All About That Vat (on Kickstarter)

by existoid | Jan 29, 2020 | Arthur’s Production Diary | 9685 Views

I’ve previously written about how a small publisher prices games generally (see here), as well as how we price shipping for Kickstarters (see here), and also about sales tax for US backers (see here).

Today I’ll tackle a long discussed (if not overly prominent) topic on Kickstarters: Those darned expensive European shipping costs (i.e., VAT).

Before delving too much into VAT itself, I’d like to build an initial frame for everything by pointing out a fundamental feature of Kickstarter projects that is (generally) unseen by backers, but at the forefront for creators: the distinction between known and unknown costs.

It is very easy to grasp that Kickstarters provide a huge benefit to creators: up front capital to make a project happen – indeed, that’s the entire point!

But there’s a flip side to this coin: predicting accurately the final costs of goods sold. You see, a business that follows the normal course of events has the luxury of adjusting their pricing (and doing other things with their product) AFTER they’ve seen the full costs of developing and manufacturing it. Obviously there are details and nuances (sellers don’t have ultimate control over pricing in a competitive market), but my basic point is true: that if a new product ends up costing more to make than a seller initially anticipated, they can do things before it hits the market to ensure they’ll recuperate their costs and have a decent margin (net profits), so they can continue to exist as a company.

A Kickstarter project, unfortunately, does not have any such luxury. No matter what happens or changes in terms of costs while developing and manufacturing a project, we cannot derive more revenue from the backers to make up for this. We already set our prices and received the funds – that’s it.

So, if something causes our costs to rise, doesn’t matter. We are still obligated to fulfill what we promised to backers. Period. (I could delve more into this facet of crowdfunding as it is relevant to many common backer gripes such as the idea that some KS creators launch new projects to pay for previous ones – but that’s a huge separate discussion by itself).

The following are a sampling of variable costs we nevertheless have to account for when setting prices before a new Kickstarter:

• Miniature Tooling costs
• Mass manufacturing per unit costs
• Freight shipping
• Fulfillment shipping
• Additional development (art, design, etc., if needed)

The variability isn’t necessarily super huge in each of these aspects, but even a 5 or 10% shift in several of them can mean our pricing is WAY off, as to what it should have been. For example, if we set a game to be $79 on Kickstarter, but the final costs of goods sold analysis tells us it should have been $99, that can be very bad, financially, resulting in tens of thousands in lost revenue.

(If your initial reaction is to suggest we merely always add in a buffer to our prices, there are further variables we must consider. Among them is the price elasticity of a new product – the relationship between price and sales volume. If we simply raised all our prices by, say, $20, we may reduce our total sales by an amount that more than offsets the added revenue, making it a very bad idea).

VAT – one of the few costs that can be perfectly known in advance

If you’re following all of this carefully, there is a silver lining! There is at least one type of cost that is fixed and known in advance no matter WHAT happens – The import taxes and value added taxes of each country and region.

The European Union and virtually all European countries that are not part of the EU charge a 19% value added tax to goods sold there (whether from domestic or foreign sellers). This VAT is inescapable for all goods sold into the EU, no matter where it was produced or who sold it – whether a domestic or foreign company.

Like retail or sales tax that is found in many places in the US, VAT is ostensibly “paid” by the end consumer, but it is actually reported and paid to the government by the seller (in this case, Petersen Games).

The VAT technically has a range, but hovers around 20%, and is never below 19% for any EU countries. We set it at 19% on the KS, so technically, we are subsidizing it already for the majority of EU backers! Here are official the rates so you can see for yourself.

This is inescapable. If we failed to pay it to the European Union, we could have our products seized!

Here is further reading – official information from an official website of the EU which explains everything I wrote above, as well as additional information (see here).

Why don’t other Kickstarters charge me for VAT?

Some very well might, without directly showing you that they do. Some may not. But unless they are acting illegally, they are paying the VAT to the European governments for all backers they ship to inside Europe.

