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Investing and Economics Blog

Small Business Profit and Cash Flow

A couple posts by Jeff Vogel, founder of Spiderweb Software, discussing the financial success of his small computer gaming company are quite interesting. They provide a nice view of one successful small businesses’ finances and the customer focus and market awareness needed to succeed.

How Many Games I Sell

Releasing games for two platforms has always been the key to our profitability. Porting games is free money, and it’s awesome. I suppose this is the sort of thing we should keep secret, as it’ll only get us more competition on the Macintosh. But, on the other hand, more games makes the Macintosh more viable as a gaming platform and thus attracts more potential customers for me. So I don’t worry about it.
…
Geneforge 4 cost about $120K and has made about $117K. Given current sales rates, it should be in the black in at most 2-3 months. After that, everything it earns is pure, tasty profit. And we will sell it in bundles (we sell a Geneforge 4-5 bundle already, and a Geneforge 1-5 CD is coming), making more money. So I don’t regret the time spent writing it at all.

And it gets better. What was my reward for the year spent writing Geneforge 4? It wasn’t just the cash. I also own the game! That means, in ten years or so, I can return to it, give it better graphics and interface, add a bonus 2-3 dungeons, and release it to a new generation of gamers. I’ve done it before, with my games Exile 1-3, Blades of Exile, and Nethergate, and the resulting products, since I didn’t need to write them from scratch, were immensely profitable.

Don’t underestimate the value of owning your own intellectual property.
…
A lot of people have commented that I should lower the game’s price to $10. The idea that this would increase my profits is, I feel, purest nonsense. Bearing in mind that the percentage cost of credit card processing increases as the price goes down, and, to make the same profits from Geneforge 4, I would have had to triple my sales. Triple! As in, go from a conversation rate of about 1.5% to almost 5%. This is just not realistic.

Or, to put it another way, Geneforge 4 was the game where we raised our prices to $28. Our sales did not go down from Geneforge 3 (which was $25). They went up. A lot. And Avernum 5 ($28) sold a lot more than Avernum 4 ($25).

So Here’s How Many Games I Sell.

It’s worthwhile at this point to go to the web site and look at the screenshots. Some of you might ask, “Why would anyone pay money for a game that looks like that?” The answer is, “I don’t know, but they do.”
…
But I think the most important thing to note is that Geneforge 4, after a few years, is almost in the black, and it continues to sell. In the long run, the time spent on it will be quite profitable. Despite the crude graphics. Despite the high price.

A neat example, I think. he doesn’t specifically talk about cash flow but you can see that the business needs to pay salaries and sales come much later. So you need to have cash to sustain the business (which could be a loan, that then is paid back as sales are made). And then, as you have games that were developed earlier you get sales with very little cost to you in the present time (you paid for the bulk of the effort earlier).

Related: posts on entrepreneurs – Entrepreneur in Ethiopia – Entrepreneur Results – Curious Cat Management Blog

April 1st, 2009 John Hunter | 5 Comments | Tags: Investing

Comments

5 Comments so far

  1. Curious Cat Management Improvement Blog » Build Your Business Slowly and Without Huge Cash Requirements on April 12, 2009 10:22 am

    […] Business Ideas – Find Joy and Success in Business – Our Policy is to Stick Our Heads in the Sand – Small Business Profit and Cash Flow by John Hunter   Tags: Career, Competition, Creativity, IT, Innovation, Investing, […]

  2. Y-Combinator’s Fresh Approach to Entrepreneurship at Curious Cat Investing Blog on June 13, 2009 10:01 am

    The opportunities are available today. Y-combinator’s support of the businesses with knowledgeable resources and education (startup school) are far more important than the money they provide…

  3. Small Business Owners Angry at Big Banks at Curious Cat Investing and Economics Blog on September 28, 2009 9:20 pm

    Good idea, big banks have shown over and over again they take pride in consistently raising fees, reducing service and treating customers as though they are a bother…

  4. Company Spotlight on Campaign Monitor by 37Signals at Curious Cat Investing Blog on May 24, 2010 4:12 pm

    Very interesting article on successful entrepreneurship. I also appreciate the management ideas discussed which resonate with those I discuss in my management blog…

  5. Good Startup Ideas from Startup Weekend JB (Malaysia) » Curious Cat Management Improvement Blog on November 27, 2014 3:53 am

    To create a greatly successful startup focusing on great, not adequate, customer experiences is extremely useful. And you can leap ahead of competitors that don’t focus on customer delight…

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