Explainer: Wii's push, Xbox 360's pull [update 1]
by Vladimir Cole 
{ Oct 16th 2006 at 9:50AM }
The information above comes from CompUSA's retail system according to an employee of that company who wished to remain anonymous, 'cept for this link to his or her blog.
The "consumer pays" column shouldn't surprise any of us. What's more interesting is the "retailer pays" column and the subsequent margin percentage (under "retailer keeps"). All else equal, a rational retailer faced with these percentages is going to do a whole lot more to push the Nintendo Wii, because there's more in it for him. Every unit sold will net him higher margin. Though the gross proceeds from each Wii sold are only $12.49 (versus the Xbox 360's $15.78), it's generally a heck of a lot easier to make a $250 sale than a $400 sale.
What do these different prices say about Nintendo and Microsoft marketing strategy? Marketers often incentivize retailers to merchandise and promote their products heavily by giving them heftier margins. This generates demand from retailers for the product, and is called a "push" strategy because manufacturers push product through the retail channel by offering retailers discounts. The Xbox 360's price, on the other hand, points to more of a "pull" strategy in which Microsoft generates end consumer demand for the console that spurs consumers to walk in and say, "I want an Xbox 360." Consumers pull the product from shelves, giving retailers no choice but to request additional units from the manufacturer.
Pull strategy is typically coupled with increased spending on advertising. Push strategies rely on partners to take on some of the promotional duties with mega in-store displays, special mention in store flyers, and so on. These numbers indicate that Nintendo is using more of a push strategy which itself shows increased reliance on retail partners versus expensive and hard-to-measure advertising.
Of course this analysis can't be complete without looking at the rate at which customers purchase accessories and the margins on those accessories. Accessories are the real money-makers for retailers, and we already know from analyst reports that the Xbox 360 sold more accessories per console than anyone was expecting it to. (To keep things simple, we just looked at the base consoles.)
We don't have all the accessory data, nor do we have the PlayStation 3 data, but if we were to receive it via the Joystiq tip line, we'd love to add it to the analysis.
[Update 1: our tipster got his own friggin' site address wrong. We've updated the URL in the first paragraph.]
Reader Comments (Page 1 of 1)
Kevin @ Oct 16th 2006 9:58AM
And the wiiner is: Wii!
Jonathan @ Oct 16th 2006 10:09AM
I'll really be interested to see how the 360 fares when faces with real competition. My feeling is that it will be like the Dreamcast: a powerful system with a fan following but ultimately an also-ran.
Good thing for 360 owners that Microsoft, unlike Sega, is willing to lose money indefinitely on the division...
The1 @ Oct 16th 2006 10:08AM
This is not a great representation of this space at all. CompUSA is not a leader in CONSOLE sales. Therefore, one would assume their margins to be less. I am sure Best Buy, Wal-Mart, Circuit City and Gamestop are much different. We all know that Wal-Mart will nickle and dime you to death to squeeze a profit.
32_Footsteps @ Oct 16th 2006 10:10AM
The real gamble from Nintendo is whether or not the companies will actually push for them.
Sure, it'll be easy to get cooperation from the top. The numbers shown certainly show that you'll get a board of directors on board (another number that favors the Wii is size - since the box is guaranteed to be smaller, stores can stock more units, and if the stock will move, more stock is always better).
However, the Invisible Hand gets held up by the Obnoxious Store Clerk. In order for a push strategy to work, it has to be pushed at all levels. The lowest levels, the sales clerks, are only going to push if there is an incentive for them to do so (IE commissions), and most video game retailers are loathe to offer those.
Thus, clerks and managers overseeing the store will push the system they feel like pushing, most likely based on fanboy preference. Basically, the theory goes that if more people buy your system of choice, the better it does and you see more good games for it. Thus, clerks have a selfish reason to push their favorite system over what corporate tells them to push.
Of course, if Nintendo is offering a carrot (get a cheap Wii if you help push it) or corporate offers a stick (push the unit and reach these sales goals or find a new job), then it'll overcome inherent fanboy prejudices. But beyond that, I don't think the push or the pull will matter as much as the appeal to the common gamer.
Martin @ Oct 16th 2006 10:13AM
Most stores do say, push this console or push for a new job.
