Nov 152011
 

David Berg writes, over on the Evil Hat 2011 Q3 Sales Numbers post:

I have a bunch of distro questions!  If this isn’t the place for them, no prob, I can revisit some other time.

Basically, I’m wondering what those 1095 Q3 sales of DFRPG:YS look like, the chain of ownership from Evil Hat to the customer.  That’s 77% of the total 1427, which surprises me!

My (probably incorrect) understanding looks like this:
1) Alliance gets Dresden books from Evil hat.
2) Alliance offers Dresden books to American hobby stores.  The number of hobby stores is small and dwindling.  The number of those that carry RPGs is smaller still.  The number that carry anything other than D&D is vastly smaller still.
3) Those few retailers pay Alliance for Dresden.  Alliance then takes their cut and pays Evil Hat.
4) If the retailers can’t sell Dresden, they send it back and ask for their money back.  So Evil Hat hasn’t really sold a book until a customer’s taken it home with them.

1095 in 3 months seems like a staggeringly large number to me, based on that process.  Am I simply underestimating the number of people who go into hobby stores and buy a spiffy new RPG they’ve never heard of?  (I mean, if they’d heard of it, they probably would have bought it via another channel, right?)  Am I underestimating the overseas market?

Up front, I should say that the Dresden Files RPG books don’t necessarily behave like any other product in our catalog. That’s the strength of the license at work there. DF probably makes up a good 80-90% of our revenue — which can be a little nervewracking in the long term. Part of why I’ve been using this year and will be using the next couple to try to expand the variety of games that Evil Hat produces.

Anyway, to get into your question, the good thing here is that there’s plenty of history to peruse on this blog, so to get our context straight, let’s first figure out how that ‘77%’ on DFRPG:YS has been trending over time:

Quarter – Total Sales – Distro Sales – % distro
Q3 2011 – 1427 – 1095 – 77%
Q2 2011 – 1099 – 819 – 75%
Q1 2011 – 1346 – 967 – 72%
Q4 2010 – 1373 – 1004 – 73%
Q3 2010 – 2531 – 1776 – 70%
Q2 2010 – 4545 – 2741 – 60%

Now, I think if you broke down the month-by-month of the book’s first quarter, you’d see that Evil Hat and distribution were going about neck and neck at the start. We have very solid reach and leveraged it to give us a strong direct sales preorder (which trapped a BUNCH more per-sale cash for us, a real boon), but over the long haul, that reach only goes so far. So while distro started at a 50/50 kind of split with us, they’ve trended upwards since. The reason for this is simple. Or, perhaps I should say, the reason for this is “simple”. The service that distribution is offering to retailers is a simplification of product acquisition: one stop shop, many publishers. It’s a pain, and a lot of time investment, for a retail store to contact and buy from each individual publisher, so most simply don’t. They form a favored relationship with one to three distributors, and they’re done. If your product isn’t there, there’s a decent chance they won’t have your product on their shelves.

Once the spike on DFRPG:YS sales settled down, we started averaging between 300 and 400 a month, with 3/4ths-or-so of that being due to distribution. (Note: The ‘total sales’ numbers on the above fold in our PDF sales numbers as well, so if we limited the data to strictly only physical books, distribution’s percentage would be even higher.) We might have captured some of those sales if we’d stayed out of distribution, but I’m pretty certain we wouldn’t have captured all of them. It’s likely, given the interest in the game, that distribution has brought us enough additional sales to accommodate for any “loss” of per-sale revenue due to the steeper discounts that product is sold into distro. It’s been a good partnership.

Now, to get into your (in fact, semi-correct, semi-incorrect) understanding of the process:

What you’re describing is a situation where a service holds the stock, but does not own the stock, and sells it on behalf of Evil Hat, providing revenue to Evil Hat only when that sale (to a retailer) occurs. That’s not how most distribution works, though (more on that in a moment). That’s consignment, which is essentially what IPR does (not counted in my distro tallies). IPR sells stock on behalf of publishers both to retailers and direct to customers, so they’re sort of a half-distributor — as far as the retailer client is concerned, they are a distributor, because they distribute products they have not themselves created to retailers. The consignment thing is what makes IPR a little different.

What most distributors do is buy the products from the publisher, at a steep discount (often just 40-44% of the cover price). At that point, the distributor owns the product and assumes the risk. They’re responsible for then turning those units around and selling them to retailers. Since most of Evil Hat’s distributor clients are placing reorders at least once per quarter, we can surmise that all the books sold to distribution in prior quarters have at least been sold to retailers. Hopefully, those retailers have then successfully sold those books to their customers, but that’s nearly impossible to get visibility into. But, to get to the heart of your question, yeah: there’s enough interest in the DFRPG by enough retailers out there to have sustained such numbers as these for over a year.

