Tao Wong: Operating Costs for a Boardgame Store

Editor’s note: Wong’s previous articles for Boardgame News are ”Launching a Board Game Store in Canada” from August 2009 and ”Capitalization of a Boardgame Store” from September.

Operating expenses for an online boardgame store come in a variety of ways, most of them common to most businesses, but some unique to the industry. These costs will differ from what I discussed in the capitilization article as these costs are ongoing. In the first year, you’re not likely to cover these costs with revenue from sales, so you’ll need additional cash on hand.

All of the figures provided are based on professional quotes in Canadian dollars, but with personal connections and favors, they could potentially be lowered.

The Hard Costs

The costs below are fixed costs and are related to physical aspects of your business, such as your rental space or server bandwidth.

• Rent

Rental cost is obviously going to depend on the size of your business and how much stock you carry. Currently, warehouse space in Vancouver is about $1.50 per square foot and office space between $1.50 to $5. As a comparison, retail space can go from $3 to $10. These estimates all include taxes and other gross expenses such as heating and electricity.

While warehousing is far cheaper, keep in mind that you’re unlikely to find a warehouse with less than 1,000 sq. ft. while you could easily find office space of 300 to 500 sq. ft.

• Hosting and Domain Name Purchase

This is another form of rent for an online business, in this case for your website. Purchasing a domain name is cheap, as low as $2.00. Of course, the better domain names are already taken, and you probably don’t want a .biz or .net domain name, so you are looking at about $20 per year for a domain name purchase.

Hosting varies, with starter hosting packages from $5 to 20. For a more dedicated long-term site, you are looking at $50-100, which is what you will need for a site of any size with good design and images. This cost will depend on how you code the site; image and Flash-based sites with heavy databases will require more dedicated hosting than others.

• Shipping & Packaging

The cost of shipping games to customers can be significant due to reshipments for missed games, mistakes on the costing of shipping during order processing, and free shipping costs. If you are wondering, no, we don’t make any money on shipping; the cost quoted by our boardgame store is our cost plus the box cost, give or take a dollar or so. Sometimes we lose, and sometimes we gain as the software isn’t 100% accurate.

On top of the actual shipping cost with your carrier, you have the cost of boxes, packing materials and tape. Most cardboard boxes will cost $1-3 depending on size and stock, while packing materials can generally be purchased on the cheap. In fact, if you save the packing material send to you and all of your junk mail, packing material costs can be negligible.

In addition to this, you have shipping costs to you from your distributor. Unlike the U.S. where some distributors will ship for free when orders reach a certain size, Canadian distributors will always charge for shipping. Generally, the shipping cost from distributors within Canada is 4-7% of the cost of goods (for a $1,000-2,000 order). Note that due to our location in Vancouver we mostly have orders shipped across the country, so stores in eastern Canada are actually better off.

If you are shipping from the U.S., which is a possibility as not all the Canadian distributors will have what you want, the shipping cost is much more significant and can be 8-12% of the cost of goods. This amount does not include brokerage costs, which is another 1-2% generally speaking.

You can see why we prefer to pick up our games ourselves from the U.S. rather than pay all the shipping costs. Admittedly, there is a hidden time cost with this method, but one of the advantages of an online business is that you can work at 2 am and still get sales.

The Soft Costs

Most of these costs are discretionary services. You can choose a variety of ways of undertaking them, and the costs can often be reduced significantly through the liberal use of pleading looks and good connections. As a small business, who you know is going to count for a lot.

• Insurance

It’s a good idea to have insurance if you hold any significant amount of stock. After all, a bad accident could wipe you out completely if you had to replace most of the stock out-of-pocket. Figure to spend at least $750 annually for insurance, possibly more depending on the plan that you choose and the amount of stock you are insuring.

