August 19th, 2014 Posted in business | No Comments »
Stocking inventory for Starlit is always an interesting guessing game. Sure, we have past data and industry knowledge of what might sell – certain designers and certain publishers do very well. In addition of course there’s BGG and ‘buzz’ on specific games that help us get an idea of how much demand there might be for a game. However, it’s all educated guesses at best and sometimes you guess wrong and there are real costs involved.
Let’s Do Some Maths
Let’s have some fun with maths. Say, on average 50 games come out a month (are solicited to us). Of those 50 games, a certain percentage will not sell in the store. Let’s say 80% of the games will sell a copy, 20% are low demand. So, of those 50 games, 40 games will sell, another 10 won’t at full price.
If we brought in every single game, ignoring our knowledge of the business, and assume an average cost of $20 per game; total inventory outlay would be $1000. 40 of those games sell, which means we are looking at $200 of ‘dead’ inventory which will not sell at a profit. Let’s further say that half of those games (10%) will sell at cost and the other 10% won’t sell ever. So, you will have sold $900 of the inventory that you bring in at any one time, with $100 of dead inventory. Now, on the $800 at our regular profit margins, we would generate $400 in gross profit. Actually, much less since there are shipping costs, interchange, labour costs – so we’ll call it $300. Now, with $100 of ‘dead’ stock, you have instead $200 of profit and $100 of stock that won’t ever move in your warehouse.
Let’s say instead that you bring in 40 games, and assume that your actual guessing ups your sale rate to 90%. So, you sell 36 games for a profit of $360. Your dead stock in this case is actually $40, so your profit is $230 ($90 additional COGs). By bringing in less stock, even though you have ‘missed’ out on the other 4 games that could have sold; you’ve made more.
Another thing to note is that dead stock has a cost. It takes up space in your storage, has to be counted and cleaned once in a while and eventually has to be discarded. Add to the initial out-lay of funds to purchase the stock and the opportunity cost of dead stock and keeping lower stock is better than not (to a certain extent). After a few years, those 5 or 6 games start piling up.
So if you are ever wondering why we don’t hold all the games that are coming out, well, here you go. A simple, simple explanation.