Friday, December 11, 2009

Best Buy Game Lounge

In previous posts and other forums I have talked about an innovation that I call the Best Buy Game lounge, usually as a pay by the hour network that Best Buy would host inside of its retail stores. In this update I would like to expand on that idea along with adding elements that I feel would complement this idea in ways that drive customer satisfaction/loyalty and assorted business metrics.

Game Lounge - rehash

For those who haven’t seen my previous posts or submissions around this idea allow me to rehash for a moment. The Best Buy Game Lounge would be a gaming network setup inside of a Best Buy store that allows for customers to play either computer or console (Xbox 360/ps3) games together in either cooperative or competitive modes. Customers would pay an hourly fee to have access to these machines. This gives the customers an experience that can’t be duplicated through typical online play, a great VPE for gaming customers, and a competitive differentiator that other retailers would find difficult or impossible to duplicate due to many factors.

Game Lounge – how it works

Let’s move onto the nuts and bolts on this to see why this innovation has the potential to be very profitable. For the purpose of this example of cost I will use 8 (eight) Xbox 360s (Arcade) @ $200, 8 (eight) of any HDTV @ $300, 1 (one) 8-port switch @ $32.99, and misc. Cat-6 cables @ $10. This means that the entire LAN would cost about $4043 excluding any other costs (labor, electricity, rent, etc). We can use this number to find our breakeven point for the equipment.

Price per hour/Hours needed to hit breakeven/Hours needed with 8 machines full
3 / 1347 / 168.375
5 / 808.6 / 101.075
7 / 577.57 / 72.19625

Essentially if we assume the machines are full for an average of 2 hours a day Monday-Thursday and 4 hours a day Friday-Sunday we will arrive at an average 20 hours a week, this assumption also provides that there are no other customers paying for use. At that rate the LAN equipment would pay for itself in as little as 4 weeks or as much as 8 and a half weeks. The next aspect to look at is the other costs. These costs such as labor, electricity, and rent are costs that we already incur. There is a slight increase in total electricity and labor costs because this is additional, but the electrical costs are minimal and the labor pays for itself.
In terms of this assumption the labor we would use is one associate “zoned” in the Game Lounge for this single LAN. This associate is responsible for taking payment, measuring time, ensuring proper conduct from those at the gaming machines, etc. During the time the associate will also have other tasks to perform in the immediate vicinity.

Essentially if we assume that the average salary for anyone in retail (Best Buy or anywhere else) is about $10 per hour, then it whenever two people are playing at $5 or $7 dollars per hour or three people are playing at $3 dollars per hour, then 90-140% of the employee labor cost is being offset. Also, the associate would be able to perform tasks such as farming or greeting/stacking customers in an adjacent department depending on the layout of each individual store. This scenario was also assumes that we use only have one LAN comprised 8 computers for each associate that we use in the lounge.

One of thing to keep in mind while thinking about this innovation is that it is scalable based on area and demand. This means that one associate can manage multiple LANs comprised of 8-16 machines. A large part of the testing of this innovation would be to determine the average number of LANs/players the average associate can manage easily. With that said another assumption that I will make is that the average associate will be able to manage about 24 people regardless of how they are spread out between LANs, this is based on the experience that I have had in the past with LAN gaming and Midnight openings at Best Buy.

A quick note on “Measuring Time”: There are a great many ways to measure time for multiple machines that are being used from something as simple as a kitchen timer to the very elaborate computer programs, whichever we use really doesn’t matter as long as the customers and employees can all tell when the time has expired for each customer/machine.

Once the breakeven point for the equipment is made we are also able to sell the equipment for whatever cost and derive 100% margin from that sale as well. This is something to consider when it is time to upgrade the equipment that we are using. For the gaming consoles (Xbox 360/PS3) this will only need to be done once every 2-8 years. Depending on the frequency at which new gaming consoles come out (which has been trending longer and longer). The computers are a different story, and should likely be upgraded at least once per year. This is due to the changes in PC gaming which happen frequently.

In order to draw customers into the store we must have machines better than what they typically have at home. Part of the VPE of having a gaming LAN in the store is machines that can outperform the average customers’ home PC. This is also a benefit to us because customers are more likely to want to purchase a computer like the one they are playing. Because of this we can inspire possibility while explaining to the customer why Best Buy is the one place they should consider when purchasing this type of PC.

Value Proposition – Unbeatable Experience for the Customer

As I stated before the Game Lounge is about creating an experience that can’t be matched by online play and it is also an experience that other retailers would have trouble creating due to their lack of powerful people. One of the greatest things about Best Buy is the emphasis on its people and the power they have unleashed in each of their associates. It is partly because of this value that Best Buy can pull this off where others cannot. Another part of the reason why it is Best Buy that can be successful is because of the culture of knowledge they have cultivated in their employees, because line level associates are more knowledgeable they will be able to handle changes and adaptations to the business better than other companies’ associates.

Margin Driving – benefits to Best Buy

There are several benefits for Best Buy these are some of the most important: building great customer experiences, margin, and driving the service culture at Best Buy.

Great Customer experiences are obviously a benefit to the company because of organic growth. A happy customer returns to do business where an unhappy will potentially lapse and not shop with us again for months, years, or ever again. By creating an area of the store that is designed to deliver good customer experiences, we will gain more lifelong customers.

Margin is obviously a big focus right now. The TV wars have taken their toll on TV prices and Margin. It is coming to the point where TVs have as little margin as Computers. For a long time computers have been a loss leader that drive traffic and present an opportunity for us to show the world how we are building a service culture. TVs are getting to that point as well, which is troublesome for me when I think about the business as I have seen it evolve so far as TVs have been a product that drive margin. We can always hope to turn to appliances as a product that carries margin, but for now let’s focus on the Game Lounge. If the Game Lounge were able to drive a very conservative $100 a month in bottom line revenue for each store it was in, that would be a $1.2 million gain in margin. Now obviously there is more margin possible than that as I stated earlier the breakeven for $4000 in revenue is possible within one to two months, which means out of the rest of the year each store would have $48,000 of revenue in which to make a profit, or $48 million companywide if this rolled out that far. And these estimates are based on very small usage of one 8 machine LAN.

This innovation will help drive the service culture at Best Buy. First and foremost this is a service that we are offering to our customers, but it also inspires the art of possibility. This works as more than a revenue/margin driver, it allows customers to see what is possible. It also shows them that we are capable of doing complex networks, so we will obviously be able to handle their home network.
Next Step – Hobby Gaming

The complementary products to LAN gaming are based in hobby gaming. For those unfamiliar with hobby gaming you might want to look into companies such as: Wizards of the Coast and Games Workshop. The companies produce many games that appeal to the same customers that would frequent the Game Lounge.
The big innovation over the way other retailers sell this product is to have a place to play. By devoting a small area with a few tables we will give hobby gamers a reason to visit our store which will increase traffic. By hosting leagues such as Arena and other assorted tournaments on a monthly/weekly we can also drive sales of targeted products (e.g. a Warhammer 40k tournament drives the sales of Warhammer 40k models, paints, etc).

Having these products and hosting a place to play are great value props from a customer perspective, but they also have great benefits for Best Buy notably: 30+% product margin and increased customer traffic.

Anyway, I am going to leave it here before I get too long winded… Anyway as always your comments and suggestions are always appreciated as the point of this blog is to inspire conversation.

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