Causes of the Current Inflation

 Prices were going to start falling as the money from last year’s stimulus checks worked its way through the economy but with the war in Ukraine and sanctions imposed on Russian exports, expect to see them moving up again. Sanctions against Russian mean there are sanctions in place on their international trade against three of the major oil producers in the world:  Russia, Iran, and Venezuela.  The world’s economy has been doing OK with the sanctions against Iran and Venezuela but Europe, last time I checked, gets about 40% of its oil from Russia. The US, currently the number one oil producing nation in the world, has promised to ramp up oil production to help fill the gap left by the expected loss in Russian oil production, although the sanctions may provide exceptions for energy, which makes them much less effective. According to S& P Global Platts, about 75% of the world’s sunflower oil comes from Russia and Ukraine and  just under 25% of its wheat supply comes from the two countries, so disruptions in the supply from both of them will mean further, and longer term, price increases in the food supply. Food is a necessity, games and comics, luxury items. When it comes to how to allocate dollars as prices rise, food will (usually) take priority over entertainment. Although it is doubtful we will see the double digit inflation rates of the late 1970s, the current 7% rate still triples the numbers we have seen over the last 20 odd years and will likely continue for most, if not all of this year.

Effect of Inflation

 

Prices were going to start falling as the money from last year’s stimulus checks worked its way through the economy but with the war in Ukraine and sanctions imposed on Russian exports, expect to see them moving up again. Sanctions against Russian mean there are sanctions in place on their international trade against three of the major oil producers in the world:  Russia, Iran, and Venezuela.  The world’s economy has been doing OK with the sanctions against Iran and Venezuela but Europe, last time I checked, gets about 40% of its oil from Russia. The US, currently the number one oil producing nation in the world, has promised to ramp up oil production to help fill the gap left by the expected loss in Russian oil production, although the sanctions may provide exceptions for energy, which makes them much less effective. According to S& P Global Platts, about 75% of the world’s sunflower oil comes from Russia and Ukraine and  just under 25% of its wheat supply comes from the two countries, so disruptions in the supply from both of them will mean further, and longer term, price increases in the food supply. Food is a necessity, games and comics, luxury items. When it comes to how to allocate dollars as prices rise, food will (usually) take priority over entertainment. Although it is doubtful we will see the double digit inflation rates of the late 1970s, the current 7% rate still triples the numbers we have seen over the last 20 odd years and will likely continue for most, if not all of this year.

How People Will Spend Their Dollars

 

Prices were going to start falling as the money from last year’s stimulus checks worked its way through the economy but with the war in Ukraine and sanctions imposed on Russian exports, expect to see them moving up again. Sanctions against Russian mean there are sanctions in place on their international trade against three of the major oil producers in the world:  Russia, Iran, and Venezuela.  The world’s economy has been doing OK with the sanctions against Iran and Venezuela but Europe, last time I checked, gets about 40% of its oil from Russia. The US, currently the number one oil producing nation in the world, has promised to ramp up oil production to help fill the gap left by the expected loss in Russian oil production, although the sanctions may provide exceptions for energy, which makes them much less effective. According to S& P Global Platts, about 75% of the world’s sunflower oil comes from Russia and Ukraine and  just under 25% of its wheat supply comes from the two countries, so disruptions in the supply from both of them will mean further, and longer term, price increases in the food supply. Food is a necessity, games and comics, luxury items. When it comes to how to allocate dollars as prices rise, food will (usually) take priority over entertainment. Although it is doubtful we will see the double digit inflation rates of the late 1970s, the current 7% rate still triples the numbers we have seen over the last 20 odd years and will likely continue for most, if not all of this year. What do you think? Post in the comments or email castleperilousgames@gmail.com

The Point of the Anchor

Anchor points come into play when a business sets a price on a product in a category either higher or lower than normal which then causes consumers to re-evaluate their perceptions of the price on other items in the category based on the high or low priced item.

For example, Wal-mart often uses the anchor point to create a perception of low prices on everything within a category by reducing the price abnormally low on just one item. By reducing the price on, say, a TV to $149.99, the company sets a low anchor point for the other TVs it sells. The anchor point Wal-mart sets on that particular TV is lower than the price a customer would find on that particular television wherever they shopped. Wal-mart then prices its other televisions similarly to what other retailers sell price them but, because of the low anchor point, the other televisions are also seen as lower prices.

Anchor points are often used with high priced products, making them seem cheaper. A few years ago, during the GAMA Trade Show, I had the opportunity to have dinner with a couple of other store owners at Gordon Ramsay’s Steak. Now, when I typically go out to eat, I will spend $10 to $20 on a meal. However, at Steak, the average entre runs about $100. When a Porterhouse steak sells for $117, it makes the roasted chicken breast at $36 seem like a steal. Very few people order the Porterhouse steak. It is there to make other items on the menu look much more reasonably priced and lower customer resistance to purchasing them.

