Deadly Fredly

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.