Retail and Internet Strategies

So easy to begin, most difficult to build: that's your business. Making decisions about distribution can be daunting. Should you sell directly to consumers via magazines, bulk mail or the Internet? Should you develop a multi-tiered distribution infrastructure, or partner with a company which has this infrastructure already in place? Or some combination of these options? How you answer these questions depends on what you are trying to accomplish and the assets at your disposal.

There are two popular, yet contradictory, rules of thumb in business. The first is "Never build anything until someone pays you for it or you have a buyer for it." The second is "Build it and they will come." Regardless of which strategy you choose though, the important step is simply to pick one and go with it.

You Can't Start at the Top

A reader wrote me saying, "While reading the newsgroup posts on comp.games.development.* it seems the only way to get started in the game business is to produce a finished demo disk to prove you've got the righteous stuff." It sounds like this person wants to start at the top, but you can only reach that level with hard work.

If you're new to the industry and you're looking for a means to develop, publish, or distribute a game, you may be faced with the prospect of using your first release a loss leader. In the unlikely instance that a newbie would produce an exciting product, an interested publisher might be required to sell and distribute it. If this is your situation, here are some words of warning: you will probably get little more for your efforts than experience, recognition, notoriety and the opportunity to do it again. However, afterwards, assuming all goes well with the sales of your game, you'll get more money. That's when it gets fun. But don't count on getting rich: some people make big bucks in the game industry, but most develop games because they love it.

Retail Realities

Most major publishers pay millions of dollars to guarantee their products' success at retail, and as such they can muscle their way onto store shelves, into magazines, and into consumers' minds. They do this because they have done it in the past, they are experienced at it, and because they know that the more space they can control, the less space will be available to you. Shelf space is generally limited.

This is one reason why "alternative " channels are of interest to everyone. Besides the obvious reduction in customer costs, publishers constantly seek incremental increases in their sales and profit margins. If an opportunity arises for a publisher to localize a product in a foreign language or alter a product and place it in a sales channel it does not currently dominate, it will do so when the spreadsheets say it's the right time. This means some sales channels are open for opportunity prior to being dominated by the big guys. Did you know there are five major distributors in a Christian software channel selling to niche retailers? Did you know that some software is distributed by magazine rack-jobbers? Did you know there are great companies out their ready to localize and distribute your product in a foreign language at no charge? The key is to think creatively and employ guerilla marketing tactics.

Focus Your Distribution Efforts

Distribution is the name applied to a vehicle that facilitates the delivery of your product or service to the end customer. There are many distribution channels in the game industry: chains (national accounts), educational, direct mail, Internet, flea markets, magazine racks, and OEM are all methods for reaching customers. Each one has a different associated costs and business models, and the more channels a company can enter, the more successful it tends to be.

Most readers simply want to know how to get into the market and sell their product. This requires a strategy, and a strategy in turn depends on a number of factors:

Large publishers enter small channels to improve their gross sales and, sometimes, margins. This does not usually boil down to simply choosing between brick and mortar (actual physical buildings) retail versus direct sales (mail, Internet). Rather, successful publishers look at all aspects of their product distribution and continually assess whether their current distribution strategy is optimal, whether they are executing their methods effectively, how they can keep their distribution channels clean, and how they can maintain and extend their brand's reach without cannibalizing one channel for another.

Strategies

When considering the retail channel, assess your weaknesses and partner with companies which can make up for your weaknesses. If you have a product that requires distribution to a multi-tier organization, you can conserve capital by employing a representative sales force or manufacturer representative to lace product into distribution and retail. Distribution by its very nature has evolved into a no-risk environment for the distributor. Distributors spend plenty on pick, pack and ship infrastructure and do not do deals that will affect their profit margin negatively.

Until the Internet, only early pioneers and failed companies spent money building a product with the hope of someday finding a buyer, which makes this strategy a very difficult one to consider. In the Internet space, your revenue model is of key importance. Fulfillment is a second critical component of success. It's one thing to sell a product on the Internet, but it's quite another to fulfill the sale at a price that won't bury you. In the standard means distribution (i.e., brick and mortar establishments), you generally ship in case lots to central warehouses which then parcel products out to individual stores. However, when you sell a product to a visitor on your web site, you incur the highest fulfillment price – a single order handled by one transaction. A very leveraged and generally very expensive transaction.