Before exploring how some KS creators may be handling VAT, let’s take a step back to see how the VAT payment fits into the cost of goods sold overall.

The VAT percentage is assessed on the TOTAL sale value of the goods (even including the shipping cost***). So, a game that is sold for $100 would require a payment of $20 to the EU government the customer lives in. That means that Petersen Games really only gets $80 for this game sold into Europe. And that’s going to be cutting it very close (or possibly will be LESS than our real cost to sell each unit). When you factor into all the up front costs needed to develop and manufacturing a game – miniature sculpting, art, tooling, etc. – margins on large games are pretty slim (I went into detail on this here in which I showed how a nearly $600k Kickstarter of ours ended up losing money overall). What this means is that we really and truly don’t have $20 left over per copy sold just to give to the EU.

So how in the heck do other Kickstarter creators avoid it? Assuming they are not acting illegally, and they are also not showing you any VAT charges, there are a few possibilities they could be operating under.

Possibility 1: Having some backers subsidize others

First, they could be spreading the VAT through a combination of the sale price and/or shipping prices they charge. For example, in the example of a $100 game, with a $20 VAT, let’s say that it costs the same to ship this game to the US and Europe – $20. This would mean that the cost for a game sold to Europe is $100 (game itself) + $20 (VAT) + $20 (shipping) = $140 total. And a game sold to a US backer is $100 (game itself) + $20 (shipping) = $120 total. To even these out in order to not scare away EU backers or to make it “fair”, you could increase the shipping to $30 for both the EU and US, and not “charge” VAT at all. This would mean the US backers are paying $10 more than they really “should” and the EU backers are paying $10 less.

There are two fundamental problems with handling it this way:

1. Subsidies are not fair.

I put the word “fair” in quotes above because it merely appears to be fair – you are charging the same total price to customers in different places. But shuffling prices around in this way is actually the opposite of fair. It does not cost the same to sell the same product to different customers, and so these different buyers are often charged differentially (in the real world, outside of Kickstarter) to account for this. That’s why there even exists such an economic measure as “purchasing power parity” which would not make sense as a thing if every given product were always sold at the same price everywhere. It is not the fault of backers in other countries that the European governments impose such an extremely heavy value added tax on all goods sold there. Backers in other places should not have to subsidize them.

2. The subsidies will be wrong unless you can see the future.

It’s also a bad idea unless the KS creator can accurately predict the number of backers from each country or region. In the example above, with a single EU backer and a single US backer, it was an easy calculation to say that by simply removing the VAT charge and then adding $10 to the shipping for both they both pay $130. But what if 250 backers are from the EU and 750 are from the US? This would mean that the US backers are, overall, paying far more than is needed to cover the actual cost of the VAT!

Let’s work it out so you can see how off it would be. The VAT for those 250 backers would be 250 times $20 = $5000. But the money received to account for the VAT is 1000 backers times $10 = $10,000. The KS creator just got an additional $5,000 that does not have to go towards VAT or anything! Going back to the question of fairness – it’s not simply that non-European backers are unfairly paying for taxes they don’t have to pay, it’s ALSO a way for KS creators to possibly derive even more revenue unfairly from non-EU backers!

And of course, the KS creator could be screwed if the opposite ends up being true – what if there are 250 US backers and 750 EU backers? In this case, the VAT cost is 750 EU backers times $20 = $15,000. But the money received is still only $10,000. In this case, the KS creators will have to cough up $5,000 to cover the Europeans’ taxes. Also not fair. And it only gets more confusing and intractable to calculate the more other countries and shipping prices you add in to the equation.

The bottom line is that without knowing in advance how many backers will come from each region, you can’t possibly set the subsidized shipping price accurately. Subsidies aren’t fair in the first place, but this unfairness is compounded when the numbers are all wrong anyway!

Subsidies have the clear downside of completely removing just about the only good thing about VAT – that it is a perfectly known cost beforehand! I believe that Kickstarter creators who are shuffling it into the product and shipping prices are not only doing a disservice to non-European backers, but are also not being very careful in their budgeting and financial calculations!

