exact number... 70%?) now prefer watching a movie at home over going to the theater. Backing up that poll is the fact that movie sales have had year over year declines for 19 straight weeks now (a record) and ticket revenues are down 11% from a year ago.

In terms of what's kosher in business, well... all this stuff is legal, but people will bring a different set of ethics to the table. In my mind, I see nothing wrong with dealing in used games. It's a higher profit margin item for the company, and only once have I ever had a problem with a used game. On the other hand, this latest warranty program strikes me as below the belt-- it seems to me like EB is just trying to snow uneducated consumers, and I'm not sure that a Dumb Tax qualifies as ethical practice. I'm not even sure that the tactic of slipping the warranty into the bill without asking is even legal. How do you make them stop? Shop somewhere else. But for used games, it's pretty slim pickings elsewhere, unless you want to go EBay.

I think a couple of people may be misinterpreting my goal here. I have never said, nor am I implying that these companies are deceitful or dishonest. But, a lot of people don't understand - or haven't fully connected the dots - as to why the certain business practices of these guys is what it is. I decided after my last article that what I really wanted to do was be clinical, even 'journalistic' in the discussion. Fair to both sides, because, as I say, both companies treated me well and I don't really begrudge them. Again, not trying to say these guys are deceitful, but they do play a game, and they don't give customers all the information.

I currently work at GameStop, and have for nearly five years, and we certainly do give trade-in prices over the phone. In fact, we can get into trouble if we refuse.

Interesting, though I have been refused prices by Gamestop over the phone before (it might have been for other reasons). It is, however, EB's official policy not to give trade prices over the phone.

Wow, what a well thought out, well constructed article. I think I'll jump on the hoochie bandwagon and come out and live with you. Me and the cats. You like cats, right?

As for the business revelations, there's nothing there that's the least bit surprising, having lived my entire professional life in the corporate world including a chunk of it in retail. The profitability mantra is pretty much business as usual across all industries, and it's far more cutthroat for public companies than private ones.

Looking forward to the next installment.

Great, first she makes a post in her own blog about how hot it's going to be to shoot Reaper's guns and now she's going to run away with Elysium thanks to one article. This is going to be a great trip!

Bwahahaha!