The Shelf Is A Gamble

I want to talk about the notion of a book on a shelf in a game store (and relatedly, in a book store), as well as how that ties into the math of pricepoints in RPG publishing.

This is on my mind because at Evil Hat we’re getting ever closer to the release of the Dresden Files RPG.  (Yes, we’re splitting it into two books. No, I don’t want to talk about that here. I’m talking about it enough other places already.)  Our press release doesn’t talk about distribution; it says we’ll have it on sale through Indie Press Revolution (and therefore through retailers who get books from IPR), and we’ll have it on sale through our own web store.

Now, that’s not the whole picture, but it’s most of it. (We have a good relationship with UK-based distributor Esdevium, and we’ll likely continue to work that relationship for getting products over to the other side of the Atlantic.) The question, then, is why is that most of the picture? (i.e., why aren’t we diving at distributors aplenty and trying to get signed up?)

That’s a complicated question, and one that I’m not sure I can get completely surrounded in today’s post, but it breaks down to two main things for me: the cold hard math of publishing and price points, and the curious state of The Book On The Shelf in today’s marketplace.  In the specific case of the Dresden Files RPG, it also has something to do with the degree to which we can make direct contact with Jim’s fan-base — I certainly have a unique advantage in that I also run Jim Butcher’s official website and forums for him — but I’m trying to think about the more general case, here.

The Cold Math

Selling something direct through our webstore gets us around 90% of the cover price. Selling something direct to an end-consumer through IPR gets us 70% of the cover price.  Selling something to a retailer through IPR gets us about 44% of the cover price (the retailer gets the book at 55% of the cover price, and IPR gets a 20% cut of that; 0.55 * 0.80 = 0.44).  Selling to a distributor gets us 40% of the cover price, minus any additional costs due to covering the shipping ourselves (distributors often ask for a minimum order amount at which they can get free shipping, and then hit that minimum amount; the threshold is usually no more than a few hundred bucks total on the order’s bottom line).

Mathematically, in order to make sure you stay solvent as a publisher, you have to plan for the smallest amount of revenue per sale. If a distributor is a major factor, I have to plan on something in the mid-30% range (let’s say 37.5%, though reality may slide that a few points in either direction depending on what your shipping costs are; a recent order from Esdevium came out to about 37-38% after adjusting for shipping cost).  The difference between planning on 37.5% and 44% might seem small, but that’s still a difference of 6.5% — an over 14% drop in the revenue source.  So all the same I’d prefer to plan for that 44% mark

And that’s just talking gross revenues.  Depending on how you’re able to work the math, the cost of producing that book could be 20% of the cover price (maybe as little as 10%, maybe as much as 25%, and hopefully never more than that).  I’m gonna use 20% in this discussion because “five times your cost” is not a bad rule of thumb in general. So look at those numbers again, through the lens of net profit per sale.

(This is shaky ground, that said: it supposes that you’ll sell every single one of your books! Otherwise you have to absorb the cost of those books that you didn’t sell through and spread it out across the units that you DID sell. But it’s a useful abstraction for the kind of algebra I want to do here. And in essence, the “net” I’m talking about here IS that buffer through which you accommodate unsold product — as well as your other non product specific costs of staying afloat.  It may also be where you’re making back production costs that you aren’t working into the formula; I often run my formula strictly off printing and shipping, and hope for the profits to cover things like our art budget, etc.)

Knocking the 20% off gets us: 70% in the web store, 50% in direct sale through IPR, 24% sold to retail through IPR, and 17.5% to distribution.  Now the math of profit gets pretty harsh when comparing IPR-to-retail to distribution-to-retail: 24 vs 17.5 is a nearly 30% drop.  Flip that over and you’re saying that distribution needs to increase your sales volume by at least a third in order to maybe be worth it.  And consider: distribution comes hand in hand with new risks such as delayed payments (yes, IPR “delays” its payouts to quarterly milestones, but I know they’ve collected money for every copy sold already; not so with distro) and other assorted issues and constraints.  And while distro’s “alpha strike” order might be respectably large, follow-on orders are usually going to be pretty small.

So say you have a $40 book, and you’re looking at making $28 off a sale, $20 off a sale, a little less than $10 off a sale, or $7 off a sale. Where’s your cut-off? Especially given that you have other costs and future growth that you’ll need to pay for out of that revenue?