(To be completely fair, though, it is possible a KS creator doesn’t set shipping prices at all until after the Kickstarter is over so they can see the mix of backer countries – but this is very rare. Backers always want to know how much shipping will be during a Kickstarter nowadays)

Possibility 2: Accepting a smaller margin

The second possibility is that KS creators are simply accepting a 20% smaller margin from all European customers without accounting for it elsewhere. This is possible, but I would consider highly unlikely. Given the fact that most products in the final analysis won’t even have a 20% margin to begin with (as noted above, and again here), this effectively means that a KS creator is basically losing money on each European backer.  If that is happening, it’s because the seller didn’t properly analyze the numbers, not because they’re a charity. I regard this possibility as so unlikely that it never occurs on purpose. A KS creator who does this is much likelier to simply be unaware of the VAT (as Petersen Games itself was, when it launched Cthulhu Wars in 2013 and absolutely did not account for the VAT – which nearly bankrupted us on the eve of shipping the “wave 2” back in late 2015). Since then, we’ve always accounted for the VAT somewhere in the numbers. Not doing so is very very dangerous – 20% is a BIG portion of the cost for a product.

What about that “Friendly Shipping” thing? Doesn’t that mean I don’t have to pay VAT?

No.

“Friendly Shipping” is a clever idea that some Kickstarter creator came up with long ago to say that you don’t have to deal with any paperwork or money at the receiving end of the KS rewards.

To understand this, there’s a dichotomy in shipping things international that used to be referred to as DDU or DDP (the terminology has changed in recent years, but these acronyms still work well for the concept). DDU means “duties UNpaid” by the shipper, which means that the recipient therefore has to pay those fees. DDP means “duties Paid” by the shipper, which means that the recipient gets the package, and doesn’t have to cough up any money to physically receive it.

“Friendly Shipping” means that the packages are sent DDP – that the sender handles the paperwork and pays the duties and taxes. But that money used to pay the duties and taxes has to come from somewhere! And in the end, it’s really going to always come from the consumer, as I outlined in my previous section.

Yes, I understand that some KS creators represent that “when it ships from within Europe, there are no VAT fees” but this is simply not true. Sellers still have to pay VAT on all those goods, even when “shipped from within the EU” (as we ourselves do – our European hub is inside Germany). All the paperwork and actual VAT payments are made by the seller on the buyer’s behalf. But it still has to be paid. The government will collect taxes even if you put a “friendly shipping” badge on your Kickstarter! 

***So, if we charged $100 for a game, and $20 for shipping, a 20% VAT would actually be $24, not $20! The government includes the TOTAL sale price that the customer paid in its entirety. And based on how WE charge things, yes, this means we are paying a “VAT” on the VAT portion of the shipping that we charge to you (though we just eat this cost, obviously, since it’s minute). Yes, it’s ridiculously stupid – we are not at all fans of how the EU bureaucracy tries to stifle free business transactions.

  – Arthur

Sales Tax on a Kickstarter?

by existoid | May 1, 2019 | Arthur’s Production Diary | 9669 Views

A few weeks ago we began charging sales tax on our pledge manager for all Kickstarter sales. (This did not extend backwards to already paid orders). We received lots of comments about this, so I asked our accountant for a concise explanation (a few paragraphs down). Let me jump right in to the issue.

Kickstarter only has a very brief paragraph for project creators regarding sales tax, which reads in full: “Sales tax may also be applicable in certain cases depending on the local rules. In general, sales tax applies only if the creator has sufficient connection to the location of the backer.”  This has always been the case – it is not new.

But that’s merely a message from Kickstarter to project creators. Kickstarter is merely acknowledging that sales tax may be applicable, and as with any business, it’s really up to us to figure out what we actually have to do with regards to the law, regulations, and taxes.

