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How to manage costs to match sales expectations?

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How does a studio form sales expectations? Managing costs and being efficient is really important in setting the scope of the game and the costs that will be incurred during development.

 

Does one look at sales data for similar games?

 

Besides this, are there any other ways to form a reasonable estimate of potential sales?

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How does a studio form sales expectations?
Does one look at sales data for similar games?

There might be some formula, even a formula which works to some degree for the 5. game in a well known series. But the truth for most (unknown) studios will be, that you can't pin a number at the expected number of sales. I think, that a common approach is

 

1. Invest money to create a game.

2. Calculate break even.

3a. Sales>break even => Party biggrin.png

3b. Sales<break even => Dept sad.png

 

Game business is a high financial risk and there seems to be three, at least partly, working approaches:

1. The hobby/indie way: try to keep the investment as low as possible. Most fulltime member do it for a share, external investment is minimal.

2. The known indie studio way: you have a small studio backed up by some known designers or games (torchlight, double fine etc.).

3. The AAA way: you have a publishing contract with a big studio.

 

A valid way to test your idea is crowd-funding (eg kickstarter), thought is has other disadvantages, it is a good indication if a game idea could sell.

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How does a studio form sales expectations?
Does one look at sales data for similar games?

There might be some formula, even a formula which works to some degree for the 5. game in a well known series. But the truth for most (unknown) studios will be, that you can't pin a number at the expected number of sales. I think, that a common approach is

 

1. Invest money to create a game.

2. Calculate break even.

3a. Sales>break even => Party biggrin.png

3b. Sales<break even => Dept sad.png

 

Game business is a high financial risk and there seems to be three, at least partly, working approaches:

1. The hobby/indie way: try to keep the investment as low as possible. Most fulltime member do it for a share, external investment is minimal.

2. The known indie studio way: you have a small studio backed up by some known designers or games (torchlight, double fine etc.).

3. The AAA way: you have a publishing contract with a big studio.

 

A valid way to test your idea is crowd-funding (eg kickstarter), thought is has other disadvantages, it is a good indication if a game idea could sell.

 

 

Will examining similar games help with estimates? But keep note to always lower drastically the sales expectations due to the "new" game being:

 

1) made by a new studio who nobody knows

2) with lesser scope

3) and being a new IP

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Will examining similar games help with estimates?

I dont think that this will help a lot. Either you make a 1:1 clone (you will have other issues here) or your game will be different (most likely). The difference could result in flop or top. Did Notch have ever thought that Minecraft would be selling like this ? Or if estimation would work, why did THQ  go bankrupt ?

 

If you are able to estimate the game sales of an not yet produced game, then you will earn lot of money by doing just this, estimating the games sales of games not yet finished wink.png

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Will examining similar games help with estimates?

I dont think that this will help a lot. Either you make a 1:1 clone (you will have other issues here) or your game will be different (most likely). The difference could result in flop or top. Did Notch have ever thought that Minecraft would be selling like this ? Or if estimation would work, why did THQ  go bankrupt ?

 

If you are able to estimate the game sales of an not yet produced game, then you will earn lot of money by doing just this, estimating the games sales of games not yet finished wink.png

 

Is there any way to deal with this problem of estimation? How can dev studios actually start making a game without considering how well or poorly it will sell? Surely, it can't be just a blind investment right?

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For my game, we have a business impact statement, business plan, publishing plan, performance indicator statement, genre analysis, market analysis, and yes, a competitor analysis.

It's a black art, but you need to at least be able to make some ball-park estimates for what the range of possibilities are. If you're asking anyone to invest in your business/project, they'll want to see this kind of documentation... even if you don't think it's very useful yourself.

 

Every developer that I've worked for in the past has themselves worked for a publisher. The publisher does all this work and comes up with numbers of how much they want to spend on development and how much they want to spend on marketing/advertising, and how much they expect to make.

They'll then approach developers with a rough concept for what the game should be and a rough budget, and the developer will create a 'pitch' containing an actual development plan and cost. So, generally the devs don't worry about how much to spend -- they get told how much money is going to be spent on the game and then have to come up with a design that fits within that limit. This is an entirely different black art of estimating development costs biggrin.png As the dev in this situation, if your estimates are wrong and the game is late to be finished, you're not likely to get paid any extra beyond the original negotiated figures. Being late on any one out of a dozen milestones can cause a dev to go damn close to bankruptcy.

