Distribution Myths and Lies
When I started Bungie Software, all I wanted to do was write a computer game and sell it, just like I sold popsicles during the summer when I was in fifth grade or my chemistry notes in college. My naive vision had an elegant simplicity, a kind of commercial innocence.
It wasn’t long before that innocence was betrayed by the long list of vendors, distributors, retailers, and mail order companies who were more than eager to insert their grubby hands into my pie. Now, don’t get me wrong: we couldn’t have made it to where we are, or get where we’re going without these channel partners. But there’s a lot that goes on behind the shelves that consumers seldom realize.
Bungie sells to several different kinds of customers. We sell direct to the end user, we sell to mail order companies (from whom consumers buy), and we sell to large distributors (that in turn resell to stores, from whom consumers buy). Selling directly to the end user is a simple process, but retail distribution gets more complicated.
Channel 1: End User Sales (easy)
A) Bungie places an ad.
B) Customer sees the ad and buys the product.
C) Bungie ships the product to the customer.
Here, step A can be a magazine ad, direct mailing, newsletter, Web site, demo, etc.
Channel 2: Mail Order (harder)
A) Bungie submits a product to Mail Order Company for evaluation. If approved, Bungie doesn’t ever have to do this again. (This didn’t happen until we released Pathways Into Darkness for most of the mail order companies.)
B) Bungie buys an ad. That’s right, Bungie doesn’t sell a product to the mail order companies. The mail order companies have sales people, whose job it is to sell ads to Bungie (the sales people get commissions, too).
The tricky part here is that Bungie must buy the ad two to three months before the ad comes out, so a December catalog is booked in October. As you know, planning for new products can be hard, and mail order companies, by law, are required to estimate shipping dates, which is why they frequently say "two weeks" even when Bungie is saying "we don’t know."
C) Mail Order Company sends Bungie an order for product. This absolutely doesn’t happen until Step B is done.
D) Customer sees the ad and buys the product from Mail Order Company.
E) If Mail Order Company bought too much, then they send the product back. That’s right, nobody actually buys product from Bungie! It’s all consignment. If Mail Order Company doesn’t sell it, the product comes back to Bungie. Remember this lesson, it repeats later.
Special Notes: With entertainment software, a mail order company derives most of its profit from the advertising sales, not the product sales. A full-page ad in one of the big Mac catalogs costs about $25,000 (multiply that by 150 pages for some big monthly numbers!). On a given month, Bungie may pay $9,000 for an ad. For the mail order company to make more than that ad price they would have to sell over 1,200 units of product that month, which only happens around Christmas. Consider MicroWarehouse, a publicly traded company that does around $750 million in business per year. They produce four catalogs with a total of over 600 ad pages a month. This generates a mammoth $180 million per year. The remaining revenue ($570 million) is generated by product sales and yields only a 20 percent margin. That puts the net revenue at $180 million for ad sales and $114 million for product sales. Remember this lesson, it repeats later.
Channel 3: Retail Distribution (extra hard)
A) Bungie submits a product to a distributor for evaluation. The distributor says, "Bungie who?"
B) Bungie spends years and lots of money trying to make a name for itself so Bungie can go back to the distributor with an established customer base.
C) Repeat steps A and B as long as necessary.
D) Distributor finally offers Bungie a contract with the following options:
Bungie guarantees that the distributor is getting a better price than anyone in the world.
Bungie agrees to take back any product the distributor fails to sell. (Remember the consignment lesson.)
Bungie agrees to give the distributor anywhere from 3 to 6 percent of sales as a marketing fee. Distributors typically mark up software by 1 to 3 percent; think back to the lesson on how marketing profits outweigh product profits.
Bungie agrees to spend at least $10,000 on product launch marketing with the distributor. Again, remember the marketing profit lesson.
Bungie agrees to pay shipping to the distributor.
- Distributor agrees to pay Bungie 30 to 90 days after delivery of product. This is the biggest joke here. Distributors never pay until they need more product.
E) Bungie tries to negotiate, but ends up getting the shaft like the rest of the software developers and signs the contract.
F) Distributor says, "OK, to place your products into Retail Store X, you must spend $5,000 on their in-store catalog." Or even better, "You must pay $25,000 on their end-cap." (An end-cap is a product display positioned prominently at the end of an aisle.) That’s right, kids (this is another important lesson): every time you walk into a store and see 100 copies of Mutant Death Machine stacked at the end of the aisle, it isn’t because the store thinks the game rocks. It’s because the publisher paid big bucks to place it there. And the store keeps those big bucks as profit.
G) Bungie sells some product to the distributor.
H) Now Bungie realizes that to compete with all the other software that the distributor sells, we have to bribe the sales people. It’s called a spiff. That’s when Bungie says, "OK, I’ll give you a dollar for every unit you sell to a store." Alternately, we have to tell the distributor that we’ll give them a rebate of 5 percent if they sell a certain amount.
I) OK, here’s the best part: The distributor goes out of business owing Bungie a ton of money.
Now, this whole rant may sound like a bunch of whining from a company that’s made plenty of moolah selling a great game, and it is whining. But, wouldn’t it be nice if selling software were like selling popsicles on a hot summer day?
[Alexander Seropian is CEO and Founder of Bungie Software and is constantly evolving his job role by hiring talented people to work with. Eventually there will be enough smart people around that he’ll be able to sit around all day and do nothing.]