Petersen Games has been paying sales tax to several states for several years. It is something we have always had to factor into our Kickstarter pledge level and add-on prices. But it’s generally been a low amount overall. Because of the small amounts and the relatively low number of states involved, it never made sense for us to set up a way to explicitly pass those costs on to each backer, even though that is the prescribed thing to do for any business.

That changed for us this year when our accountant told us that we effectively will have to be paying sales tax to virtually all of the 50 states.

Here is a message directly from our CPA:

“In light of the recent Supreme Court ruling over South Dakota v. Wayfair, the collection and remittance of sales tax on internet sales, online crowd funding included, becomes applicable when a company has sufficient connection to the location of the buyer. Furthermore, crowd funding creators are required to collect sales tax on donations in the event they provide retail services (such as meals), digital products or tangible personal property (books, videos, copies of games, etc.) as rewards.”

Here is a helpful excerpt from the linked Wikipedia page regarding that recent ruling:

“As of December 2018, 31 different states have standing tax laws requiring taxation of Internet purchases, most following the model of the South Dakota to only collect tax from those vendors with more than 200 shipments into the state or exceeding $100,000 in revenues. Several of these new laws came into effect on January 1, 2019.” [emphasis added]

We cannot speak for other project creators as to how they handle their sales tax obligations. But like Amazon and Walmart.com, as well as any brick and mortar retailer in your town, we have to pay sales tax on what we sell, regardless of whether the customer “sees” this tax or not. And like with any business, including Amazon and Walmart.com, it’s not a cost we can roll into the sale price – it’s an itemized, separated charge that is illegal for us to keep for ourselves. We pay it to the states on a quarterly basis.

Trust me, we don’t like taxes any more than you do!  But like death, and the rise of Cthulhu when the stars are right, it is one of the inevitable things in life.

– Arthur

After the Kickstarter: The Board Game Industry’s Value Chain

by existoid | Jan 30, 2019 | Arthur’s Production Diary | 3021 Views

The unasked question I’m going to answer here, is:

Since Kickstarter creators sell directly to customers (without the intermediary of distributors and retailers), why can’t they offer the game at the same price as they would to a retailer?

My half-snide initial answer would be that sometimes we DO! Look at Planet Apocalypse we ran last year – a $299 level for over $600 worth of stuff. We currently have our Hyperspace campaign which also has a $299 level for $519 worth of stuff.

But more often than not, KS campaigns don’t quite offer that level of deep discount. Why not?

First, let’s acknowledge that in the past decade, Kickstarter has dramatically changed the tabletop game industry by lowering the main barrier to entry in this industry – capital. Indeed, Petersen Games only exists thanks to Kickstarter! But once a Kickstarter funded board game exists, it still enters the same industry as games published without Kickstarter. Or, it dies, having been a one time print run.

Let’s start with the tabletop game industry value chain without Kickstarter. Like all industries, this one has a chain from the product creator all the way to the end consumer. And also like all industries, there is some amount of negotiation between each link in that chain over the value each link deserves. I do not know the details of other industries, but I do know that the value each link in the chain for tabletop games is fairly rigid. Not to say it can’t be changed, but it’s long standing and well established.

Here’s how it breaks down, roughly:

Manufacturer: 20%

Publisher: 20%

Distributor: 10-20%

Retailer: 40-50%

Here’s an example, in case this is confusing:

Suppose there’s a game with an MSRP of $100 in a game store. That store paid $50 to $60 to its distributor. That distributor paid $40 to the publisher. And the publisher paid $20 to the manufacturer. To see how much value each link has captured, simply follow it the other direction: the manufacturer received $20, which is 20%. The publisher received $40, but paid $20 to the manufacturer. So, they only got 20% of the total value. The distributor received $50 to $60 from the retail store, but had to pay $40, so they are left with $10 to $20, which is their 10-20%. And finally, the retail store paid the most (among the supply chain), and therefore has, in many ways, the most control over the value they receive in the chain (i.e., they can choose how much to charge the end consumer). If it’s a hot game that people will buy at close to MSRP, then the retail store can obtain the most value (40-50%!!). Often, they have to discount it (especially if they’re online retailers), and so they don’t quite get that much. If they only get, say, 20-30%, the remaining value would go to no one (or, more properly, to the end consumer).

