Saturday, May 19, 2018

Nothing Special (Tradecraft)

Some of my friends have been kicking around an article from the Harvard Business Review entitled The Five Stages of Small Business Growth. There are summaries of this article online, but if you own a business, you should download the PDF with all the details, especially the impact on owners. It was published in 1987, but it could have been published today. It's relevant.

The article discusses the stages of small business growth and most importantly the role and motivations of the owner during each stage. If you've felt like an NPC, Non Player Character, through your tenure as small business owner, this article helps you gain some perspective. You are the hero of this journey, at least in this article. This is important for small business owners because as you grow, the owner tends to fade into the background, a natural, as it turns out, but disconcerting development.

Your role is increasingly in the background, and your personal needs, what you want from this, are not usually part of the discussion. So you develop feelings of alienation and loss, which can lead to erratic grasping behavior or some odd expressions of disengagement (my experience, not the article). This article helps put your role into perspective so none of these stages come as a surprise. Or as one of my Buddhist teachers once told me after I complained about travel making me feel disoriented: "Well, don't get oriented."




As technical and wonky as this article may be, it draws observations about the role and motivations of owners at each stage of development. I felt like I must be the only one suffering through the Survival phase, that living like a pauper and just hoping it would fail or succeed already, was unique to my experience. Nope. Happens to every small business owner.

How about the alienation that comes from delegation in the Success phase, where I'm increasingly disengaged and money is suddenly an issue, with demands from new hobbies and the business? Happens to everyone at this stage. It's the Success-Disengagement substage, otherwise known as III-D (D is for Disengagement) with our recent expansion an attempt to move to III-G (G is for Growth), the painful and often scary, success-growth substage. That's where I am now, classification III-G, which I have to admit, makes it a little less formidable.

So I must have it all down and there are no more surprises, right? When I look at Stage IV, Take Off, I realize I may never get there. I may never get my III-G attempts to launch into a full on IV. Stage IV is incredibly rare in the game trade, but don't let the field fool you, as only 12% of small businesses ever get there.

There is no wrong answer in the stages of growth and you can languish in Survival for your entire existence, as most mom and pop stores do (according to the article). Or you can buy your house in Maui and remotely manage while chugging along in the III-G Success phase (according to the article). When you look at the staggering requirements for Stage IV, buying someone else's II at the Survival stage or a healthy III-D seems so much more palatable.

I do know of business owners in Stage IV, but they tend to be too busy to chat most of the time, with their large enterprises and high finance. I'm not sure I want to be that busy again, especially now that I'm older with a family and more to lose, and thus III-D, with occasional launches into III-G, is where I'll end up for the long term. It's where 57.9% of companies end up. Nothing special.


Thursday, May 17, 2018

The Law of Six Dudes (Tradecraft)

I love miniature games. I love everything about them, the beautiful sculpts, the creativity in painting, thinking up various ways to trounce my foes. Because I love them, I want to carry all of them. However, not every store is cut out for this, or more accurately not every demographic is capable of supporting this. I've discovered The Law of Six Dudes.

The Law of Six Dudes says I may sell a ton of starter sets for any given miniature game, but there will be a limited number of customers who engage with that game beyond that initial surge. It's six dudes. They're not all dudes, and the number six is my arbitrary number. It's not really a law, more a rule of thumb, but you get my gist.

So what do you do when faced with the Law of Six Dudes? This comes down to your very retail philosophy. Do you demo games, run events, and promote these games to break the Law of Six Dudes? You can spend an infinite amount of energy attempting to create a community where there is none. You may get some of those starter set people to re-engage and you'll suddenly have Eight Dudes, or Ten Dudes. That's an awful lot of work for not a lot of return. Is that your job as a retailer?

You may decide to drop miniatures entirely. Certainly no reasonable mass market retailer would continue supporting a product line that appealed to Six Dudes. But we're specialty retail. We're where you go where everybody knows your name. I've carried RPG product lines for over a decade for TWO dudes. The problem is miniature games are really expensive to carry. The opportunity cost to carry a wall of plastic (once lead) for the potential for a Seventh Dude is far higher than one of each book in the RPG department. It would not be unreasonable to declare your store not a miniatures store and stop letting your love of pretty models get in your way. That's not unreasonable at all.