 

Publishers / marketers will have a very good idea of how many sales they can create from every 1$ spent on advertising (n.b. the amount spent on development doesn't really factor into their plans -- they'll be happy to market shit and make you hyped for it).

Edited by Hodgman

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Will examining similar games help with estimates?


It CAN, but there's no guarantee that it WILL. The best business practice is to make a target (decide how many sales you want/need to make) and then make a plan that enables you to achieve that target. Analyzing other companies and products is a necessary part to making that plan.

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TeresaS, on 04 Sept 2014 - 03:03 AM, said:

Will examining similar games help with estimates?
I dont think that this will help a lot. Either you make a 1:1 clone (you will have other issues here) or your game will be different (most likely). The difference could result in flop or top. Did Notch have ever thought that Minecraft would be selling like this ? Or if estimation would work, why did THQ  go bankrupt ?
 
If you are able to estimate the game sales of an not yet produced game, then you will earn lot of money by doing just this, estimating the games sales of games not yet finished

 

It doesn't really, but if you're truly serious about trying to figure out how likely your game is to sell, you can't afford not to do it.

That being said, it's a bit more complex than just looking at similar games. Games, even though they may be similar, have been produces in a different context and you need to identify what this context is before determining how likely these figures are to be similar to yours.

 

When was the project released? Was it a good / bad time?

What kind of hype did the project have? Was it part of a brand that has recognition? (did it get labeled "Castlevania"?)

What exposure did it get? How much of it was from actual marketing vs press being interested? (roughly helps you identify the marketing budget). Is it similar to what you intend on spending?

How much press attention did it get? Was it at PAX? How are you faring with these interviews pre-release? Is that in-line with what they had?

How "original" was their concept when it was released? How original is it now?

Who is the developer? Are they known? Do they have something unique that you don't? 

How does you target audience differ from theirs? Is is the same game (clone) or did you go in a different direction with art, gameplay, etc.?

 

Be honest about how your game's quality compares with your reference title. The fact you're impressed with what you've achieved doesn't mean you come even close to beating your reference material. Apply that modifier to your final numbers.

 

Now, balance your estimated costs with your expected sales. If it's your first, second, third or fourth project, don't expect to be out of the red. Most developers break even by their 5th commercial venture.

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TeresaS, on 04 Sept 2014 - 03:03 AM, said:

Will examining similar games help with estimates?
I dont think that this will help a lot. Either you make a 1:1 clone (you will have other issues here) or your game will be different (most likely). The difference could result in flop or top. Did Notch have ever thought that Minecraft would be selling like this ? Or if estimation would work, why did THQ  go bankrupt ?
 
If you are able to estimate the game sales of an not yet produced game, then you will earn lot of money by doing just this, estimating the games sales of games not yet finished

 

It doesn't really, but if you're truly serious about trying to figure out how likely your game is to sell, you can't afford not to do it.

That being said, it's a bit more complex than just looking at similar games. Games, even though they may be similar, have been produces in a different context and you need to identify what this context is before determining how likely these figures are to be similar to yours.

 

When was the project released? Was it a good / bad time?

What kind of hype did the project have? Was it part of a brand that has recognition? (did it get labeled "Castlevania"?)

What exposure did it get? How much of it was from actual marketing vs press being interested? (roughly helps you identify the marketing budget). Is it similar to what you intend on spending?

How much press attention did it get? Was it at PAX? How are you faring with these interviews pre-release? Is that in-line with what they had?

How "original" was their concept when it was released? How original is it now?

Who is the developer? Are they known? Do they have something unique that you don't? 

How does you target audience differ from theirs? Is is the same game (clone) or did you go in a different direction with art, gameplay, etc.?

 

Be honest about how your game's quality compares with your reference title. The fact you're impressed with what you've achieved doesn't mean you come even close to beating your reference material. Apply that modifier to your final numbers.

 

Now, balance your estimated costs with your expected sales. If it's your first, second, third or fourth project, don't expect to be out of the red. Most developers break even by their 5th commercial venture.

 

 

This is a very informative post - thank you so much!

 

One thing that has been bugging me is the inability to find just how much revenue a studio can gain out of the retail price. After publishing costs, production costs (if physical copy) distribution costs, retailer costs, just how much is left to the studio?