Bryan B @ Oct 16th 2006 10:15AM
Where is the PS3?
BlindsideDork @ Oct 16th 2006 10:19AM
No one cares about the PS3 except rich people who are willing to spend thousands of dollars for it, they don't matter in this poll :P
The Intangible Fact @ Oct 16th 2006 10:22AM
"Where is the PS3?"
They cancelled it because of technical issues.
acceptablerisk @ Oct 16th 2006 10:25AM
I don't think it's a difference between push and pull strategies. It's as simple as the fact that Nintendo profits from their console sales, so they can afford to give retailers a bit more margin.
Microsoft, on the other hand, takes a loss on each hardware sale so naturally, they're likely to have a lower retail margin. Add that to the fact, that they're still relatively new to this market. Spending more on advertising to generate brand awareness makes sense for them.
Of course, "all else equal," the "rational" retailer would certainly push the Xbox over the Wii. Making $15 on a sale is better than making $12. If you're comparing the difficulty in making a sale at two different price points, then it's not all equal. Is it just me or does that phrase seem like a cop out? Once you get into "all equal land," you leave reality.
The1 @ Oct 16th 2006 10:29AM
3. I'll really be interested to see how the 360 fares when faces with real competition. My feeling is that it will be like the Dreamcast: a powerful system with a fan following but ultimately an also-ran.
Good thing for 360 owners that Microsoft, unlike Sega, is willing to lose money indefinitely on the division...
-------------------------------
Are you that lost or just an unwise FANBOY? I am so sick of gamers who hate MS for what they are trying to do. MS took a calculated risk entering this space. However, I am proud that they did this to make sure competition is strong. What other company would have done such? If you do not like the XBOX 360 no one in the world cares. You are the one losing out.
I am no FANBOY. Again, I have my PS3 paid off ($653.99-Chitown) at my GAMESTOP. I am #1 in line. Yeah, I am taking a calculated risk as well being number one at Gamestop to be the first to play. However, it’s a risk I am willing to take. Now you think about it. Do not worry about money MS loses on consoles. I am sure they are one of the few companies that have the checkbook to pay for it.
I think you are not looking at the BIG picture. I could see if MS was losing money in every market. Fortunately, they are not. One must spend money to make money. Does anyone else see MS’s big picture? XBOX360, XNA, WINDOW Gaming? If MS can pull this feat off, I do not think they are going to be worried about losing money at all.
dsub @ Oct 16th 2006 11:29AM
odds are the PS3 would have the lowest profit margin for retailers. With as quick as these things will sell out intially and how much of a loss sony is taking on them a profit margin of 2% or so really wouldn't suprise me.
Then again, I question the vailidity of this shoddy litte excel chart in the first place. From an "anonymous employee" whose blog isn't even in english?
Gilbert @ Oct 16th 2006 10:28AM
And Sony, of course, will be using the infamous "please, God, help us" strategy.
Cryoakira @ Oct 16th 2006 10:38AM
What a strange analysis you're doing...
First, you're only comparing the margin on console, which is absurd. What about games ? How much margin do retailers get on X360 games and Wii games ? Because that's what can make the difference for any retailer smart enough to think "long term".
Second : saying that it's harder to make a 400$ sale than a 250$ one is only partially true because here, we're talking about prices that remains under the psychological threshold of a big purchase (meaning more than 500 bucks) and about a difference on what you get. Wii and X360 are not equal. You're not trying to convince someone to pay more for the same product.
Third : How hard can it be to convince. I mean, you'll have two kind of customers : those who know which console they want and trying to convince them is a waste of time. Those who don't know and then, that's you JOB to convince them to buy what's the most interesting for you. And to me, having a higher profit (not percentage but actual dollars) on the X360 might be a reason good enough to motivate you.
GMan @ Oct 16th 2006 10:58AM
My gut instinct is that consumers will spend more on games and accessories if the main console price is lower. Perhaps I'm wrong, but it surely makes sense. If $500 is your upper limit, you're not going to get much extra when you buy a 360. However, once you have the Wii in hand, you probably won't mind buying an extra controller and a few games.