So far so good? The publisher, who thought of, designed and developed the game, captures about 20% of a game’s value. It’s a minority of the value, but that’s fine – I would expect that in almost every industry a given link in the chain only captures a minority. But it’s less than a quarter of the value in a chain with only four links – i.e., if things were split evenly you’d expect publishers to capture 25% of the value, which is not the case here. Alas.

In addition to only capturing a minority of the value, publishers have another challenge in getting these games to market that the other three links in the chain do not. As the publisher, there are many up front costs of goods sold that are NOT captured in the value chain as described above! If they are accounted for, then the numbers shift such that publishers take a very small amount indeed (at least on the first print run).

Let me explain. When a manufacturer makes a game, it costs them roughly the same whether it’s the first time they’re making it, or the second, or third, or fifteenth. (There could be upfront costs, such as steel mold tooling, but those would always be passed on to the publisher). Likewise, distributors and retailers have no special upfront costs for a new game. Their costs of goods sold for a game are the same whether it’s the game’s first print run, or seventh. (There could be some extra marketing costs for a new game, but that would be a very small proportion of their received value in the chain). They basically just buy the game from the previous link, and then sell it down the line.

By contrast, a publisher has a lot of up front, one time costs that apply to a newly developed game. Most publishers, except the very biggest, tend to use freelance artists. (How do I know this? Because a zillion freelance artists have reached out to us over the years asking for work, and showing art and work they’ve done for all sorts of publishers, from Fantasy Flight to CMON). The design process could be cheap (aspiring designers could act as freelancers for a relatively low price), but it can also be expensive depending on the amount of playtesting and time it takes to develop. Other miscellaneous costs such as editing and layout exist. And if the game has sculpts, this can dramatically increase the art budget, as a single highly detailed 3D model can cost thousands of dollars. Finally, these 3D models have to be turned into steel molds (an expensive process called tooling). These can also cost several thousand dollars per model.

After accounting for all of these up front, one time costs to develop the game, the publisher can’t really “bake” these costs into the total value of them (otherwise known as the “MSRP”). If they did, then the game would cost too much for the consumer and no one would buy it. Thus, a game that hits the market for the first time has cost the publisher, uniquely, a lot of capital. But the manufacturers, distributors, and retailers have no such special difference between this new game and any other game.

Each game’s up front costs are different, but say, for the sake of example, that these costs divided out equal 10% of the per unit cost. If so, then the value chain for the FIRST print run, instead changes to the following:

Manufacturer: 20%

Up front COGS (art/tooling,etc.): 10%

Publisher: 10%

Distributor: 10-20%

Retailer: 40-50%

On the second print run, these up front costs don’t exist, and the publisher can capture the full 20% it normally gets.

Now, let’s see how Kickstarter DRAMATICALLY changes this model for us.

The up front costs for Planet Apocalypse, a KS campaign we ran a year ago, were in excess of $200,000 (the majority of these costs are tooling, as there are many unique figures, and they are fairly large). Since the funding level was a little over $500k, this means the up front costs represent about 40% of the value. Kickstarter itself takes about 10%. There are no distributors or retailers, so the value they get is 0%. That leaves us with 50% left over to split between the manufacturer and publisher.

You’d think that with manufacturing normally taking 20% of the value, there’s a full 30% left over for the publisher! Much more than the typical 20% portion. BUT, there’s a major catch:

Kickstarter offerings (especially ours) have deep discounts compared to the MSRP. So, for example, the Planet Apocalypse offered a roughly 50% discount for the top pledge level. That means the per unit manufacturing cost should represent twice (proportionally) what they normally do – so 40% instead of 20%.