Now — to complicate this a bit, along the way, Alliance made me an offer to take over as Evil Hat’s fulfillment service. That’s a phrase that simply means “act as shipper for”. They also are doing flooring, which means they’re warehousing our stuff for a small monthly fee (which gets reduced a little if our stuff remains active at a certain level). Because they’re doing this, they don’t need to purchase our stuff in advance in order to have it available when a retailer places an order. So this has essentially moved Alliance into the same ownership-sequence space as IPR: consignment (matching the 1-2-3 chain of ownership you theorized was applicable for all other distributors, but isn’t). So the sales numbers I get from them each month are based on stuff they’ve actually sold. Now, for business partnership reasons I don’t want to put a specific number on what Alliance sold, but I can tell you that they account for over half of Q3’s distribution tally, with Esdevium (a UK-based distributor) and ACD (Alliance’s top domestic competitor) vying for the second place spot.

Where your theorized sequence breaks down is “4) If the retailers can’t sell Dresden, they send it back and ask for their money back.  So Evil Hat hasn’t really sold a book until a customer’s taken it home with them.” That situation only exists if the publisher offers returnability — basically a promise that if a book isn’t sold, it can be sent back or destroyed and the seller can get a refund.

If you think about it a bit, returnability sounds great to a middle man — it essentially says that they face no risk for buying the product and putting it on their shelves. Which is dandy for them, but poison for a publisher (and in fact has sunk publishers of various stripe over the years, especially those that sold into big chain bookstores) because it’s utterly unpredictable, and it means that you can’t trust that the money you’ve been paid is money you’ll get to keep. But money spends — so the publisher spends some of it, and hopes that they won’t end up with a negative balance when the returns come in. Worse, when publishers offered returnability with a time limit (say, 180 days), they’d see a scenario where buyers would buy a bunch of books, return them on the last day or so of the time period, and then rebuy, essentially rendering the time limit moot and the cash situation continually in question. (And since most buyers don’t have to pay right away — they usually defer payment by 30 or 60 days — that wasn’t a momentary dip in cash on hand for the publisher, it was a canyon.)

I know some publishers still offer this, but I don’t and won’t, and that’s going to limit what distributors and retailers will buy and sell to an extent. But that’s fine by me. To be perfectly frank, I don’t want them buying books they don’t have confidence they can sell, because the point here is to get them to the end consumer — the guy or gal who’ll actually take the product home and put it to use.

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  7 Responses to “Dear Deadly: Chain of Ownership in Distro”

  1. These sales are startlingly good. How much do you think it’s the license?

    • I’d say it’s the difference between the SOTC lifetime sales numbers (7293) and the DFRPG lifetime sales numbers (13113), plus a little more (because SOTC’s had longer). So roughly half.

  2. Fred, thanks so much for the thorough account. Consignment is the key term I was blanking on there.

    Re: returnability, a novelist friend of mine made it sound like she didn’t have a choice, that was the only way to get her book in stores. I’m glad that’s not the case for RPG publishers working with distributors (unless Evil Hat is a special case?).

    Let me see if I get the fulfillment distinction with Alliance.

    1. What you’re NOT doing
    If Alliance was only shipping and warehousing the Evil Hat products they were going to buy anyway, then all Evil Hat would save is (a) the quarterly cost and hassle of shipping stuff from your warehouse to Alliance, (b) a little bit of room in your warehouse, in exchange for (c) a cut to make it worth Alliance’s while, and (d) dealing with consignment possibilities of returned stock.

    2. What you ARE doing
    Instead, Alliance is fulfilling all your orders (including from IPR, people who order off the Evil Hat website, etc.) and warehousing all your products. The printer sends the books to Alliance, and when you want to send them somewhere, you ask Alliance to do that.

    Correct?

    I assume that this arrangement can save both you and Alliance money, right? But that’s an economies of scale thing, where it wouldn’t hold for other publishers with less volume?

    Does anyone do #1? It strikes me as plausible, though not massively appealing.

    Separate question: does selling to retailers through a distributor make it any more difficult to anticipate demand (and order print runs accordingly) than other methods?

    Thanks for taking the time to share all this. My interest at this moment is purely academic, but hopefully, some day, it’ll be practical.

    • Yeah, returnability is more common in the fiction market than in the game market, but non-returnability isn’t unseen in either, too. The latter just means less volume of sales — but for reasons I’ve already covered, that’s not necessarily a bad thing.