• Marketing expenses

I won’t provide numbers since marketing expenses are truly dependent on the marketing and corporate strategy chosen by a company. I’ve seen numbers range from 2% to 10% of revenue, with most consumer good companies at the higher end of that scale. In fact, marketing expenses can be as high as 20% of revenue during brand-building years.

I will say that next to development costs, this is probably the most expensive part of running an online business as one or another form of marketing expense is going to be necessary, unlike retail stores that have foot traffic that “finds” them, an online store must actively draw customers to it.

The main ways to gain customers are via advertising on other sites or advertising on search engines. A single month’s advertisement on a site could easily cost US$250, while advertising on Google Adwords can cost (for a moderate budget) a minimum of $300 per month. Figure to spend more if you intend to go through Google’s content network or are going for higher placement on broader keywords.

Search engine optimization (SEO) is a great strategy, but requires a high level of expertise and time. Google generally will not index and rank your site for at least six months from launch, and you can expect to spend a large chunk of your time working on SEO. If you do not have expertise in SEO, hiring a company to do it on an on-going basis can be expensive; I’ve seen quotes ranging from $46 (don’t even touch) to $500-2,000 a month. Larger sites, which require even more dedicated time, can expect even higher quotes.

I’ll skip the other forms of marketing since this could go on and on and we’re discussing expenses, not marketing tactics. This section was to give you an idea of what you want to do. The best suggestion I have is to project for how much your revenue you want, then work out what your budget should be from there as above.

• Contractors

There are two contractors that you can expect to require: graphic/web design and IT consultation. Think of it as analogous to your handyman in a normal game store. As an online store, you will likely need new banners as well as changes to your site graphics on a relatively regular basis. These costs can vary, but will be about $35-50 an hour for graphic/web design support. Expect to need graphic designers at least once every few months for a couple of hours to keep your banners and site fresh. Learning how to do this work yourself is cheaper, but you’ll need the right programs.

With regard to coding, the best option in our view is to put your IT consultants on a retainer. The website will give trouble for no apparent reason: sometimes due to updates on other browsers, sometimes due to capacity issues, possibly even because you added a new product to the site. Having a third party available to troubleshoot problems can be extremely handy, especially if the problem stops your customers from buying from you. In addition, as you grow you’ll find the constant need to update your site with better graphics and better options.  Again, having your IT personnel on retainer allows them to work on these side projects when your site isn’t crashing. It’s hard to provide a fixed amount for this expense, but a couple of hundred dollars is the minimum that you can expect to be charged.

I’ll note that if you use third party software for your e-commerce backend (e.g., Yahoo! Shops), much of this work will be done for you for one low fee. This work is all part of the package, and the provider will eventually pass on additional tweaks and updates. On the other hand, you’ll always be behind the curve for the latest sales tools (not necessarily a bad thing as all these tools need time to be implemented) and many of these companies charge a percent of your sales.

• Legal & Finance

Yup, accountants and lawyers are a ton of fun. They are also quite expensive, but necessary come tax season and registration. This is again a variable cost; depending on the size of your business and whether you get audited, the expense can range from $500 a year to thousands. For the most part, expect to pay the $500.

• Miscellaneous Costs

This category is a catch-all and can include everything from the cost of paper for printing your orders to food and beverage expenses for late nights at work to nails and a hammer to fix a broken shelf. These costs will crop up, quite often unexpectedly, and while they are relatively minimal individually they do add up. I’d suggest you budget $50 per month for this kind of thing.

• Salary

Or what you pay yourself. I’ll leave you to figure out what this number should be, but let’s just say that in the beginning, the guy at Timmy’s is probably earning more than you are.

Conclusion

Hopefully, this article has given budding entrepreneurs an idea of what to expect. Between this and the capitalization costs, you should have an idea of what it takes (on the financial side of the business) to start a store. It’s not cheap, and the breakeven point is years down the road, but it is doable – at least in our mind.

If there’s a specific article or more information on an aspect of the business you’d love to see, either comment here or write me directly to ask.

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