Basic Manufacturing Math for GAME MANUFACTURERS

By Ali Summers (ali@thegamebabe.com  / www.thegamebabe.com )

When you make a game, it is easy to think your costs will come back to you when you sell it.  But that is not always the case.  If you spend more to make and sell the game than you made from selling it, you will lose money.   Here is a basic guide to manufacturing math.

Let’s say for example that you have a product with an MSRP of $20.  Your first print run is small enough so that you aren’t risking too much capital, but large enough to see a reduced manufacturing cost.

This is what pricing looks like:

Standard Wholesale (keystone) – 50% off:  $10

Major Chains/Catalogs – 55% off : $9

Sales Reps – 55-65% off:  $9-$7

Distribution – 56-66% off: $8.80 – $6.67

Let’s say you make 5,000 copies of something that you will sell primarily through sales reps and distribution, and you negotiate $8 per unit.  Even if you sell everything- you will only make $40,000.   If you have spent more than that to you’re your game, you have lost money.  I actually always recommend that you only consider 90% of the revenue.  You will send a LOT of samples and you will have some bad debt.   So in this case actually consider only $36,000 in revenue from your first run. This is ONLY if you sell everything.  If you don’t sell it, you don’t make it and you can’t count on it!

In order to maximize the possibility for profit, I recommend the following costs be the following percentages of total revenue.

Production:  < 40%. (You should spend less than 40% of your revenue on the materials and supplies which go into your product.  This does not include design, warehouse, fulfillment, etc.) That means your production costs should be under $14,400 (or $2.88 each). 

Sales:   10%.    Your sales budget is only $3,600.  This means that you can hire someone who is $10 (which is really a minimum wage person plus the hiring expenses) for 360 hours (or about nine weeks). You cannot hire someone for three hundred hours, plus pay a ten percent commission, unless you take the funds from some other part of the budget. 

Marketing: 5%.  That means your marketing cost should be under $1,800.  Yep.  $1,800.  You can’t do a full scale marketing campaign for something that is only going to move 5,000 units.  You WON’T HAVE the return. Make your marketing count- ask yourself the hard questions before you spend marketing dollars.  Will this expenditure result in revenue?

Everything else (Design, freight, business expenses, warehouse/fulfillment, taxes, etc.): <45%

Profit is whatever is left. If you go over, you lose money.  It’s that simple.

Do the math from both sides of the equation.  Look at how much it will cost to make the item, and then look at the predicted MSRP.  (If it costs you $5 to make an item, then you have to sell it for more than $25.)   Also look at the market.  If everything else in the market in this category sells for $15, you either have to have some great new features and reasons why yours is SO much better, or your products won’t sell.  

Before you go into production- make certain your math works!