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.]
_thumbnail.jpg "i am 8-bit: 2008")
(Page 1) Reader Comments
Reply
Reply
Good thing for 360 owners that Microsoft, unlike Sega, is willing to lose money indefinitely on the division...
Reply
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.
Reply
Reply
Reply
Reply
They cancelled it because of technical issues.
Reply
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.
Reply
Reply
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 ($653.99-Chitown) at my GAMESTOP. I am #1 in line. Yeah, I am taking a calculated risk as well being number one at Gamestop to be the first to play. However, it’s a risk I am willing to take. Now you think about it. Do not worry about money MS loses on consoles. I am sure they are one of the few companies that have the checkbook to pay for it.
I think you are not looking at the BIG picture. I could see if MS was losing money in every market. Fortunately, they are not. One must spend money to make money. Does anyone else see MS’s big picture? XBOX360, XNA, WINDOW Gaming? If MS can pull this feat off, I do not think they are going to be worried about losing money at all.
Reply
First, you're only comparing the margin on console, which is absurd. What about games ? How much margin do retailers get on X360 games and Wii games ? Because that's what can make the difference for any retailer smart enough to think "long term".
Second : saying that it's harder to make a 400$ 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.
Reply
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.
Reply
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.
Reply
Either that, or learn the proper uses of both.
Reply
Reply
Reply
Reply
Reply
Reply
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?
Reply
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?
Reply
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.
Reply
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.
Reply
Reply
Reply
Reply
It surprises me because I only see a "customer pays" column.
Reply
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.
Reply
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.
Reply
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.
Reply
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.
Reply
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'
Reply
Reply
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.
Reply
Reply
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.
Reply
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.
Reply
Reply
Wii $ ---> =D
Xbox 360 $$ ---> =|
Playstation 3 $$$ ---> >:-(
And that is all I have to say about that.
Reply
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.
Reply