Okay, I've really gone off the deep end this time...
(edited slightly to insert a couple of missing words and correct a mistyped number)
jasamcarl said:
And may I add that you don't make your profit off of thin margins. Instead, you 'anchor' your profits through membership fees by your regular customers.
Yes, I understood you. The problem is the same as the product margins, though -- the customer base is too small and too diverse in its spending patterns for the program to be profitable.
Let's play with some real numbers. (Or at least some real projected rounded numbers.)
The Space-Crime Continuum is going to make about $200K in sales this year. About $100K of that is from tracked customers who spend $100 or more per year. These are our core customers (the other half comes from occasional purchasers picking up a book here or a game pack there) -- there's about 285 of them and they average about $350 per year in sales. Cost of Goods Sold is about 60%, so our core customers represent about $40K in gross profit.
Let's say we want that gross profit as membership fees from our customers. We're looking at a $140 fee per person -- if they fork that over tomorrow, they'll get all their gaming stuff at 40% off for a year.
Cool deal, neh? Well, actually, no.
See, the average sales is $350, but the median sales per customer per year is only about $150. The average is pulled up by a relatively small number of super-customers spending $1500 or more per year. And you know what? Paying $140 for the opportunity to get $150 of merchandise for only $90 more would be a really, really rotten deal.
Now we could construct the deal so it works best for the $150 gang. So we make the fee $60 per year, and everyone who pays that gets 40% off. Now my $150 people break even, but look what happens to the super-users -- the ones who have the most to gain from the deal. $1500 times .6 = $900, plus $60 = $960, so they save $540, all of which comes right off my gross profit.
$500+ less gross profit. Per super-customer. Congratulations, Mr. Econ Major, you just cost the business my salary for the year.
Okay, what if we raise the bar a bit? Let's turn this into a reward for the super-users. They've got money to burn, after all, so they won't blanch at a $600 Super-User Deal. They can buy lots of games then...
...and that is when reality comes knocking again. When somebody drops $1500+ in your store per year in $8 to $50 increments, it means they really, really, <b>really</b> like you. It means they are satisfied with your pricing, and so satisfied with your service that they don't care that they could save $500+ or more a year going somewhere else.
If you are a sane businessman, you do not look for ways to save these customers money. You do not bring price up at all with them. You focus your efforts on giving them the most amazing service you can think of and finding all sorts of neat new things that they'll be thrilled by.
Which is where the true foolishness -- and I use that word carefully -- of your plan becomes clear: it gives you no room for the upsell.
The easiest and arguably best way to increase your profits is to find new products and services for your customers. New games, new authors, new dice, more booster packs, paint services, tournaments, whatever, your goal as a salesman is to get them to buy more this visit than they did last visit, more this year than they did last year. You want to give such great value for money that people are thrilled to give you more of it.
The membership fee approach completely short circuits that route of growth. It doesn't matter if you introduce them to <i>Midnight</i> if you're not going to get any more profit from it. If they've paid fee $X then it doesn't matter if they spend $1000 or $2000 -- in fact, you'd prefer it if they spend less, because then you've got less wear and tear on your inventory and staff.
(Keep in mind that you're never going to get enough inventory flow for true economies of scale. There's not enough money in the <b>industry</b> for that. )
While we're at it, let's look at the fellows who get stuck on the fuzzy end of the lollipop. As you say, this "punishes" customers who spend less than the threshold amount. If they don't take the deal, then they're not getting the "great deal" some of their friends are. That breeds resentment, and resentful customers go elsewhere. If they do take the deal and don't buy enough to meet their break-even threshold, then they've just paid <b>more</b> than MSRP for their games. Nobody takes that kind of "deal" twice.
Let's review, shall we?
If the customer spends more than it takes to "break-even" on a membership deal like this, then you the retailer lose gross profit. Since most customers are not dumb on these things, they will either not take the deal if they fall below the threshold or buy more product so they benefit, which you will not gain additional profit from since you took yours "up front" in the membership fee.
If by some miracle the customer spends less than the break-even point, then they get screwed and start looking for a cheaper source. Oddly enough, there <b>are</b> cheaper sources -- Amazon.com for instance, which started the discussion. Amazon offers equally spiffy discounts, free shipping and no membership fee.
