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Traditional sales model

8 replies [Last post]
Sat, 04/05/2014 - 20:19
questccg
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Hi all,

So some of you are better versed in the "Traditional sales model", having dealt with one or more publishers. Let me state an example and I'll ask the question after.

Okay so this is what I know:

  • Consumer pays 100% MSRP ($25.00)
  • Retailer pays 50% MSRP ($12.50)
  • Distributor pays 40% MSRP ($10.00)
  • Manufacturer makes 20% MSRP ($5.00)
  • Publisher makes 20% MSRP ($5.00)

All of that makes sense. But here is my question:

Who pays for the shipping cost to the Distributor (Warehouse)? And then to the Retailer (Store)?

One designer told that it's factored into the price. So that would mean that the Publisher would include the charge for shipping into the unit price (so included with $10.00 is the shipping cost).

However another designer said he thought that the Distributor would get charged for shipping the merchandise to his/her warehouse (on top of paying the unit price).

Same deal for the Retailer.

I'm not certain based on the two (2) different opinions that I got. Maybe someone on BGDF can clarify this...?

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Sat, 04/05/2014 - 22:25
#1
questccg
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Hard time believing

I'm really uncertain about the second opinion I got. Namely that a Distributor pays the cost to ship the merchandise to his warehouse.

In the whole scheme of things this is the profit made by each party:

  • Retailer makes $12.50
  • Distributor makes $2.50
  • Publisher makes $5.00
  • Manufacturer makes $5.00

Two (2) things stand out:

  1. The Retailer makes the MOST
  2. The Distributor makes the LEAST

So from that I conclude that the Distributor CHARGES the Retailer for the delivery (shipping) of merchandise and the Publisher unit price INCLUDES all shipping cost to the Distributor.

Why I make these conclusions? It just seems reasonable because the Distributor makes the least amount of money and if he paid for shipping fees, he would never make any money!

Again input on this would be welcome!

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Sat, 04/05/2014 - 22:43
#2
Ecarots
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markups

Here is my experience having been in retail and manufacturing ends of products then ideally:
widget game costs $10 to make, manufacturer/publisher Calculates MSRP under following conditions.
manufacturer sells to distributor for $20
Distributor to retailer for $30 (50% markup)
retailer to consumer for $45 (50% markup)
So MSRP is at least $45.00

Unless orders are in sufficient quantities to justify free shipping all shipping costs are paid by the receiving entity. (distributor or retailer, consumer if it is mail order)

I have seen this formula in use may times.Remember the profit made pays for staff, facilities, and any other costs of doing business at each level.

Although the retailer has the highest markup they also have the greatest risk and have to be willing to accept sometimes putting an item on sale to compete or get rid of "dead" stock.

If you sell direct to retailer then the MSRP could be less but you still need to keep the profit in it. Otherwise why should a retailer tie up their hard earned capital in your game.

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Sat, 04/05/2014 - 23:03
#3
questccg
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Okay so let me get this straight

Let's use these figures because they are more in-line with my WIP.

  • $5 to manufacture/publish
  • $10 to Distribute (+100%)
  • $15 to Retailer (+50%)
  • $22.50 to Consumer (+50%)

Is this correct? This seems more logical because the margins are more equal. Obviously like you said, the Retailer takes the largest piece but also assumes the most risk because of the business (Brick & Mortar).

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Sat, 04/05/2014 - 23:14
#4
Ecarots
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yep

you got it. I've worked and managed various retail stores along with product design for a specialty tool company and these are the desired markups.
As to shipping that is why you try to order as much as possible, it is cheaper per item to ship a pallet of goods rather than 1 or 2 items in a box.

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Sat, 04/05/2014 - 23:19
#5
Ecarots
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yep part 2

Because the cost of shipping eats into the profit margin. Now a sneaky way around that is drop shipping directly from the manufacturer to the retailer FOB (Free On Board) manufacturer. that way the distributor bills the shipping directly to the retailer but never had to handle, repack, or pay shipping costs themselves.

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Sun, 04/06/2014 - 01:28
#6
questccg
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So confused...

JT from The Game Crafter (TGC) gave me other margins that he says are correct:

  • Retailer pays 50% MSRP (So for $25 = 12.50)
  • Distributor pays 30% MSRP ($7.50)

He says that it's Distributor = MSRP x 70%. But it seems like it's 30% because the amount is $7.50.

With those margins, I get why it's impossible to make a game outside of China. Can you imagine the manufacturing cost? It must be like $1.00 - $2.00 (at most)!

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Sun, 04/06/2014 - 07:29
#7
Ecarots
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Math

msrp=25

ret cost = .5(50%) x 25
ret cost = 12.50

dist cost= .7 (70%) x Msrp
dist cost = 17.50

if dist cost is 30%
then dist cost = .3 x 25
dist cost = 7.50

lets now add it up

manufacture sell price = msrp- (ret+dist)
manufacurer= 25- (7.5 + 12.5)
= 25-20 = 5

Looking at it I believe he may have meant that distributor cost is 70% off the MSRP.
That would get you the 7.50 figure also.

The big questions are:

what are your production costs?
What profit margin do you NEED to make?
What then will your MSRP be then?
Will your game sell at that MSRP?

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Mon, 04/07/2014 - 13:00
#8
mindspike
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Shipping kills the indie publisher

The cost of shipping is one of the largest obstacles to the small publisher, and a contributing factor to the existing three-tier distribution model.

Unless special arrangements are made, the receiving entity expects to pay the cost of shipping goods which they have purchased. The distributor model allows retailers to achieve an economy of scale and save money on shipping costs.

Shipping tends to have a high initial fixed cost and a low marginal cost. For example: ABC Shipping charges $100 to ship a single pallet weighing up to 100 pounds, plus $1 for every additional 10 pounds to a maximum of 300 pounds. The retailer then prefers to ship a single heavy pallet from a distributor than to ship multiple light pallets from several publishers. It just costs less.

Because a retailer will seldom order more than a few units of any given product at a time, it is difficult to achieve an economy of scale when products are divided among several publishers. They are unable to create a heavy pallet. By aggregating products through a distributor, a retailer can purchase from multiple publishers and still achieve an economy of scale.

Distributors can also achieve an economy of scale by placing large orders from a publisher and distributing those units across multiple retailers in combination with products from other publishers. Fulfillment services like those provided by Game Salute provide distributors with large catalogs from which to purchase, allowing them to achieve that economy of scale with shipping.

Retailers also benefit by dealing with a single supplier, greatly streamlining the time and effort spent in tracking, invoicing, and receiving.

I think the discussion of margins is fairly well covered. I would hesitate to say the numbers are "industry standard" (I've never experienced such a thing) but I'm confident to say they are a good "industry average".

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