Wednesday, August 31, 2005

"P500" Business Model

Talking about my game development experience on Sword of Rome earlier this week, I alluded to the difficulty of getting game designs published. The problem essentially comes down to the fact that there are probably more aspiring game designers out there than there are game purchasers. We're not talking about Monopoly or Candyland here. Games you find in Toys R Us sell 100s of thousands or even millions of copies for basically pennies. Hasbro can rely on the classic "small margins / large volume" principle of making money. On the other hand, hobby wargames are considered a success if they sell more than a few thousand copies over their entire *lifetime*. They retail for $30-$100 per copy just to get to the break-even point.

As a result, hobby game publishers have a hard time figuring out what to publish that they won't take a complete bath on. A number have adopted an interesting business model to stay afloat: They put designs that they feel are promising on a pre-order list on the web and start collecting pre-orders from fans. When they hit the magic number of orders that more or less assures them a break-even proposition (usually 500-1000 copies), they begin full-fledged production of the game and subsequently charge the pre-order customers' credit cards to get the funds to pay the printers.

As far as I know, GMT Games was the first company to go entirely to this model (after very nearly going bankrupt on at least once on a bad production decision), and they called it "P500" (for 500 pre-orders). Many other hobby game publishers have followed GMT's lead. Obviously, this benefits the publisher by helping them print only the games that won't lose money -- that people have pre-committed to purchase. The games that get published are essentially selected by popular vote. The "voters" also benefit by getting a reduced pre-order pricing and being the first ones to receive their new games (which can be very important to us true game geeks). It's a very creative win-win solution, for which I truly salute GMT Games.

With the ever-increasing footprint of the web, I actually think this is model that may be able to be applied to more and more "niche" consumer areas -- "on-demand production". The downside is time -- It took about 1 year for Sword of Rome to garner enough pre-orders to warrant publication.

What say our resident economists?

(Update: I don't know about resident economists, but the administrator would like all links in RED, please)


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