32_Footsteps @ Oct 16th 2006 10:40AM
"Of course, "all else equal," the "rational" retailer would certainly push the Xbox over the Wii."
Actually, that would only be the case if the retailer could get an equal supply of both consoles at the same value.
However, as you can tell from the chart, that isn't the case. Let's take a theoretical example where a retailer can buy $20,000 worth of consoles at the warehouse price. They would have the option of buying 52 Xbox 360s or 84 Wiis. Presuming all the consoles are sold, that results in $820 profit on the 360s, but $1049 profit on the Wii. And the more money you can afford to get units to sale, the higher the profits.
LaughingTarget@gmail.com @ Oct 16th 2006 10:42AM
No, the rational retailer never pushes for the highest straight-line profit, but for the highest profit margin. It is a hard and fast rule that the best retailers use.
While the 360 does make $15, it took a $384 investment to do it. The Wii gets $12 on a $237 investment.
What many people don't think about, mainly because it just isn't out there in the public, is the financial department's creation of cost of capital. The resources a company uses has a cost. The cost could be tangible, like interest payments on loans or bonds, or an intangible payment, like expected return on equity or opportunity cost of going with an alternate product.
The financing departmnet puts all of these factors into an equation and builds a cost of capital number. If the number is, say, 12%, that means the products are going to have to sell for a 12% markup for the company to break even. Yes, the company does have more cash than before the sale, but the cost of the capital matched the sale, so the net gain was zero.
In the above sense, the 360 and Wii are still selling for a loss, because a retailer will have a cost of capital well above 5%. The only difference is the Wii is selling for a smaller loss.
Think of it more along the lines of a limited-resource model. If a retailer can only outlay $1,000 to buy consoles, then they can either buy 2 360's or 4 Wiis. Yes, the 360 does have a $2 advantage straight line, but the company can buy twice as many Wiis. In this scenario, the 360 can only make the retailer $30 while the Wii will make the retailer $48.
The 360 focus is only a viable strategy in a situation where funds were free and unlimited. In a world where money costs money and there is only so much to go around, the Wii is far more attractive than the 360.
Jeff @ Oct 16th 2006 10:49AM
Vlad, I really think it's time you retire the phrase "all else equal" and the word "rational" from your vocabulary.
Either that, or learn the proper uses of both.
Chad @ Oct 16th 2006 10:51AM
The store may make more money on the Wii, but I would be interested to see how many people that buy Xbox 360s, actually buy a HDTV with the console. That might change some retailers marketing strategies.
Ruiz @ Oct 16th 2006 10:59AM
This isn't "push" and "pull" strategies. Push means creating products to fill stock, which is standard. Pull is what BMW and Dell does, and not produce a product until an order is filled.
Lasz @ Oct 16th 2006 11:06AM
I worked at CompUSA for some time, and can still walk in and access the system and check cost on products if I like. The problem is this isn't real 'cost'. The cost the store see's is an adjusted cost set by corporate (compusa employees can purchase products at this price, which is why it is adjusted). The real cost of the product might be the same, but more than likely it is not.
husky99 @ Oct 16th 2006 11:40AM
Anyone notice that the 360 display areas in Gamestop/EB store have been moved from the front of the stores to the back wall? The DS has taken over. Due to a higher margin maybe? Also to make room for the upcoming systems? It seems a little odd to see a one year old system set back in the shadows already. Microsoft needs to work on their product placement incentive by increasing the margins for the stores or else the DS and Wii will make a killing this xmas.
number one fan @ Oct 16th 2006 11:09AM
Incentivize?
logikil @ Oct 16th 2006 11:21AM
None of this really matters to anyone here. For those folks trying to analyze corporate strategies based on a few cell table, please stop.
The one thing that came out of this that i'll comment on is the Dreamcast/360 reference. I mean c'mon people. Aren't we past that rediculous comparison?
killcount @ Oct 16th 2006 11:29AM
As far as employees pushing their favorite product, when I worked at Best Buy, you damn well better have pushed everything and anything. We were checked on our sales everday and I did see people fired because of consistently low sales over a given time. Now, as far as systems go, the system is only pushed so that the accessory can be pushed with it. I agree that if I was still working there, I'd be more likely to push a Wii simply for the fact that I can probably attach a few more things to that sale.