So, here’s the value chain for Planet Apocalypse:

Manufacturing: 40%

Up Front COGS: 40%

Kickstarter: 10%

Publisher: 10%

You’ll notice this is HALF what a publisher normally gets!  Why on earth would publishers bother to use Kickstarter??

Well, of course, that’s incorrect, because it IS better than a new game sold through regular retail markets for the first print run. If we went straight to distributors with Planet Apocalypse, for example, having to front 40% of the total print run’s value, then the value chain would look like this:

Manufacturer: 20%

Art/tooling/misc. COGS: 40%

Publisher: -20%

Distributor: 10-20%

Retailer: 40-50%

This is not an impossible thing in the business world. For example, pharmaceutical companies could have R&D costs for developing a new drug that equals hundreds or thousands of times the cost or value of actually making the pills and selling them to retail pharmacies – think of the Art/tooling/misc. as R&D spending. Whatever the link in the value chain that invents and develops the product (for the game industry, the publishers), this sort of thing can happen.

The publisher, on the first print run, has invested money, and once the product has sold enough units, especially over more print run, the publisher eventually recoups that money, and eventually their 20% take in the value chain becomes a positive sum.

In short, Kickstarter usually allows us to offer a game to the market when the up front costs would likely be too high for a small publisher to handle. Yes, I took a long way to say what we all knew already – Kickstarter provides indie companies like us to make big, expensive games!

But hopefully you can see that even with this, the value the publisher really keeps is fairly small. And therefore, it is not always wise for KS creators to offer games at steep discounts.

There’s another catch to all of this. What should we do with the 10% from Planet Apocalypse? Should we use it to cover our normal overhead (salary, etc.)? Or, should we use it to print an overrun of games to sell at retail later?

This is why The Gods War, as I’ve said several times, lost money for us. The up front COGS was too much, and rathen than even the low 10% value we should have gotten, it was a negative amount.

Planet Apocalypse had VERY thin margins, and the current Kickstarter – Hyperspace – will have slightly better margins, because we’re not quite offering half off. We’re offering about 40% off. So, the manufacturing per unit is going to be about to 33%, and the up front COGS, because the miniatures are smaller, is also unlikely to be a full 40%, but probably closer to 25% with any luck (and assuming we fund at a higher level than PA, which could be the case).

This means that Hyperspace will likely have more products available at retail later, or we’ll be able to fund our company for a little longer!

And that is what Kickstarter does for a game company!

• Arthur

P.S., Now you can probably see why our shipping prices and import taxes and VAT for Hyperspace are NOT subsidized in any way in our pledge levels. If we were to ALSO subsidize that, we’d soon be losing money.

How Shipping Prices Work on Kickstarter

by existoid | Nov 21, 2018 | Arthur’s Production Diary | 2091 Views

We recently set the prices for our Cthulhu Miniatures Line we’re selling on the Sandy Petersen’s Cthulhu Mythos for 5e Kickstarter.

Here is the link to see the prices for these minis if you’re a KS backer, compared to the MSRP we’ll be offering them at.

It seems almost every Kickstarter project handles shipping pricing differently. Some offer free or subsidized shipping, although most charge a fair amount. I’ve not personally seen too many examples of shipping prices that are obviously gouging, in the sense that the creator is expecting to actually profit off of shipping (although it could happen).

For Kickstarters like ours, in which we manufacture expensive board game and related products in China, then freight them around the world, there is a series of costs we have to account for. These include:

• Labor cost to load the containers at the factory floor
• Freight from factory to port
• Port fees
• Shipping the containers across the ocean
• Arrival (unloading) port fees
• Import taxes and fees
• Freight to fulfillment warehouse
• Container unloading
• Product inventoried

Smaller operations than ours often have their KS rewards shipped to their home and then they and their friends and family handle a lot of the final processes. We don’t have this luxury, with the tens of thousands of products to pick and pack in a typical KS campaign. We have to rely on fulfillment warehouses which specialize in this service.