Is your service or product free to the site visitor? If so, you may be able to support it by ad revenue. Advertisers want eyeballs on their banners, so you must consider is whether you have enough web site visitors generating page views to generate advertising dollars from outsiders. Also determine whether what volume of transactions on your site is necessary in order to justify sponsorship dollars or revenue from e-commerce transactions.

At retail, the preferred method is selling direct to the stores that put product on the shelf. The difficulty with this is that retailers are very selective about what products they carry. Not only must a game sell, it must sell enough copies at a sufficient margin to the store to justify carrying it instead of another game. In selling direct, stores risk placing a product on the shelf that may not sell as many copies as a known quantity. As a result, retailers test products to make sure they don't miss an opportunity. Do you have enough leverage with retailers to convince them that they should sell your game, based on the premise that your title will sell enough units to make the effort worthwhile? If not, publishing partnerships, bundling and OEM opportunities may be alternatives. In the best case, a strategy that can deliver multiple revenue streams is a form of strength and certainly some protection.

Develop your distribution model based on your operation and its costs. Compare it to others available today. Take a look at your personal buying habits and compare those to the general buying public. With this thoughtful review, you may find holes in your strategy. Research, review and asking plenty of questions are required. Plan on reviewing and adjusting your revenue strategies sooner rather than later.

A company I used to work for didn't believe me when I told them they were missing an incredible opportunity to sell internationally and that in most companies, international sales represented 50% of the gross annual income. This company had no plan to sell overseas. I'm glad I based my statements on my education and experience, because they made me prove it.

Mailbag Madness

Now let's dive into this month's mail bag from readers. I received my comments and questions, and I'd like to request that if you're going to send me a letter, please be as specific and relevant as you can be. I'm flattered to have requests for information, and will continue to answer as many of them as I can, but if you spend your time requesting information, make sure I (and any other people you direct your questions to) understand your business direction. Also realize that some requests require more research or information than I can possibly give, so please understand that brevity and specificity in your correspondence is appreciated.

With that said, let's talk about two recent letters. The first came from someone who wanted details about underground independent retail strategies, and the names of low-cost distributors. I went on the Internet and entered "game distributors" in a search engine and then compared these findings with contacts in my database. In the process I found some new companies, verified some existing knowledge, but had to sort through a lot of crap. If you need this kind of information and you don't have the money to pay for it, start searching on the Internet. The net is a great place to gather data.

The second letter came from a reader who took issue with the "war" metaphor I used in my first column. To briefly recap, in that column I said that there are more aspiring game developers than spaces on a shelf, and if you want to get your product on that shelf, you have to develop a strategy to beat others to the shelf. I got a nice letter from someone who objected to my use of the word "war" – he said that games were for fun. Nice, true, but naïve. Games are fun, but this is business. The reader also said that developers shouldn't make design tradeoffs to appeal to a mass market. I don't disagree. If this developer wants to develop games and sell them into niche markets that are not already funded by or populated with large publishers, he doesn't have to. Not all businesses have to be giants, and not all games have to be sold by a major publisher to be successful in the market. If this is your strategy as well, I would just caution you to be cognizant of your market niche and try to anticipate who might enter it as a competitor. Such surprises can cost you your business.

Many people have asked me how to get started in the game industry. I suggest attending local job fairs and industry-specific shows like the Game Developers Conference and E3. Every game industry show I have attended recently has had a job fair section, and companies have been hiring new employees at all levels. This is an extremely busy industry and many bodies are needed, but to enter this field requires persistence. Maybe you'll have to develop your game with family and friends' money, maybe you'll have to give up your first product to a publisher as means of paying your dues to enter the market, maybe you'll have to join a company to learn the basics. Successful developers and publishers are in an enviable position in that they can see "everything" coming onto the market, but these companies worked hard to achieve that position. They base their decisions on whether or not a particular game fits a category, whether the development team has any past successes, whether the developers can meet and beat deadlines, and more. Like the Academy Awards, only a few of the recognized performers receive awards. A solid, well-devised career strategy is needed to attain that level.