What it really is going to come down to is what accessories are making the most money. I remember when we get the logitech wireless controllers. We made a huge profit on them and all I did everyday was try to sell them to people.
Jonathan @ Oct 16th 2006 11:34AM
To The1:
Just because you disagree with my assessment doesn't make me a "fanboy". In my opinion the 360 is selling very well right now, given the lack of competition. And when PS3 and Wii come out, it's going to be that much harder for them.
Also, the abysmal Japanese sales are bound to cripple their efforts to attract developers. I know Microsoft has bought some developers, but that can only take them so far.
Jonathan @ Oct 16th 2006 11:40AM
Oops. I meant to say "the 360 isn't selling very well right now"
Petrie @ Oct 16th 2006 11:57AM
I believe part of the reason the DS has been put toward the front is the recent push for "kid" and "family" friendly titles to be featured prominently in EB/GameStop stores. I'm no expert but my belief is that another factor is that DS titles are easy impulse buys and quicker to push on a kid who comes in with a parent, and sees a cover they like. The 360 on the other hand will have its costomers arrive knowing what they want, or at the very least heading right for the section of the store they are looking for. Just my 2 cents as both a 360 & DS owner, the only system I'm skipping out on for the time being is the PS3 pre price-drop.
Trevor @ Oct 16th 2006 12:02PM
>> "The "consumer pays" column shouldn't surprise any of us."
It surprises me because I only see a "customer pays" column.
Ragnarokender @ Oct 16th 2006 2:10PM
Ah well I learned something about (basics?) of marketing today, so thanks for that. On topic: agreed, I dont think compusa is a well enough representation of console sale strategy everywhere though.
That Other Guy @ Oct 16th 2006 12:11PM
One thing we can't see is the amount of marketing funds kicked back to the retailer by each company, which is a HUGE factor in the amount of marketing and placement for each console.
My guess is that Nintendo's is fairly low, with Microsoft in between them and Sony. Looking at the PS2 and PSP placement in both ads and stores, I think Sony lines the retailer's pockets with a lot of temporary increases around launches.
Just look at your local Target--chances are the PS3 will be in the easiest-to-see cabinet, just like the PSP was.
Once you factor in distribution costs (unless MS is doing direct-to-store shipments) and interest on inventory, I'd guess that a lot of retailers are actually losing money on each XB360 they sell.
Evan @ Oct 16th 2006 12:30PM
@16 "I would be interested to see how many people that buy Xbox 360s, actually buy a HDTV with the console."
I recently went HDTV shopping at Best Buy and other stores. They tried to push overpriced HDMI cables and "home theater in a box" surround sound systems on me, but they never tried to push any game consoles on me.
Also, they did not try to push BluRay or HD-DVD on me. One or two mentioned BluRay but didn't really try to push me to buy it. Most didn't even mention it. Hmmm.
Benoit Tremblay @ Oct 16th 2006 12:34PM
I beg to differ. Being a retailer myself, I don't care if it's 3% or 5%. Typically, Nintendo console games (the only ones that sell aka made by Nintendo) have the lowest profit margin all consoles combined. It is typical for Nintendo to sell us a game 23.50 when the retail price is 25, or 37.50 when it's 40. You get the idea. Nintendo is by FAR the worse when it comes to profitability. Even the accessories are barely profitable.
Of course it is not so for the big chains but being an independant retailer is a labor of love more than anything else. We're really happy *when* we can make 10% on something. There's ALWAYS a competitor who'll go loss-leader on bigger titles(in other words, below 5% profit or sometimes even lower prices than our actual costs)
That blog post you just made is pure non-sense. Just because you whip out numbers outta your ass doesn't mean jack in practice. In the end, we just want the consumer to find what he needs and be happy with it so he comes back, so at the end of the day we have a bunch of people buying for us. Otherwise we'd die.
chiralfox @ Oct 16th 2006 12:48PM
Meh. This demonstrates nothing, except for what has been known to retailers for years.
The margins on hardware have always traditionally hovered around 3 to 5 percent on average for all consoles. The margin on the PS2 at launch was approximately 2.9%, or $8.70.