Our solution has been one of accommodation. I accept that there may but one successful miniature game, and thouest name is Warhammer 40K. However, I also accept that there are strategies to accommodate those six dudes. This means miniature product is carefully curated and cycled through. When the six dudes have had their fill, I don't wait for dude seven to wander in. We also don't clog our event nights with these six dudes, but instead have a catch-all day where all the army men from the beginning of time can be fielded. We've dabbled with nearly every major miniature game over the last 14 years, and you may play them all on Sunday.

Accept your Law of Six Dudes. You are not all things to all people. If you can grow beyond the six, that's great. If you wish to declare you are really not a miniatures store, and drop them entirely, that is perfectly fine and reflects your wisdom not your foolishness. If you want to accommodate as we've done with a curated experience, that's a potentially profitable position that makes most (but not all) customers happy. What you really don't want to do, and I did it for years, is delude yourself about your demographics and your position in the market. It's a painful way to lose money, catering to six dudes, pretending there may be twelve or a hundred. It ties up capital, makes you sad, and shows everyone you're the fool.

The upside of the Fool is it's the card of renewal and new beginnings. 
Start embracing The Law of Six Dudes with a clearance sale.

Wednesday, May 16, 2018

Shifting Value Propositions (Tradecraft)

When you open a hobby game store, you have no idea what kind of store you'll be. If you're starting with a giant Magic collection and you're a Magic maven, sure, Magic will be a big part of your mix. However, you really don't know if you'll be big into board games or miniature games until you figure out the needs of your customer. Your store inventory reflects their needs. Likewise, business models are being shown to shift over time as well, and you need to be just as flexible in this arena as you are with inventory.

In the beginning, there was the Traditional Value Proposition, the pretty good price, with pretty good service, with pretty good selection. Tap 80% of the population and you could safely ignore the other 20%, their poor reviews and all (also known as word of mouth). That has given way to a more Useful Value Proposition, where you find ways to make your retail operation sticky to attract and keep customers, usually through concepts like Third Place Theory. Third Place Theory builds community, and communities are resilient and defy common retail considerations. Finally, you have the future proofing of a Unique Value Proposition, the special sauce in your operation, which might be the building you bought to bend the price curve, community outreach, or supercharged demos that make you the source of demand, rather than attempting to predict supply.

The problem is the Traditional Value Proposition is obsolete, and stores relying on it are closing. The Useful Value Proposition, relying on Third Place Theory, was indeed useful 7-10 years ago, but is now becoming ... wait for it ... traditional. Most game stores are in the useful category, and as useful becomes traditional, their mojo declines and they're at risk. At one point, the early movers of Third Place Theory were unique with their value proposition, so they've slid all the way from Unique to Traditional. Like the shifting whims of customers that determine your inventory mix, your entire retail operation is also built on shifting sands, and you need to be prepared to adapt.

You may think you will run a particular type of store when you begin, but in fact, you absolutely will need to change over time, provided you succeed and you're around long enough. This is not news to more dynamic businesses. Retail didn't change much for a hundred years up until around 1991, when the technology began to intervene. Sears was Amazon for nearly a century, selling everything from wrist watches to houses through catalogs (Sears emerged from the big innovation of that day, catalog sales made viable by the railroad). Sears was so wildly successful they opened brick and mortar stores, much like Amazon is doing today. In 1991 they were the unassailable king of retail. Then the web happened and online shopping provided a Unique alternative.

The key to retail success is coming up with your Unique Value Proposition, but what's even more important is keeping nimble for when your Unique proposition becomes merely Useful, and hopefully before it becomes Traditional. I once ran a profitable BBS system, that relied on technology with multiple phone lines and crazy looking octopus cards. When the web emerged, we invested in new technology to link our BBS to the Internet. Before the loans were paid back, the model shifted again to websites and portals, and we simply couldn't adapt fast enough, while some BBS system could, and became Internet Service Providers. A critical part of having the Unique Value Proposition is being nimble enough to shift your model as you become Useful and then Traditional. When you look at the Traditional Value Proposition losers in retail, the big stores, you'll find the Internet didn't kill them. Almost universally, their lack of dexterity to change did them in. You may be one thing now, but in the future, you'll be another.