Much of the costs above, when divided out into the thousands of individual products shipped amounts to very little. It can range anywhere from $1 to $5 or more, per SKU (discrete product) we are shipping. So, it’s not a very big cost, but it is a cost for us. Our games are big, and we often ship a LOT of expansions along with them (looking at you Cthulhu Wars!) which means we usually need more container space per customer than a typical Kickstarter product, to fit all the products we’re sending out to our backers. Those costs do add up.

Once the product is inventoried at the warehouse, the most expensive part of shipping takes place – the actual fulfillment processing and mailing of individual orders. Fulfillment warehouses typically charge three key line items (though there can be more):

• Pick and Pack
• Materials/packaging
• Final mile courier cost (postage).

The picking and packing is the physical labor of selecting an order’s SKUs from the inventory and packing it into a box to be mailed. Most fulfillment services charge a flat rate per order, which includes the cost to pack the first SKU into the box, and then to charge another, lower flat fee per additional SKU added to an order. Our warehouse, in all honestly, is not one of the cheaper ones, but they still only charge $2.25 per order, plus $0.85 per each item beyond the first.

Materials and packaging is often a fairly low cost, and this is usually a pass through cost in which they just forward the costs to us, without any markup (although, it would be hard to know if there is a markup). It often ends up being about 10% of the overall fulfillment cost.

The final mile courier cost – postage, essentially – is also a pass through. The fulfillment warehouse passes along the costs charged to them from FedEx; UPS; USPS; or DHL (or someone else). They also will have an account with these companies so that the postage is a little cheaper than it would be for a random person at a UPS store. The postage is typically the most expensive part of fulfillment. Take an average board game, which may weight 3 lbs., and the postage is going to be something like $10. Add the pick and pack of only $2.25 to that, and you can see where most of the cost goes. It’s even more obvious if someone orders several expansions. Each expansion might add a pound or more to the weight of the shipping box, each therefore adding a few dollars to the postage. But they are each only adding $0.85 to the pick and pack cost. When all is said and done, most of the money for shipping is going to FedEx, UPS, USPS or DHL (and after all, this makes sense, as they are also doing most of the working in actually getting the physical box to your home).

So, the fulfillment companies effectively make their money from the pick and pack – as well as the product storage if they are handling ongoing fulfillment (i.e., the cost to store our products in a warehouse on pallets from month to month). Our fulfillment company shows us the rate sheets that they are charged by the couriers (FedEx, etc.), and so we know that they aren’t marking these up. They don’t make any money from the postage, much as they may want to.

Let’s use our most recent Kickstarter as an example. The book, which is the main event for the Sandy Petersen’s Cthulhu Mythos Kickstarter, weighs a little more than 3 pounds. This means it’s unfortunately in the 4lbs. category of weight for shipping. In the US, that’s a postage average of $12.16 across the 9 shipping zones of the continental US (or an average of $12.50 if weighted by having most customers on the two coasts, which is likely). Add to that the $2.25 pick and pack fee, and it’s almost $15, which is what we’re charging. I rounded up to $15 to provide the necessary buffer for the inevitable mistakes in picking and packing which will require us to re-send (particularly for the mini, which I’ll get to below), and for any books or minis that arrive broken, etc. (It also helps to cover the packing materials, which are usually a roughly 10% cost of the given package mailed, which means we’re slightly undercharging our backers as to what the fulfillment bill will be to us). Additionally, sharp readers will note I didn’t mention that we also factored any freight fees into the shipping cost (the long list of freight line items near the top if this post). We have decided to eat the freight costs on this campaign. So, not only will the fulfillment cost be slightly subsidized, the overall shipping cost is subsidized much more so.

Now to the miniatures, whose shipping considerations are very different. All the miniatures, no matter their size or weight, in all regions but EU will cost our backers only $1 each. For EU, it will be only $1.50 each. The reason all miniatures are the same price is because the cost is almost entirely the pick and pack cost (of $0.85 per item), and not the postage – which is the opposite for bigger products like board games.