The strategy for all three companies is the same. Sell games. Make money.
ZeroCorpse @ Oct 16th 2006 1:35PM
How many Martins could there be working in CompUSA in Michigan?
Bet you're in either Ann Arbor,Lansing, Grand Rapids, Saginaw, or the Metro Detroit area.
Dude, if you're going to break your non-disclosure contract with your employer (something they can terminate and sue you over) you'd be smart to at least not put a name on your blog.
I'm just sayin'
epobirs @ Oct 16th 2006 3:27PM
Other factors, harder to quantify, can also drive a retailer's choices.
For instance, which product is the retailer better position to exploit for further sales? An HDTV or surround sound system, for instance? How well does the demographic appeal of the console match them of the retailer? If the retailer is Toys R Us, the Wii works very well for them. Price, demographic, linkage to the DS, all are factors that should lead TRU executives to feel they can get a lot of mileage from this product.
For CompUSA, with its more adult high-tech image and ability to offer HDTV purchase, might see the Xbox 360 and PS3 offering them more mileage. Going further, a service oriented boutique store targeting highly affluent customers could favor the PS3 to appeal to those customer's inclination for status symbols.
For a retailer like Gamestop there are different circumstances. They're much more focused on the games and have little or nothing in the way of big ticket tie-in to push. They lack those distraction but the big profits for them are in used game sales. Their executives are no doubt avidly awaiting sales data to draw some clue as to which platform better suits what makes net revenue for their outlets.
obo @ Oct 16th 2006 6:21PM
Economics + Vladimir = ts;dr
K_G @ Oct 16th 2006 7:12PM
Blah, blah, blah, I'm in biz school...let me show how smart I am by extrapolating a long analysis out of some unverified numbers supplied by an unknown party. You are well on your way to a successful career in the consulting industry...This is almost as good as when Mckinsey told AT&T that cell phones would only be a tiny niche market in the US.
I don't supposed it ever occurred to you that the numbers talked about are internal pricing numbers (used for insurance and inventory matters) and not actual cash amounts paid by CompUSA corp to MS or Nintendo. 3% gross margins don't even cover the costs of the gas of trucking, the labor of putting it on the self and keeping that shelf illuminated....regardless of the higher margins on accessories and games.
Super Maggot @ Oct 16th 2006 10:01PM
You forgot about the games. It seems Wii games are going to cheaper thus less profit from them. I imagine one $60 game covers the difference between the wii and 360.
You only sell one console while you sell many many games. They're not going to care about getting a few extra $s on the system, that's not where the money is.
elmer @ Oct 17th 2006 6:44AM
I thought I'd add that Wii is a significantly smaller console, coming in a significantly smaller box. This means Wii take significantly less shelf space in a store (not to mention they're cheaper to ship). This means a retailer can probably make similar margins on a smaller shelf space, freeing the space up for more products, which is good for business.
John VanderSchuit @ Oct 23rd 2006 3:11AM
Here's my chart for the 3 systems.
Wii $ ---> =D
Xbox 360 $$ ---> =|
Playstation 3 $$$ ---> >:-(
And that is all I have to say about that.
Kyle K Balkissoon @ Oct 25th 2006 4:00AM
Firstly ignoring this chart several assumptions are made.
1. There will be a demand on all three systems and equal. Otherwise stores will just stock whichever has highest the demand.
2. Purpose, Market hardware, hardware needs software and accessories.
3. Costs of shipping wii will have the lowest costs on the stores side, shipping, storage, moving etc..
4. Quantities... Simple Economics, Higher Supply = lower demand = cheaper price. But Ps3 quantities do not appear to be sufficient so the price may be going up over the MSRP. Demand for the x360 will spike up it is christmas, but the supply should remain constant and maybe even increase allowing ms to lower the prices. Wii quantities appear to be sufficient so the prices will stay at MSRP.
2 Possible Scenarios.
1. Ps3 sells out, wii in short supply, x360 stocks remain, x360 will be pushed very hard.
2. Ps3 sells out wii in large supply x360 stocks constant. Wii will be pushed harder (lower costs associated with it)
Stores Want to get rid of what they have in large supply which is why we have price drops. Especially with big bulky items.