Sunday, May 13, 2018

GMROI Checkup (Tradecraft)

You may find yourself with higher sales but that sinking feeling something is wrong with your store. It's like the money is coming in, but there's still no cash at the end of the day to pay bills. It's not that people are stealing from you, but you've seen an increase in sales of corrosive products that erode your margin. Or perhaps you run poorly thought out events under the umbrella of a "marketing expense." Marketing expenses are where bad ideas go to die. This is when you need a GMROI checkup.

We work on a lot of assumptions about how our stores work. We do the work, we hit sales targets, things are well. When you invest in low margin product, or low margin activities, assumptions are no longer enough to keep you afloat. Some examples of this are Ultra Pro with their "net" pricing that leaves you with a 35% margin. For a long time, CCGs like Pokemon and Yugioh were at a 40% margin, although you can boost that with the right distributor.

The proper functioning of a traditional game store historically required a 50% gross margin, but that has been slipping for years. My impression is it hovers around 45% for a diversified store and perhaps down to 40% for a more card centric model.  Besides product problems, you may also be running "customer appreciation" events that rewards "butts in seats" but erode your margin. The margin of your traditional $15 Friday Night Magic event is pretty poor if you're in a state with sales tax and you're including it in your event fee. Our FNM hovers around 25%.

The solution to this is fewer customer appreciation events. If you have to have them, boost your game center sales by monetizing space. We do this by requiring a buy in to play, a $5 for $5 of store credit model. Every scheduled event uses this model, with free play only when nothing is scheduled. This won't change your margins, but it will increase your sales as freeloaders are now required to become customers. Your event won't support pay to play? Appreciation goes both ways and it sounds like you are the one not being appreciated. Drop the event. You don't owe them anything.

When it comes to inventory, you have several options. First, use just in time inventory for low margin items. An extra box of Pokemon or a month supply of Ultra Pro sleeves is an opportunity cost you can't afford. Go lean on these products. Order more often if need be, provided you can avoid freight. Also be ruthless with these inventory categories. We used to carry every play mat. I never met a play mat I didn't like. Just last week I decided there were just too many low performers to treat it like the "product pyramid" as we do with dice, especially at low margins. As Magic had tanked over the last year, so had play mats. It turned out a third weren't performing to my liking. Goodbye.

You can also mark up low margin items. Many stores see CCG supplies as a profit center making up for lower prices on their cards. If you've got low CCG prices and low CCG supply prices, you should definitely be balancing this out. Even if you aren't in the balancing game, who is Ultra Pro to decide you will carry their stuff at the worst margin in the game trade? Mark it up.

Finally, get out of some of these lines altogether by diversifying. If you have more than three lines of card sleeves, you probably have too many. Drop the lowest performer. Card players have a tendency to fetishize their sleeves and they need to get over it.  Of course, if you raise the price, you can have a wall of card sleeves a mile long. An Ultra Pro example would be to lean out your stock, raise your prices and take that money and invest it in just about anything else. If you have the market for high margin items, go there.

Our jigsaw puzzles aren't great sellers but they're the highest margin item in the store. If you're going into board games, seek the brand value protected product. Look to Asmodee right now as they've changed their MAP on their core line to no more than a 10% discount. Seek value with product over 50% margin.

There are also categories that have price elasticity that will allow you to go over MSRP, such as dice, miniatures, and even some of those aforementioned card supplies. An extra quarter for a miniature won't be noticed by the customer, but it might keep you in business. Take advantage of any opportunity to balance your margins by exceeding that 50% line in the sand. Look for sales of things you actually need. Buy direct from China. Embrace publishers who provide such opportunities.

Thursday, May 3, 2018

The Best Damn Clubhouse Store (Tradecraft)

Let's build one. Yeah, the model is broken, but let's make one that works.

Location: We want a Class C retail location, right on the edge of hospitable. It needs to have enough square feet for huge events, seating for 200, but it also has to be presentable to moms and their children. It also needs to include a multi year lease, which makes it potentially a unicorn of a location. Don't go light industrial, go marginal retail.

Concessions: While most full spectrum stores might have half and half retail to game space, you're going two thirds game space to one third retail. You are also going to put in a full snack bar with prepared drinks, either coffee or some sort of funky soda shop. You'll have sandwiches brought in, but you won't prepare them, at least at first. In general, you need to supplement your income with prepared food and drink. You will personally make sure every prepared drink is better than everyone within ten miles and you will master the machine.