The postage beyond about 4 pounds (averaged across all 9 zones) averages an additional $1.50 per pound in postage (for US, anyway, it varies around the world, but not enough to change the prices for other regions, except EU). In other words, 4 pounds costs about $12.16, and 5 pounds costs $13.61, or about $1.50 more). Our minis average 33 grams (some are 200 grams, but most are 20 or 25 grams each). 33 grams is about one thirteenth of a pound, so by dividing $1.50 by 13 we get that each mini (on average) costs us an additional $0.115 in postage costs. Add that to the $0.85 pick cost to get $0.97.

However – it is more labor intensive to pack a mini into a box and protect it from damage, and it takes more packing material to do so, than board games. Our shippers actually wanted to charge us MORE to pick and pack each mini, but after discussion, they did not. Just imagine the difference of putting a few rectangular shaped boxes, already mostly self-protected, inside a larger box to mail, as compared to putting a handful of odd shaped, semi-fragile small plastic figurines into that same box to mail. It simply takes more time, effort and materials to put a bunch of miniatures into a box for mailing than board games.

In short, $1 is actually a really good estimate for us to have an almost revenue neutral fulfillment price, which is our long standing goal. We seek to neither make money, nor lose money, on fulfillment (though again, we’re eating the freight costs on this project).

Because we suspected the shipping prices may feel a little high for some of our customers, we decided to offer the minis themselves at very deep discounts. By definition, therefore, we can’t afford to subsidize the fulfillment part of shipping even a little bit. (Had we charged more like $2.45 for an Acolyte, which is what a Reaper Bones mini of the same size would cost on a typical online store, then we could have perhaps charged $0.50 for shipping each, and have covered our shipping costs in the marked up miniature price). We instead went for a discounted mini price, and a revenue neutral fulfillment price.

Also, despite what I wrote earlier about being revenue neutral, and despite the fact that we have shipped many Kickstarter projects, the final sum of invoices we’ve paid for shipping a given project has ALWAYS exceeded the revenue we’ve received from backers for shipping (especially for the original Cthulhu Wars Kickstarter, in which our shipping bills exceeded shipping revenue by almost half a million dollars!). Though that was a serious outlier, shipping is always subsidized to at least some small extent. It’s just how it is. But at least we try to get close to revenue neutral, at least for fulfillment, if not for overall shipping costs!

POSTSCRIPT:

After some comments on the Kickstarter page, I wanted to add this short, clear summary which further clarifies why the miniature shipping cost is the way it is:

The rationale for providing discounts in shipping as more items are added to an order is always about the reduction in POSTAGE per pound. But we are only factoring in $0.12 per mini for postage. Even if you add 1000 minis to your order, the postage for each is not going to average much less than $0.10 per mini. You can do the math yourself with any USPS (or other courier) rate sheet.

There is another part of shipping items to customers: the pick and pack. Another word for this is LABOR. All fulfillment warehouses charge a flat pick and pack fee, and ours charges $0.85 per item. That means if you have 100 items in your order (beyond the first), our warehouse will charge us $85, regardless of the postage cost or any other cost.

If an order does have 100 items, the owner of the fulfillment warehouse IS NOT going to tell his low wage worker: “Hey buddy, because this order has so many items, I’m going to reduce your hourly pay while you work on it.” Can you imagine that? Or, if he told his whole warehouse staff: “Hey guys, since this Kickstarter we’re fulfilling has over 4000 orders, after we pick and pack the first 3000, I’m going to give Petersen Games a discount, which means I’m going to pay all of you less per hour to pick and pack the last 1000 orders.”

Hopefully this explanation makes it clear. With big heavy boxes like board games, we could theoretically reduce the shipping cost if you added a lot of them, but we’d be reducing it because the postage per box would get cheaper. But we’d never lower it below $0.85 per item because that pays for the guy who actually selects the item and places it in the box with packing material and tapes the box shut.

– Arthur