Kicking out the Center Pole

By Jared Nielsen (grafx@gamecodex.com) www.GameCodex.com

The game industry is fraught with peril, egos and good intentions but unfortunately a rarely sustainable revenue model. This article will go through a series of discussions about each facet of the game industry, be it distribution, retail, or manufacturing. So, how am I an expert in these? I'm absolutely not. Ask anyone. However I have done Internet consulting for each tier and I get to see some of the strangest things. Some of them are funny, some are a bit sad, and most are just plain morbid.

know how gamers are... you all are thinking... "I could do that"... "I could be a publisher"... "I could open a gaming store". In this bigtop circus we call the gaming industry, it's time to kick out the center pole.

Installment A

"Why"

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Why are you starting your business? What are your motivations? The reason we evaluate this entire principle is to find out what your "exit strategy" is. Like it or not, every business has one (note this is one key difference of a business and a hobby)... even if it's the "I never want to quit" option. The entire point to an exit strategy, especially if you take on investors, is so that you can set your plan to make sure that you accomplish what you started your business for to begin with. Feel free to add to this list (indicate if we can include your submissions in the final document), but a starting list of possible exit strategies include:

1. "I want to build my business so someone else will buy me"
2. "I want to build my business to generate replacement income"
3. "I want to build my business so I can go public" (don't think about it btw)
4. "I want to build my business so I can create an intellectual property
franchise that will lead to other sources of revenue... like licensing, TV, computer games, etc."
5. "I want to build my business as a hobby that covers its own expenses on a part-time basis"
6. "I want to build my business so that my shareholders will get high dividend returns"

I'm sure there are more... and some of the above aren't really "exits" but I see them all the time in business plans...

Which combination of the above that you choose will set a trend to determine how your financial goals are set... a very critical piece in your business plan.

"What"

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Now that you have reviewed your own personal motivations for starting your business, you need to then evaluate what precisely you plan to do. For the moment, we're going to ignore market demand, market research, etc... but just dream up all of the products that you want to publish. Again, if you wish to add to the list, please indicate in your response that we can include your suggestion. A typical start-up mix of salable products for a start-up small-press RPG publisher includes:

Core products
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Core Rulebook - 200 pages, perfect-bound, softcover, English
Sourcebook - 150 pages, perfect-bound, softcover, English
Module - Cardstock folio with saddle-stitched insert
Website - high-content catalog, ordering system, retail locator, community tools, fanclub database, marketing materials, contact information

Accessories
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Set of miniatures - we'll start with 25 and then work on our bankruptcy forms Customized Dice - standard color set with logo embossed on the "1" Gamemaster Screen - 3 part foldout, laminated cardstock Forms Packet - 20 pages of customizable forms

Marketing Merchandise
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T-shirt - two color with domain name and strong logo branding - qty 100
Promotional Launch Posters - 2,000 copies, four color

Again, we have been focusing on our Profit Centers (these are things you can "sell"... that's a good thing.) ... there is an entire raft of Cost Center products that need to be created as well, including:

Distributor/Retailer sell sheets - four color, 1,000 copies, 1 page Order forms (with electronic versions) - B&W, 1,000 copies, 1 page Business cards - 500 per marketing person Demo Setup - We'll say that you have it in your personal inventory

and much, much more... but we'll leave the cost center discussion for a later section.

Now that we have identified our profit center products, we need to establish pricing. Before my next update, I will basically take all of these products, evaluate a listing of all vendors that supply manufacturing services for each product, take estimates from three of each, and then compile my thoughts on my vendor selections. This entire process is part of establishing the "Cost of Goods Sold." When you evaluate the cost of goods sold you must leave out any "soft" expenses like payroll, time spent, marketing expenses, etc. These "soft" expenses are called SG&A or "Salaries, General and Administrative."

What might be grey area in defining your "hard" cost of goods sold would be things like outsourced freelancers... do you plan to define them as a payroll expense or as a cost of goods? I generally use the rule of thumb that anyone that works on an hourly basis, salaried basis, or incentive basis (such as they own 20% of the company for participating... umm... by the way... do NOT do this!) then I usually consider those SG&A or "soft" expenses that are left OUT of the hard cost of goods calculation.

Things that would be included in a hard cost of goods calculation would be:

Printing expenses
Design expenses
Asset expenses (like clipart, freelancing)
Predictable service fees (editing, layout, etc)
Product-based professional fees (trademark registrations, ISBN application fees, legal reviews, etc)

Be very careful to try to track down EVERY reasonable product-specific expense. This is most important because here is where the "fanboy gamer" fails in planning. They do their hard cost of goods calculation as follows:

"I'm going to write a book that sells for $20" "My hard cost of goods (sadly underestimated) is $2 for printing and $1 for artwork)"

"Wow! If I sell 1,000 copies, I'll make $17,000!"

And then they go get a second mortgage on their home, buy tons of advertising, and that inevitable, slow, creeping realization makes them decide that their day job wasn't so bad after all.

In the next installment, we will cover the following issues:

Installment B
1. We will review the quotes received for our cost of goods sold estimates.
2. We will establish our first guess at Pricing on our products.
3. We will then evaluate our first round of discussions about expenses (without getting into marketing or volumes yet) with a discussion of setting up our chart of accounts (just enough to get our expense items listed).. plus your accountant will love you

I think the following installment should cover:

Installment C
1. "Chicken and the Egg" - sales forecasting and marketing budgets.
2. Salaries and related Human resources expenses
3. Capital expenses and the dreaded depreciation decision

Then the following installment should probably cover:

Installment D
1. Distribution and fulfillment
2. Planning for pipeline triggers, a.k.a., when do I plan for a re-print?
3. Saving money versus keeping out of jail, a discussion of governmental regulations and Tylenol

Then I propose the next installment should be:

Installment E
1. Drafting a business plan
2. Investor solicitations
3. Legal considerations