 

A PSVITA game retails for $39.99 USD in the US - unofficial resources seem to suggest only $8-10 go towards the dev studios

The same PSVITA game retails for higher in Japan, and again sources seem to suggest $13-16 go towards the dev studios for each copy sold

 

I guess one must know or be able to estimate just how much revenue one can receive per game sold- both digitally and physically to be able to make a cost estimate and sales expectations. How are studios going about getting such information? I would imagine if a studio has a publisher, that particular publisher can provide all the information.

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Yeah, if you're producing a boxed product, you will know what prices are involved. That information is confidential / commercially sensitive, so you're not likely to find accurate info as an outsider.

 

Typically 0% of the money you pay at retail goes on to the pocket of the developer - that's not how things are typically structured tongue.png

The developer will be paid up-front by the publisher to create the game (typically in milestone payments).

The retailers buy each box from the distributor at a wholesale price, and then they increase it to a retail price.

The platform-holder (Sony/etc) take a fixed cut per disc, charged at the time that you print the discs.

The distributor will have a cost to deliver each box to the store, and the rest goes to the publisher.

 

The publisher will then internally do accounting to determine whether those profits have paid off the advertising, marketing, support and development costs.

 

If the developer is lucky, they have a royalty agreement with the publisher. Usually, these agreements state that royalties only begin to be paid after the publisher's initial costs have been repaid. This is where Hollywood accounting comes in. Say the publisher originally paid the developer 10x $1M milestone payments during the development phase, and also spent $10M on advertising. You might think that the developer will begin getting royalties after the publisher has made $20M... but no. The publisher will also add on the costs of their internal publishing, accounting, marketing, social media, financial and quality assurance services. They might claim that these are worth $30M -- who are you to argue. They might also claim that printing and distrubuting the boxed products cost them $5M. Now, the royalties only begin to flow after the publisher has received $55M in profits.

 

So if, just for example we say that 50% of the retail price goes to the publisher, and a game costs $50 at retail, that's $25 to the publisher per sale. You have to sell ($55M / $25 = ) 2.2 million copies before the publisher has "broken even" and received their $55M in profits.

After that point, the royalty contract is active. Say the dev has negotiated to get 25% royalties on each sale. From now on, for each sale, the publisher gets $18.75 and the dev gets $6.25.

 

If the game goes on to sell 3 million copies total, that's a total retail revenue of $50 * 3M = $150M.

However, the dev only gets royalties on (3M - 2M = ) 0.8 million of them, for a total of $5M in royalties, plus the $10M they were paid in advance = $15M revenue for the dev -- which is 10% of the retail revenue.

 

On the other hand, if the game only sells 1 million copies total, then the publisher hasn't "broken even", and the developer gets zero royalties, only getting the $10M they were paid up-front to create the game. In that case, the total retail revenue is $50 * 1M = $50M, so the dev received 20% of the total revenue!

 

As you can see, it's not entirely useful or meaningful to ask what percentage of the retail price goes to the developer ph34r.png

Edited by Hodgman

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How about a situation where the dev studio has the funds to create a game, has created a game, and is looking for a publisher to distribute the game?

 

So the publisher has paid the dev studio nothing. I would imagine in this game, the publisher will split revenue to the dev right?

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How about a situation where the dev studio has the funds to create a game, has created a game, and is looking for a publisher to distribute the game?
So the publisher has paid the dev studio nothing. I would imagine in this game, the publisher will split revenue to the dev right?

They'll probably try to negotiate similar terms, where they'll start splitting the profits with you after their costs have been paid off. If you're not careful, you could end up in the same situation where you never receive a cent in royalties.

 

There's no standard deals. It's all down to the specific contracts that you agree to.

 

There's a bit of a change recently with digital distribution, where many developers are self-publishing -- i.e. selling games to consumers without a traditional publisher at all. From what I hear, it's fairly common in these deals for the middleman (Steam/etc) to take about 30% of the customer's money, with the developer receiving 70%.

Keep in mind that in this kind of deal, you'll also have to pay for your own marketing/advertising/support.

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^

 

Again, wonderful and insightful advice. Much needed! Digital distribution is indeed very enticing. You mentioned marketing $10M spent on advertising alone for a game?! That is just a theory right? Can you shed some further light on the marketing costs of a handheld RPG game?

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You mentioned marketing $10M spent on advertising alone for a game?!

That's a figure for a AAA.

 


That is just a theory right?

That would be practice. I've seen budgets of this magnitude go for marketing on AAAs.

 


Can you shed some further light on the marketing costs of a handheld RPG game?

Are we still talking PSVita?

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