A number of small publishers might cut that at $20. Understandably. In doing so, they’re cutting out ALL game store access, since that eliminates IPR’s sales-to-retail option, but they’re making the most money off of high quality sales that often have an element of personal connection and fandom. They’re serving the alpha consumers and alpha gamers, there, and looking out for themselves.  That’s not Evil Hat’s approach, but I get it.

Evil Hat cuts it mostly at $10 per sale.  That final $3 difference can really add up over time, and as yet I haven’t seen strong evidence that the theoretical additional volume that a distribution service would get me would make up for that gap.  On the other hand, I’ve seen plenty of evidence that IPR is getting our product out to plenty of retailers.  Half our sales volume through IPR is in sales to retailers, after all.

Then there’s the social motive, which I have to use to “warm up” this cold math, at least a little. Getting into some retail stores is good for connecting with gamers.  So there’s the compromise, and the mostly comfortable “rest state” at which Evil Hat finds itself when it comes to getting our products out into the world.  Seeing as this has gotten us 2500 sales (digital copies included) of Don’t Rest Your Head, and nearly 5000 sales (digital copies included) of Spirit of the Century … I think we’re doing all right with that compromise.

Sidebar: The Specific Case of the Licensed Product

So the real bitch with a licensed product is the cost of the license itself.  Here’s the double edged sword: you can either work that cost into your base product cost that you quintuple to get a reasonable cover price, or you can take it out of the profit margin.

The former approach will drive up your cover price but will make sure you’re doing well (making money) in almost all of your sales scenarios (save for the catastrophic Nobody’s Buying one). The latter approach will keep your cover price down (which is socially good, as it looks out for your buddy gamers that are the reason you got into publishing for the hobby in the first place), but leave you with a very thin profit at the end.

Licensors are often looking for a percentage of cover price, so you’re often (as far as I can tell) looking at a case where you pay less when you sell a book at 55% of the cover price vs. 100% of the cover price.  From a licensor perspective that makes total sense: it’s good protection against the licensee losing his damn mind and selling the game at 90% off, reducing your take to a pittance. (There may also be other guarantees worked into the contract, like “licensor will make at least $X,000 from this, and if licensor doesn’t, licensee will pay up for the difference”.)  This percentage could be 10%, 15%, or something else. My experience on those specifics is of course massively limited, but let’s use 15% for the example.

If we’re going with the latter case (taking it out of the profit margin), our theoretical $40 book is now, in the licensed scenario, paying out $6 per sale to the licensor.  So the webstore makes a $22 profit, IPR direct makes $14, IPR to retail makes $4, and distribution makes $1.  Nasty, huh?  But making $4 per sale (10% of the cover price) at least sounds better than $1 (2.5% of the cover price), right? Plus, it suggests that a direct sale is worth at least 3.5 sales to retail (sticking strictly with IPR).

Or, considering the $40 book is based on the notion of a $8 cost base, what happens if your cost base gets $6 added to it. That’s $14, and quintupling it gives you a fresh new cover price of $70. Yuck. Even adjusting your formula a bit and just quadrupling it gets you a cover price of $56.

The reality is that I think most licensed product publishers go for something in the middle — part of the cost of the license goes against the base cost of the book, and part of it goes to the profit margin, or the “5x multiplier” is reduced as I suggest above. Regardless, a whole lot of praying goes into the idea that the license will boost the sales volume considerably to make that work out.   Or maybe other more manageable deals are being made, where the cut for the licensor isn’t based on the cover price or on sales volume at all.  Every license is its own special snowflake, and data is especially thin on the ground.

However you slice it, though, a licensed product brings in a whole host of other factors that can make the math extra messy.

The Book on the Shelf

All of this points, then, to the Book on the Shelf, as has been told of in songs and legend.

There are two kinds of shelves we’re talking about here: the ones in game stores, and the ones in book stores. I’m going to talk about the second one first.

There’s some overlap there, but the book store shelf brings some extra risks to the party. Your volume can be a lot higher, but you’re usually getting a faceful of fun risk factors like “returnability”.  The policy of returnability has killed off (or at least gravely wounded) plenty of small publishers. The idea is that when you sell a few hundred books into that particular market, it comes with a guarantee offered by you that if the stores/distributors can’t sell the products, they can return them to you and get a refund.  Which makes some sense in terms of wanting render the bookstores and bookstore distributors willing to place larger orders … but only if those stores and distros can figure out how to sell your product.  Many don’t: there are a ton of products and not a lot of time to devote specific attention to each one, and that means your product has to sell itself, reliably, everywhere it shows up.