This is why I like to have expensive Magic cards on display at the store. We very seldom sell them but having a card in the case selling for four figures makes that $25 Mox Amber look much more reasonably price.

Anyhow, back to the original incident. Recently we had a customer bring in some comic books for us to evaluate. He was curious as to how much they were worth. Among the books was a copy of Infinity Gauntlet #1, signed by George Perez, with a certificate of authentication. After a few minutes of research among various comic prices sites, eBay and Amazon, we told him it was the most valuable book in the lot, but that the price was all over the place, with sellers pricing it anywhere from $25 to $160. His response “Oh, that’s  all?” The customer figured that 1) all of the interest in Avengers:  Infinity War would have driven up the price of the book and 2) he had heard such high prices paid for first issues of books that he had set an anchor point for the value of his book at a much higher point than the price people were currently willing to pay for it. In this case, a little knowledge was indeed a dangerous, or at least disappointing, thing.

How to Make a Profit

“Buy Low, Sell High.”

There you go, that, in the proverbial nutshell, is how you make a profit in the game business, actually in any business.  Or, paraphrasing something a friend of mine, Marcus King (late of Titan Games and Entertainment, more recently with Troll and Toad) repeats from a mentor of his years ago: “You make your profit when you buy and your cash when you sell.”  The lower for which you can produce or buy a product, the more money you make when you eventually sell it.  Simple, right?

Not completely.  The above is indeed the basic of pricing but there are a number of different strategies and tactics a  business can take with its pricing, depending on what sort of image it wishes to project.

First, and most basic, is cost pricing.  You take the cost of the product you purchase or make (hopefully low, see above), increase it by an amount sufficient to generate enough money to cover the business overhead and provide a profit that you consider sufficient and sell it for that price.  Fairly straightforward, though not necessary simple, as this method does require you to know your overhead costs and how to break them down in order to assign them to items for sale.  This also highlights a recurring problem game stores have with a price for their products set by the manufacturer (manufacturer’s suggested retail price or MSRP).  Since customers are notoriously reluctant (with good reason) to pay more than the marked MSRP for items, having a price pre-set by the manufacturer constrains the amount of gross profit the store can earn from the item,  ergo the only way for a retailer to increase profits is to cut costs.  This is why game stores really dislike short discounted items from manufacturers, as a shorter discount on a product that much less money available to cover the costs associated with running the store.

Demand based pricing and competitive pricing are the two other major strategies a game store can choose to adopt when setting prices.  Demand based pricing derives from economic laws of supply and demand:  As supply decreases, price increases.  As demand increases, price increases.  A perfect example of this is collectable card games such as Magic and Yu Gi Oh.  Within any new release of either, there are always 1 or 2 cards highly desired by players.  The price for these cards quickly rises, due to demand, with the prices for the foil versions of the same cards priced even higher, this however, due to scarcity/lack of supply.  If players find these cards not as playable as hoped for or they cycle out of the preferred tournament environment, supply remains the same but demand drops, causing a reduction in the price a retailer will find customers willing to pay for cards, Magic’s Jace the Mind Sculptor card a perfect example.

When a store opts for competitive pricing, it is a good thing from the consumer’s point of view, not so much from the retailer’s as this means you reduce price in order to either grow market share or meet prices offered by competition on the same products.  Typically a retailer will cut prices in order to attract customers drawn to a lower price.  Magic packs are a classic example in game stores.  Hoping to attract more customers, mainly the price conscious kinds, a retailer cuts the price on Magic boosters to $3.50, 12.5%.  Other stores in the area have three choices:  ignore the price cut and either sacrifice those price conscious customers or determine some other way to retain them, meet the price cut and sacrifice some profits to keep customers, or exceed the price cut to keep those customers and attempt to draw in price conscious customers from the competing store.  If you choose option three, expect the other store(s) to cut their prices to meet or beat yours and, next thing you know, you have a full-fledged price war on your hands.  Great for the consumer, really bad for the store as that money you are giving up from profits is money that would otherwise go into running your store.  Price wars are usually won by the store with the deepest pockets as lesser capitalized give up, though really, no store ever wins a price war (though it is rather good for manufacturers as long as it lasts and as long as no store goes out of business).

So, returning back to the beginning, stores make profits by buying a product as cheaply as possible, selling it for what the market will bear and competing as much as possible on things other than price.  Do that and you have a really good chance of staying in business.