Game Design, Programming and running a one-man games business…

Another view of marketing: The confidence game

cliffski

Lets imagine a game with two participants. They have both produced products that will sell on the high street, but they need to bid for shop-rental.

Company A thinks it will sell $200,000 a day of it’s product (which it manufacturers on demand so there are no fixed costs), if it has the shop. (consider this profit, after costs of sales).

Company B thinks it will sell $120,000 a day of it’s product (similar in every way, but it is being cautious, maybe its not as good a product, or they lack confidence in it?) in the same shop.

How much does the shop-keeper earn?

Methinks he earns $120,000. How much does the product selling company earn? I think he/she earns $80k. why?

lets assume perfect information and a free auction. The 2 companies bid against each other for the shop. Company B cannot rationally go above $120k, because then they lose money. They rationally bid $119,999.99. They lose to company A, which bids the $120k, and then has a take-home profit of $80k per day.

In a different scenario, give the 2 companies estimates of 800k a day vs 120k a day. What happens now? Company A still gets the store for the same price, but makes 680k a day. The shopkeeper still earns the same.

What can we learn? Many things. Firstly, it is in the shopkeepers interests to have a large number of high earners wanting to rent their space, rather than a single winner. Secondly, if you are the person renting, you want to crush the competition, not just beat them. Selling 20% better than the next guy is NOTHING compared to the leverage of selling 100% better. The difference earned then is not the 80% you expect, but 400%. (assume paying 20% out for the rent, keeping 80% of revenue vs 20%)

Interesting conclusions, and maybe this explains why big companies make Call of Duty for $100 million, and not 100 1 million dollar games?

Replace ‘shop’ with web store or search engine ad, and it all becomes very very relevant and very very interesting. If you are an economics / biz geek anyway :D Why the title? I’m thinking that if you have that 120k to put down as a vote of confidence in your product, you win. You get the shop, and you earn the money. Note that Company B goes bankrupt with zero sales :D Outbid into extinction. Also known as starbucks approach to independent coffee shops. bah.

Is my reasoning/maths wrong? I have been drinking…

4 thoughts on Another view of marketing: The confidence game

  1. You’re not “wrong,” but there is one point you’re missing.

    It’s not enough to have confidence in your product, make high estimates, and put in a winning bid.

    At some point you need to follow through on your plans. Because if Starbucks couldn’t make that 120k back to pay their rent, they’d be *worse* than company B.

    Every business needs a model that’s sustainable. For some, that does mean making big bets like Activision with Call of Duty. But for other companies, it means finding a specific niche and servicing it with a laser focus. Because maybe then, they don’t need to rent the shop at all.

  2. Oh I agree that the absolute dream scenario is to do without the need for the store. So far only MMOs and EA seem to have managed this, and then even Eve Online is sold through other portals, at least initially.
    As long as the store rental cost strays slightly below the capital+hassle cost of setting up your own store, you still should pay the rental, and the store owners know this. General consensus seems to be that 30% is the sweet spot for online games. Take more than that, and people will go around you.

  3. Well I’ve worked as an auctioneer to wholesalers, and I can tell you that it is most certainly a bad thing to have only 2 people interested in a product, because, like you said, one of them will opt out eventually, and the other guy will get the product for a relatively cheap price. The more people bidding, the better prices you get. And if 2 people really want something, that is when the real money happens.

    Things can get complicated. People will often bid at a loss because they have already promised something to a client, and fulfilling the order is more important than making a profit. People will sometimes opt out of one deal in the hope that the person they let win will opt out for something that they need (collusion). People will punish each other by bidding up on something they have no intention of buying. People will bid up to a ridiculous price on one auction in the hope of scaring off competition on subsequent auctions. And the scariest scenario is when there is clearly more product than the bidders need. Prices crash to maybe 10% of their normal value in this situation.

    Large franchises will run some entire stores at a loss for the sake of gaining overall recognition and market share. Starbucks might pay more for a location than it is worth, if it means depriving a competitor of the opportunity. Obviously this will completely price out the one-store companies.

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