Fixed and Variable Costs

You may still remember the concepts of fixed and variable costs from your Introduction to Accounting classes. Of course, if you manufacture anything, you have to concern yourself with them on a regular basis, otherwise you go out of business:

Variable costs--this is the cost of the material that goes directly into manufacturing and packaging product. They are called variable costs because the total amount varies based on how many units of a product you manufacture. Since a rough rule of thumb is that the costs of the materials in a product should amount to approximately 10% of the final selling price of a product, your variable costs approximate 10% of the selling price of a product. Since, for example, a copy of Munchkin Deluxe sells for $29.99, the cost of the pieces, tiles, box and everything else should approximate $3. This is the variable cost of a copy of Munchkin Deluxe. If you produce 1 copy, the variable cost is $3, 500 copies is $1500. The variable cost stays the same per unit no matter how many or few of the item you make.

Fixed costs--this is the cost of overhead to make the product. There are all sorts of costs a manufacturer has to consider when making a product. They have to pay for payroll, rent, insurance, shipping, utilities, advertising, equipment, supplies, etc. The cost of all these get lumped together into fixed costs. In brief, fixed costs get allocated to each unit of a product manufactured and get figured in when calculating the price. The more units produced, the more the fixed costs get spread out.  Using the Munchkin Deluxe example, say the fixed costs for Steve Jackson Games to cover all overhead are $500,000. If Steve Jackson Games produces only 1 copy of Munchkin Deluxe, the company has to allocate ALL of its fixed costs to that one game, meaning a single copy of Munchkin Deluxe has to sell for $500,003 to cover all of the company's costs to produce it. Now, while Munchkin Deluxe is a great game, it is not $500,003 great. If the company produces 500 copies, the fixed costs allocated to each copy drops to $1000, meaning each copy now has to sell for $1003 to cover all the costs, and that does not even include any profit. Better, but still not practical. Steve Jackson Games, realizing this, ramps up production to 100,000 copies, which drops the fixed cost per copy to $5. Adding on the variable cost of $3, each copy now has a cost allocated to it of $8, meaning that, at a $29.99 price point, each copy has a gross margin or gross profit of $21.99.

However, Steve Jackson Games does not get to keep all of that gross profit as they have to pay things such as taxes, interest, dividends and other expenses AND sell copies of Munchkin Deluxe to distribution and retailers at a reduced price off that $29.99 so that distributors and retailers can make a profit selling copies of the game as well. If Munchkin Deluxe continues to sell at the $29.99 price point, Steve Jackson Games, its distributors and retailers will keep selling at that price. If sales drop or production costs increase, driving up either fixed or variable costs, the price will have to change.

Cognitive Dissonance

Following up on yesterday's post on opportunity cost, I wanted to talk a bit about the concept of cognitive dissonance, one form of which is "buyer's remorse". Cognitive dissonance is the attempt by a person to reconcile two opposing viewpoints or beliefs in such a way that the person can accept them. Politicians are a great example of something that often causes cognitive dissonance as a politician will often support many positions that a constituent also supports, such as economic development and infrastructure rebuilding for the area represented, expanded health care, support for veterans etc. but holds one or more positions that differ significantly from the constituent's stance such as gun control or abortion. The constituent then has to reconcile in their mind the differing positions and come to a rationalization either causing them to drop support or maintain it.

In the case of buyer's remorse, a purchaser may make a decision and then regret it afterwards. In order to minimize this, the buyer will often seek out reinforcement from others that they made the right decision, If they purchase cards for a Magic deck, they will ask other players to look at the deck and (hopefully) say how the new cards improved the deck. A miniature painter will show off their work, hoping for admiring comments to reinforce their belief that they did a good job. Boardgamers will seek out other players for a new game, looking for reinforcement that other players enjoy the game as much as the purchaser does.

Customers often like to shop with someone else, getting their feedback before making a purchase. Boardgamers also often check sites such as Board Game Geek for confirmation that other people think a game is good before purchasing it for themselves. No body wants to feel they made a bad decision.

Opportunity Cost

Had a few people ask about marketing concepts such as pricing, product development and such so thought I would write some posts on the topic starting with the concept of opportunity cost.

Opportunity cost is the idea that whenever you buy something, either with money or some other means of exchange, you give up something. Generally whenever we make a decision, we have several options from which to choose. When we choose one option, we forgo the benefits we might have gained by choosing a different option. Let's see how this works through Magic cards

A Magic player comes into the store with $22, enough to make a $20 purchase plus tax. The customer comes in looking for a Nicol Bolas, The Ravager, which currently sells for $20 or for booster packs, which sell for $3.99 each. The customer now has the choice of either purchasing the Nicol Bolas, The Ravager card or 5 booster packs of Magic and must weigh the advantages and disadvantages of each choice. They can take the sure thing and purchase the card they want but forego the other 74 cards they could get by purchasing the booster packs, or they can purchase the booster packs and forgo the Nicol Bolas. Whichever one they do not choose is the opportunity cost they have foregone in order to make the other decision.