In essence, the bookstores and bookstore distributors asking for returnability are saying: we’d like to take a gamble, but we want you to cover all our losses if the gamble doesn’t pay off.  And that, simply, is not something a small publisher — as most in the game industry are — can really afford.  Yes, in theory, you could cover all this and remain solvent by carefully watching how much money came in from those sales sources and making sure you don’t spend any of it until the window for returns has expired.  But a lot of businesses need to spend the money they make, and since we’re talking distribution here you’re looking at shipping costs tied to the order that you the publisher probably had to cover both coming and going.  Fail to be perfectly vigilant and your awesome, profitable company could go bankrupt the moment the UPS guy knocks on your door with a truck full of unsold product.

This has happened, and will probably continue to happen so long as this business model exists.  And all of it is balancing against the idea that what you’ll sell through that “channel” will more than make up for the risks.  But do you really want to take that gamble, as a publisher (especially if you happen to agree with me that the other guy isn’t)? To me, this particular gamble feels a lot like Russian Roulette. Life is on the line, and that’s a stake too high to venture.

Run all that through the feedback equation of the free market a few thousand times, with small publishers reacting reasonably to the risks and the big bookstores having their own set of reasonable reactions, and you get our current circumstance with bookstores.  Big physical stores that don’t carry as wide a variety of product as many of us wish they would (because stocking a few books in many many physical stores is a big expense), and online stores that provide a crazy amount of variety because they can better handle the idea of only having one or two copies of a book in stock (or drop-shippable through a back-end deal with the publisher). And those online stores are getting fed through the same deep-cut distro system, but since their overhead is so much lower, they can turn those deep cuts into deep discounts for the end consumer, and the physical store has to match it or at least try to get close … hence the shaky ground on which the big bookstore currently stands.

So that physical book on the physical shelf in a physical bookstore is a huge gamble. Will anyone notice it and pick it up? If they do, will they just use it for its window-shopping value, and then seek out a cut-rate lower price through an online sales venue instead? Will the book need to be returned to the publisher? More and more it will, all for perfectly reasonable reasons.   The only exceptions are those which will always reliably sell all of its copies through that venue, usually through little effort of the bookstore itself.  And when we’re talking RPGs… Well.  How many of you go to a chain bookstore instead of a game store to get yours?

So, the first case, the game store.  That book on that shelf is a gamble, too, but more often it’s one that the store is shouldering.  They can’t return the products for refunds in many cases (and if they can, the returns might just go to the distributor, not to the publisher).  Hopefully, because they’re a smaller store, a focused-purpose store, they can get to know the product and make a more directed effort to sell it to their customers.  In return for this risk, those stores ask that they get a significant discount on the products (45-50% off the cover price).  Unlike the big chain bookstore scenarios above, here the tit-for-tat seems more evident, more plausible, and thus as a publisher it’s something I’m willing to tap into.  It might not be my most revenue maximized situation (though with the IPR vs. distro math, clearly there’s a range of options for choosing a better vs. worse revenue strategy). But tapping into it is probably my healthiest scenario, from the perspective of sustaining the hobby industry, because it hits that balance point where the publisher can exercise both self interest and community interest.

But it also touches on the third case, the one I didn’t mention, the inverse scenario: the book that ISN’T on the shelf.  That’s a gamble too, one shouldered wholly by the publisher, one that plays counterpoint to the whole set-up.  When you choose not to put a book on a shelf in a retail store, how many possible customers and fans are you failing to reach?

The answer, in a quantifiable sense, is pretty damned close to unknowable.  So you roll the dice.  You listen to your gut, and you try to weigh the unknowable cost of the “lost customer” vs. the cost of sending a book at a big discount down one of the channels to a store’s shelf.  Every publisher’s gut is going to rumble a little differently, there.  Some will say the gains of selling into a full on distribution channel outweigh the risks, that you find so many “lost” customers that it’s a no brainer.  My gut isn’t convinced, and that’s not much of a surprise — honestly it’s a pretty conservative gut given how Evil Hat has incrementally, gradually accepted one risk at a time over the last few years.

We’ve taken a different approach at the Hat, one that tries to find those lost customers not through the riskiest of shelves but through making direct contacts, whether we’re talking about forums, blogs, the FateRPG mailing list over on Yahoo Groups, Jim Butcher’s website, and so on.  At the end of the day, we can’t ignore the shelf — we feel we need to take that gamble, at least in a smaller stakes sense, because we DO gain some customers we wouldn’t otherwise.  But it just feels like folly to make everything about the shelf when the age of the network has opened up so many other ways of reaching people.