Pre-Orders & Capital
October 21st, 2011 Posted in business
Our Pre-Order Shelf at os October 16, 2011. No laughing at the sloppy build job.
That’s our current pre-order shelf as of Tuesday, October 16, 2011. All the pre-orders that we have that had games on the order outside of the pre-order itself. That’s obviously doesn’t include single game pre-orders.
As you can guess, that’s a lot of product and a good 70% of those haven’t been charged. We generally don’t charge products unless a customer uses PayPal, at which point we don’t have a choice.
It’s an interesting phenomenon created by our Free Shipping offer – customers buy in bulk so they don’t have to pay shipping. They don’t have to ‘pay’ to reserve the games, so it creates a good incentive for them.
Figure there’s about 30 orders, 3 products an order, a cost of $20 per product – that’s $1,800 in capital or $1260 not charged approximately. That’s nearly 3% of our inventory capital that’s not being used. We can’t turn it over and worst, all those products have to be ‘bought’ again so that other customers have to purchase it. That means, we’re looking at doubling the capital investment.
However, it becomes a major problem only when a game gets delayed numerous times (e.g. Catacombs and Twilight Struggle this year); leaving us with a slew of games sitting our shelves. Then we end up with:
- Insufficient space – notice the additional white shelves we had to create to hold our pre-orders
- Need for more capital (remember, we have to continually purchase these pre-ordered games) over and above any budgeted amount
- Customers cancelling orders, leaving us with ‘extra’ stock. Especially bad when it’s a slow-selling game.
In fact, pre-orders like this end up being a dual-subsidy – for customers and publishers who ‘pre-sell’ these games. The fact that some of the major US online game stores don’t have such a lenient games policy says a lot about whether customers ‘care’ whether they get charged immediately or not. On the other hand, charging customers immediately leads to its own problems(the customer service hours dealing with the few unhappy customers can add fast; not to mention the potential repercussions on our reputation).
When looking at our policies, it all comes down to capital really. Would that $2,500 or so be better spent somewhere else? Would charging the customers immediately allow us to improve the site, generating even more revenue? We could buy more new, hot games or pay for more upgrades to the site? Perhaps we could do more advertising or sponsorship to get new customers?
When running a business, these type of questions always crop-up. There aren’t any ‘right’ answers – just a lot of guess-work. The best you can hope for is watch what other peoples do and
6 Responses to “Pre-Orders & Capital”
By Josh Bazin on Oct 21, 2011
My first thought for this problem would be to timeline your stock needs based on reasonable assumptions on Pre-order timelines. So, existing stock gets sold to paying customers and you replenish from there.
The problem comes when print runs are insufficient or limited. So, this idea really isn’t great unless the order is full of things like Ticket to Ride, Arkham Horror, Carc, and Settlers.
Another idea is to charge what you have in stock to the customer and ship it. Maybe charge your shipping charge (and charge price less shipping charge on PO items) down the road. This does increase your shipping costs but it also allows you to recognize some of the revenue right away, you get cash in your pocket, the customer gets his games, and you’ve maintained the integrity of your free-shipping policy.
Alternatively, you could institute a pre-order cancellation fee instead of charging shipping on the first shipment. Make the fee say, $10 per game. That way, cancellation will cover the costs of shipping the original order.
You could also institute a ‘threshold’. Say if over $100 of your order is not a PO, you you’ll send two shipments.
Personally, my gut feeling would be to get as much product out the door as possible, even if that means eating a little more in shipping cost. But that’s just gut. If your customers rarely cancel, then maybe holding items works ok.
There are lots of ways to do it. Finding what works for you and your customers is the key.
By Tao on Oct 21, 2011
Problem is, shipping is expensive. For most $175 orders, we’re looking at all in about $17-20 for shipping. If we shipped twice, figure the entire cost is $35. On a $175 order, before we input any other expenses, we now make $23. That’s not viable for us to do.
The cancellation fee is interesting – $10 might be too much; but I might have to add that after a specific period like 14 days.
By Josh Bazin on Oct 21, 2011
Fair enough! I wasn’t really sure what your margins were like, so yea – my suggestion based on those numbers is clearly a poor decision!
With the cancellation fee, I was thinking of ways to deter folks from trying to ‘beat the system’ by adding a pre-order to push things over the free threshold.
However, if you’re placing orders with your distributor based on POs, then for some reason, you have a mass cancellation of those POs, you’ve now got that extra stock. That takes away from your ability to bring in something else, so putting a cancellation fee might make some pause before ordering.
By Tao on Oct 21, 2011
Cancellations are actually quite a small number, probably less than 2% of all our pre-orders.
By Eric James Soltys on Nov 2, 2011
Would excluding pre-orders from free shipping solve the problem? Free shipping on in-stock items is still incentive.
By Tao on Nov 2, 2011
Yes, it would. But then customers who put a Free Ship order through with a $100 order of pre-order games in wouldn’t do that. Which is not that infrequent; but nice.
I’m playing around with a cancellation fee of 20% – but only for in-stock items (at time of cancellation) and only for orders over 1 month old. So basically, customers would have time to alter their mind within the 1 month without a problem; but after that, there would be a cost.