      I have to confess I didn’t fully parse your “what you’re not doing” part. Seems a little jumbly, and I think I disagree with some of what you’re portraying there, but I’m not sure how important that is. 🙂

      As to the What You Are Doing part:

      Alliance isn’t fulfilling my IPR orders — IPR maintains its own warehouse & consignment operation, so some of my stock is stored over in the IPR warehouse. They do their own thing with that. But otherwise, the vast bulk of my inventory is stored with Alliance, and they fulfill all orders from Evil Hat’s webstore, as well as any shipments to other distributors and retailers who place an order with Evil Hat. But mainly: other than the IPR thing, the “what you are doing” bit is correct.

      I think Alliance is piloting their fulfillment program with Evil Hat, so I don’t know how much my experience there translates fully, though I do believe some other companies have been considering doing the same. There are a lot of different cost factors at play when you dig into the details, and some of them break in Alliance’s favor and some in mine in this deal.

      But what’s particularly good for me is that I get access to the shipping personnel employed by Alliance’s biggest, central-USA warehouse, so packages don’t take very long to get to any domestic customer, the shipping rates are favorable, and there’s minimal risk of a hiccup in the shipping operation if any one shipping person gets sick.

      The economies of scale mainly kick in in terms of the monthly cost of flooring. So long as sales volume of my products remains above a certain threshold for Alliance, I get a certain amount of credit there in terms of the amount of floorspace I get for free. Any additional space used beyond that allowance incurs a (low) monthly fee, as I’m essentially renting out part of their space for my stuff. If I had the same amount of stock but a much lower sales volume, my monthly fee would be a little bigger. Dresden’s helped make sure that’s less of an issue, though.

      To the extent that I understand #1, I don’t think anyone’s doing that and I don’t think it’s worth their while to do it.

      Personally, I think that it’s probably easier to anticipate demand with a distributor in the mix. First off, I can outright quiz them about how they think a product will perform. If I’m on my game enough to let them know several months in advance that a product is coming down the pipe, their sales agents can let their retailer contacts know about it and get an idea of what those retailers might buy — and sometimes I can get hard numerical data out of that before I place the print order. Ultimately, a distributor represents the aggregation of multiple data sources, and once you’ve sold a few products to each of your distributor contacts across 2-4 orders, you can get a sense of their usually fairly consistent rhythm — when they usually place their orders, what an initial cautious buy is sized at, etc, at least where you’re concerned. Compared to “how much should I print for only the audience I can directly reach?” it’s much easier (for me) to figure stuff out for distro.

    • Ah! Very cool. That last point about the distributors getting intel for you to inform your print run is fantastic.

      Good stuff about the shipping personnel, location, and rates too.

      As for my “version #1” silliness, I mainly included it because that was my first reading of your intro post. I was about to post a long reply based on that misreading when I realized, “Oh, Fred’s talking about all the fulfillment.” So, I’m glad to receive confirmation on that!

      As for IPR, I follow you. I knew Alliance didn’t ship IPR orders to individual customers, but I was guessing that when IPR gets your books, they get them from Alliance. (Is that true?) My bad on the unclear phrasing.

      Finally, your answer about volume mattering primarily for flooring purposes makes me wonder: If a company is smaller than Evil Hat but big enough to not just store their books in their homes, then using a distributor for fulfillment is win-win, right? You’re just paying your flooring costs to them instead of to local storage rental.

      You say this model is new to Alliance. Any idea how it’s working out for them so far? Is it new to the industry, or an established model elsewhere?

    • If the printing already exists, I have Alliance ship from its supply to IPR when IPR needs a refill. If the printing does not already exist, I can have the printer “split the shipment” and send some to IPR, and the rest to Alliance, or wherever.

      Using a fulfillment service can be a win in the scenario you describe. That fulfillment service needn’t be a distributor — maybe they exist only to warehouse your stuff & ship orders placed directly with you.

      I skipped the “ship it myself” stage entirely with Evil Hat, because I know how awful I am at getting to the post office or wherever; my entry level was with Lulu (where they print & ship on an as-ordered basis), and then quickly transitioned to IPR.

      Alliance seems pretty happy with the arrangement. I know I’ve pointed a couple other publishers their way, too.

  3. Cool. Thanks for all the answers, man! It’s nice to have this info as background. Even at the early stages of a project, it helps me to have at least some idea of what the later stages can look like. Makes the end result of someone having my game in their hands seem more real and attainable. Even if I do just start with Lulu.

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