Concessions Alternative: You don't like drinking liquids? Alright, you now conquer the secondary market. You buy used games, including used video games. You wheel and deal and sell power cords for X-boxes and tap that market in your community. You now bring in the general public who get angry and swear at you because you won't give them top dollar on Madden 2025. It's cheaper than concessions permits though.

Product Load: Oh dear lord do you have a lot of CCGs. You have every box of Magic obtainable, sold at stupid pack prices. It's alright, even poor selling Magic sells better than every other thing in the game trade. Your single collection is vast, is also sold online at TCGPlayerPro, and you've got a ten grand bankroll in the safe for buying deeper. You are nuts and collect full play sets of absolutely everything ever. You crack 6-10 cases of everything new. This is your "top of mind" experience. You have Towers of Power, searchable collections of singles in boxes around your store, so tall they make the gods in Heaven jealous. You shake your fist at them. Young men tell their families they're looking for a job, but they're worshipping at the Tower of Power all friggin' day long.

You have Pokemon cards and singles as well. You carry a core set of Yugioh singles that everyone recognizes. Anus of Exodia? Yeah, we got that. You dabble with fringe Japanese card games and hopefully you've got someone who cares and can break the habit of this garbage sold at cost online. Good luck with that. Ganbatte!

You carry Asmodee, everything from every line. And that's all when it comes to board games. You make a point of never getting rid of a game until Asmodee themselves gets rid of it. If this segment takes off, perhaps you dabble in other brand value protected board game lines, but you deal in publisher lines not individual games. For now, you become an expert in all things Asmodee: Catan, Star Wars games, Ticket to Ride, you name it. Nobody else gets in. You are an Asmodee company store.

You also carry the Games Workshop stockist line of 40K, the basics of GW, along with their paint line. Again, you buy the new stuff to small degrees, but you don't meander into other miniature games or deeper into this line. You take the low hanging fruit and let the high hanging fruit rot on the ground as it falls. Don't eat that rotten fruit. If this really explodes, go for it. It's all brand value protected. But I warned you about the fruit.

Finally, Dungeons & Dragons, the full line and no more. Spine out. Grudgingly. In the back corner. Maybe with dice in a case. You don't need this line, but it will make you money. If it doesn't work, drop it like its hot. Wizards of the Coast lets Amazon sell this below cost, and they don't provide organized play, so you have no friends here.

Events: Your event coordinators are all employees. Lets get that straight. They work for you, even the Magic judges. Yeah, you'll bribe an L2 when you need one, which hopefully is often, but quality of events is your bag, and this is what's required. Notice how Wizards of the Coast both judges you on your event quality AND demands to be in charge of judges, WHILE telling you judges aren't their responsibility. Play the game.

You run Magic as often as people will show up, and you'll incentivize attendance to make it happen, but you'll also do it profitably. All events are pay to play. All events are professionally managed too. You'll also run Pokemon and Yugioh, with Pokemon players groomed to be future Magic players. This is a major reason why your store needs to be above average, as you are including children in the mix and their justifiably judgmental mothers. When you lose Pokemon, your days are numbered. If you ever find a game to graduate to from Magic, run that too. Bridge? Mah Jong? Why yes!

You buy every organized play kit from Asmodee and you make that shit work. Management bonuses depend on it. You hold regionals for Legend of the Throne Wars and people come from hours away.

With the slack in your schedule, a bad thing I might ad, you run events for your Asmodee and Games Workshop events, but be incredibly reluctant to give up space for D&D or other games that aren't directly adding revenue OR aren't brand value protected. WOTC gets away with Magic because Magic is huge. D&D? Less so.

Staff: You are a CCG maven. You've been playing for years. You compete. You write or make videos, and if not you try it before you start the store. You hire like minded individuals who will both run the store, run events, and make the occasional caramel mariachi. You will endeavor to have a well rounded staff that attempts to have a balance between men and women, as you have a hole to dig out of with a clubhouse style store.

There are no volunteers. There are no crappy events either. You run events you can monetize, and if you can't monetize them, they don't get run. You demo games on the half dozen tables around the store, primarily Asmodee offerings. This structure works better in low wage states, unlike California and Washington, but it can be done there too.

This clubhouse is amazing. Give me a couple hundred grand and I'm all in.