If the customer spends to the break even point, neither side loses -- because the customer has just paid the price he would have paid without the program.
Would you care to tell me again how this is a good idea?
Here's the kicker. Now that I've spent a thousand words portraying this as the kind of stupid idea only an economist could have, I'm going to tell you a little secret.
The Space-Crime Continuum has been offering the kind of plan you describe since 1995.
Oh, not the numeric details you're proposing. I'm not
that stupid, which is one reason I'm still in business today. But for years we've offered a frequent buyer's program -- $5 a year for 10% off everything, more recently $10 a year for 10% off everything.
Here is what we have learned from eight years of experience with this kind of approach:
<ul>
<li>The program has, as you described, helped us to evaluate how "serious" a new customer is. However, we've discovered in recent years that we can evaluate the new customer equally well by considering their initial purchase (both how much and what they buy) and the way they "shop" the store.
<li>Most people are very careful about evaluating this sort of program. They only take it if they think they'll do better than break even, which means the store almost always gives up gross profit from the deal.
(Interestingly, most people tend to underestimate their expenditures in this situation, even though they inflate them in other circumstances. This means some people exclude themselves from the program who would benefit.)
<li>When we upped the fee to $10, there was very little fall-off in enrollment. People didn't seem to mind paying more for the same benefit.
<li>On the other hand, when we stopped actively promoting the deal some years ago, enrollment shrank steadily over time. Very few people ask for a discount program, and many people do not renew if not verbally encouraged to do so. This is despite the facts that the program is still clearly advertised on our POS signage and we happily sign up or renew anyone who requests the program.
<li>From this, we have concluded that most of our customers really don't care too much about the program one way or another. Most of them simply do not prioritize price in their purchasing decisions.
<li>Among those customers who do care, the program has benefited us by encouraging loyalty. We have retained sales that would have become impulse buys at other stores because people signed up for the program has decided to "wait 'till I can get my discount at Space-Crime".
<li>However, we have never seen any evidence that the program -- even when we promoted it most strongly -- has ever had any effect to help us acquire customers or increase their average/annual purchases. It seems to be a customer retention tool, not a customer acquisition tool, and anyone who's seriously focused on price in their purchase decisions still goes elsewhere.
</ul>
Now the traditional argument of the armchair store manager -- and let me make this quite clear, I've been having conversations like these with people like you since long before you were in college -- is that "well, if you'll just cut deeper, you'll acquire more customers and it'll all work out." That's pretty much your plan in a nutshell, combined with a mildly interesting fiscal figleaf of membership fees.
I'll admit that I've never tried experimenting with the deeper-and-harder theory on any serious scale -- I like making my mortgage payment, thanks very much, and there's only so far I'm willing to go in the pursuit of economic science. But the simple fact of life is this -- if you're a small business and you try to compete on price, there's always going to be another fool or bigcorp who is willing or able to cut deeper than you. Even at its most optimistic, your membership plan isn't as good a price as anyone can get at Amazon.com today, and that alone dooms it to failure, because anybody who is really serious about saving money will go somewhere else. If you want to succeed as a small business, you have to identify the customers who are interested in something other than price and provide them with something they want to pay for. This isn't it.
Now, I'll be the first to agree that I'm not the best businessman in the world. One of the worst, really -- I'm too impulsive, I'm a terrible marketer, and I procrastinate like nobody's business. (I'm supposed to be writing something that makes money right now, for instance, not writing what has turned out to be my longest post in years.) But taking a slow, steady, customer-service-oriented approach to business has always kept food on my table and a roof over my head.
My store may well be obsolete in a few years, just like the other gaming stores you refer to, because I have a feeling there are changes coming that will make the last 10 years look like a still lake. But the reason us old fogeys don't have an "appreciation" for the theory you've been throwing out is because, quite simply, it's crap. It works for big corporations that can even out variations in sales over thousands or millions of customers, but it doesn't do jack for a small local business.
and I think that's quite enough from me tonight,
It's the same as criticizing physics because of bad Aristotilean physics (I say this as a huge fan of Aristotle, no offense intended).