There are also non-monetary opportunity costs as well. You can choose to spend time cleaning the house or playing D&D with your friends.. If you choose D&D, you get to have fun with friends but put off the housecleaning until later, possibly getting someone mad at you if you had promised to do it. If you choose housecleaning, you get a clean house and avoid getting someone mad at you, but miss seeing your friends and have to listen enviously as they tell you later how much fun they had.

A third form of opportunity cost is delayed or immediate gratification. If I have $10, do I spend it on a set of dice now (immediate gratification) or save it  and apply it towards a larger purchase later, such as a copy of Gloomhaven (delayed gratification). In all of these cases, we want to make the chose that minimizes the forgone opportunity cost, which we generally do by minimizing the cognitive dissonance we feel about many decisions, a topic I will discuss in the next post.

St Patrick's Day

Tomorrow is St. Patrick's Day so we will be celebrating be playing Munchkin Warhammer 40K, of course. Unless Steve Jackson Games comes out with Munchkin Leprechaun really quickly, like tonight. We will have green cookies or cake or something like that though.

Barnes and Noble Layoffs

February of 2018,  Barnes and Noble laid off some 1800 full time employees, many of which had worked for the bookseller for over a decade. Just about every store lost 3 to 7 full time people:

On Monday morning, every single Barnes & Noble location – that’s 781 stores – told their full-time employees to pack up and leave. The eliminated positions were as follows: the head cashiers (those are the people responsible for handling the money), the receiving managers (the people responsible for bringing in product and making sure it goes where it should), the digital leads (the people responsible for solving Nook problems), the newsstand leads (the people responsible for distributing the magazines), and the bargain leads (the people responsible for keeping up the massive discount sections). A few of the larger stores were able to spare their head cashiers and their receiving managers, but not many.

Just about everyone lost between 3 and 7 employees. The unofficial numbers put the total around 1,800 people.

In business, the easiest thing to cut when you run into trouble is payroll. Payroll is usually the largest of a store’s variable costs and, since most people in retail get paid by the hour,  the most variable. Hence, payroll proves a very tempting target when costs start ballooning and something in the budget needs to get cut.  Unfortunately, by doing so, especially by getting rid of the people who have been here the longest, and generally have the highest pay and benefits.  Back in 2009, Circuit City followed a similar path, cutting payroll and moving full time employees to part time positions. That didn’t work out so well. The problem with cutting your full time positions is that those are the people who have likely been with the company the longest and know the most about how the company works and the products or services that it sells. Getting rid of them eliminates decades of institutional memory from the organization. Then, offering to bring them back in a part-time position does not engender any positive feelings towards the organization by the said employees.

People can get almost everything that Barnes and Noble sells online more cheaply from Amazon or another online reseller. What they cannot get from Amazon or other online resellers is a pirate reading stories to their children or someone to teach their children to play Pokemon. Retail is moving to the experiential model wherein they must provide an experience for the customer in addition to products to purchase, even if it is just something for the customer to look at while they are taking time to shop in the store. Our store does it with large amounts of out of print merchandise for customers to look through and appropriate videos playing on the store television. St. Louis Fantasy Shop did it some years ago with a Lord of the Rings display I still remember. Prop replicas surrounded a dvd player that continually looped the Lord of the Rings movies and a sketching area where budding artists could practice drawing comic artwork. It takes a committed and creative staff to come up with interactive displays like that to keep customers coming back. Cutting staff is a great way to eliminate them.

Free RPG Day Acquired

Free RPG Day has been acquired by a consortium of 3 of the top gaming retailers in the industry (no not us) who formed Gaming Days LLC for the purpose of further promoting and expanding Free RPG Day. On Free RPG Day, we receive an assortment of free FPG items to give away to you, the avid RPG player. No change in the operation this year will be interesting to see what the trio does in the future, especially given Paul Butler's avid support of RPGs.

Dragons of Autumn Twilight Backstory

For those fans of the Dragonlance series, Margaret Weis has reminisced on her Facebook page about the start of the books and some of the backstory behind the publication of Dragons of Autumn Twilight.

TSR, which published the Dragonlance series originally commissioned an author, whose name Weiss does not (or will not) remember to write the books.. The unnamed author did such a poor job on the book that Weis feared TSR would drop the series. She and Hickman wrote the first five chapters over a weekend and turned it over to their editor, Jean Black, who read it only so that she would not hurt their feelings. Black loved what they had written, though, and gave them a contract.

However, Random House, which was TSR's distributor to the book trade, did not have high expectations for the book, telling TSR that, because Weis and Hickman were unknown authors, to not expect more than the first book to sell. TSR, taking this to heart, then pushed Weis and Hickman to end the book on an upbeat note with the wedding of Goldmoon and Riverwind instead of the planned ending, the discovery of the Hammer of Kharas.

New Talisman Variants

USAopoly has officially announced one variant they will produce using the Talisman game engine the company licensed from Games Workshop:  Kingdom Hearts. Unofficially, at Toy Fair, the company was discussing a Batman themed version of the game as well. Not familiar enough with the Kingdom Hearts games to reflect on how it would play, but I would bet in the Batman version, players start out as a member of the Batman family and build up your strength before taking on one of the major Batman villains at the end of the game.