Find Your Niche (Tradecraft)

I like the auto industry, and I would in that business if it didn't rank in seediness up there with pornography and social media analytics. Ford is on my mind after announcing they would stop making cars, other than the Mustang. There's a lesson here for every business.

This lesson comes from the old Ries and Trout book, the 22 Immutable Laws of Marketing.  I love this book, although it's a little dated nowadays. I loved it so much, I used it for the last chapter of my masters thesis describing how 14th Century Japanese Buddhist philosophy evolved new theories of enlightenment to fill open niches of thought. It was a real page turner. The lesson I have in mind is called The Law of the Category. Being first in a category is everything. Everything.  If you can't be the category winner, which usually takes half of the market share in a mature market (why I thought board games were ripe for the picking by somebody), then dominate a new category.

In the case of Ford, they're the number five auto marker in what is absolutely not a mature market. It's a market where millions of vehicles a year are made by companies you've probably never heard of. If you feel overwhelmed by pop up competitors, the auto industry is hardly any better. It's a dangerous market and Ford is losing.

Where Ford is winning is trucks. They sell nearly twice as many trucks as their nearest competitor, the sign of a mature market. Ford has one truck product line, the F-Series that outsells all their non Mustang cars combined. Trucks are also more profitable than cars. Ford is a winning truck company and a losing overall vehicle manufacturer.  So they chose to follow the Law of the Category and be a winning truck manufacturer (with an iconic sporty car).

This is a lesson any mature business, including game stores, can apply to their situation, and one I've applied a time or two. I say mature because newer businesses, assuming they're diversified, try to be all things to all people. They either don't know how to run the numbers to see where they're making and losing money, or they refuse to cede market segments to competitors because of fear the competitor will grow and dominate them (because they lack a Unique Value Proposition).

The reality is focusing on what you do best, what makes you the most money, dominating your segment and not attempting to spread out to conquer the market, is where success lies. Trying to starve competitors doesn't help you or them, and it doesn't stop a new competitor from coming along later. I'm always ready to pivot, I'm always expanding and contracting.

When a new store came along and started deep discounting miniatures, I fought. However, when customers followed price, I pivoted and stopped fighting, putting that money elsewhere. When that store inevitably went out of businesses, I pivoted back and now miniatures are a top selling department. When my competitors attempt to specialize in Japanese card games, which are rounding errors on my balance sheet and difficult to source, I left it to them. Maybe I'll be back one day. What nobody sees is how that capital is shifted to strengths. I chase strengths rather than shore up weaknesses, you know, like Ford.

Wednesday, May 2, 2018

Victory!

Friendly Local Game Store is sold out at game distributors. I always chide publishers who declare victory on selling out, since my job as a store owner is primarily about successfully predicting demand. It's like starving to death and declaring victory on your grocery budget.

This highlights the trouble small publishers face with the distribution system. You make a thing, you beat the drum, you tell suppliers about the drum beating, they gauge demand but hear only quiet drums in the distance, and then they sell out and publishers question why they didn't pick up the saxophone instead. Drumming is hard, and thus we have Kickstarter, direct sales to consumers, and the increasingly popular and always available, electronic copies.

Speaking of electronic copies, Amazon has a big order of physical copies still on the way (showing the evil empire isn't omniscient either), but they did go live with the Kindle edition. You can also get PDF, EPUB and Kindle formats from DriveThruRPG. Upcoming outlets include Indie Press Revolution and iBook. Finally, you can bypass the nonsense and go direct. Atlas Games offers a 50% margin and free shipping on six copies to established retailers. Black Diamond Games has sold 25 copies to date with our early release orders.

Those 25 copies are to consumers, I shall point out, most of whom have no idea who I am. Yesterday I was interviewed by Edward Uhler of the Heavy Cardboard podcast and one thing we discussed he also noticed was how gamers are intensely curious about how the sausage is made. Gamers are intrigued by complex systems and win conditions, and the game trade certainly has complex systems. Friendly Local Game Store pulls back the curtain while also trying to be entertaining, a book a curious gamer is likely to find interesting, not just game store owners, and based on the large initial Amazon order, they agree.

My interview with Heavy Cardboard goes live May 17th and Edward asked a lot of insightful questions. It should be fun. Meanwhile, if you're a store owner and you didn't get your pre orders in, which is most store owners, please back order copies so distributors can hear the drum beat again.