Selling used games is very profitable for GameStop. GameStop exists to make money. GameStop is going to do everything it can to sell more used games than new games, and it’s the job of the people who work there to get you to buy more used games than new games. That’s where the money comes from.
A series of stories from Kotaku described how a long-standing system for tracking how well employees sell used games and accessories has been ratcheted up, to the point where employees are scared for their jobs.
“The program, called ‘Circle of Life,’ gives each GameStop store different percentage quotas for 1) pre-orders; 2) reward card subscriptions; 3) used game sales; and 4) game trade-ins,” Kotaku reported. “Each of these quotas is based on the store’s total transactions. Pre-orders and reward cards subscriptions are based on the number of transactions, while used game sales and trade-ins are based on the total dollar value of transactions. If a store’s quota for used game sales is 30 percent, and the store sells $1,000 worth of merchandise, GameStop expects at least $300 of that merchandise to be pre-owned.”
It’s all a matter of incentives
I worked for Electronics Boutique for years, and quit relatively soon after what was then EB Games was acquired by GameStop in 2005. These companies have always pressured employees to push higher-margin items at the expense of new games in order to increase profit margins.
This is why the pre-order system is so important; GameStop doesn’t want to be put in a situation where it’s sitting on unsold copies of new games. A game that’s sealed and not selling in the back room is a liability. GameStop is not worried about a game selling out; the company can buy as many as they’d like. GameStop wants to make sure it buys as few copies as possible from its distributor, and then get your trade-ins and money for accessories.
GameStop is in the used game business, make no mistake. Let’s check out the profit margins from the third quarter of 2016:
GameStop made $187.3 million in gross profit in this period on new games and hardware, with a profit margin of 24.3 and 13.1 percent, respectively. The company made $218 million in used and “value” video game products in the same time period, with a 46.4 profit margin. That’s ... not subtle.
You can dig deeper, but the reality is — and likely always has been and will be — that GameStop’s profits from used games far outstrip the profits from new games. Therefore they want to sell more used games. So they put systems in place to punish employees who don’t do so. If the negative reinforcement is strong enough — such as the threat of losing one’s job — there is a strong incentive for the employee to lie or mislead the customer.
“We want every customer to get the product and deal that is right for them — whether that be a new or pre-owned video game product, digital game or collectible,” GameStop’s statement reads. “The Circle of Life generates great value for the customer. Consider these facts: GameStop issued approximately $1 Billion of trade credits to our customers last year. 70 percent of the time, those trade dollars were immediately spent on new gaming products.”
The statement is accurate; the company never told anyone to lie and not everyone lied. But the incentive system was put in place to make sure employees were constantly aware of the value of selling used games and systems over new. No one is telling these employees to be misleading, but the company is putting them in a situation where the bosses can exert tremendous pressure on employees to push items with high margins. The incentive system does the rest.
Why this situation exists
This information isn’t isn’t new; Gamasutra reported on the huge margins on used games back in 2009.
“This figure hammers home just how lucrative used product sales are for GameStop. On average, they get 48 percent of gross profit for each dollar of used product revenue,” the company stated. “The ‘Other’ category includes high-margin accessories, and of these, GameStop gets to keep almost 34 percent for each dollar of sales ... As is widely known in the industry, GameStop's used game sales are far more profitable than its sales of new games; new software and hardware yield margins of 21 cents and six cents, respectively.”
GameStop exists to push used games and systems, because that’s where all the money is. We don’t know the price that Sony charges GameStop for each PlayStation 4 Pro, but systems have reportedly always had either low or negative margins for the companies involved.
We do know that Game Stop will pay you $200 in store credit for your PlayStation 4 Pro, or $160 in cash. They then sell that system for $350, which is a markup of $150. There’s a reason GameStop shows you the refurbished system first when you search for “PlayStation 4 Pro” on the website.
If you go to PlayStation 4 and click on consoles, you’re given a new system with multiple accessories, a used system, a refurbished system, another used system and then finally a new system. Only four of the 12 systems on the first page of results are new. This is the tab for consoles, which is next to a tab for “pre-owned,” which only shows you used systems and games.
You’d think you were being given a choice between new and used systems with that menu but nope, GameStop is going to lead with used and refurbished systems no matter where you click or when using most common search terms. That’s where the money is, and they’re going to shove it in your face even if you come in looking for a new system.
To the company’s credit, it will show you a new Xbox One when you search for that console, but only five of the 12 results on that page are new systems. You can filter results to show only new consoles, but you have to look pretty hard on the page to find that option. See if you can track it down!
This has always been the case with GameStop; the company wants to sell the items that makes them the most money. Employees who don’t do this will reportedly be punished with worse shifts or, in extreme cases, loss of employment. Employees who do it well will likely be promoted.
GameStop isn’t evil; it’s a business with an easily replaceable staff of mostly young and enthusiastic clerks. GameStop exists to make money, and the money is in used games and hardware. That has always been the case. Employees have always been pressured to move those items first, and the GameStop website uses a lot of tricks to get you into used product. The only real story here is that a very old incentive system has likely been made a bit more explicit and pronounced for those working in the store.
The clerks and managers are there to get you to promise to get your games from GameStop in the future so they can manage their inventory, and they are there to talk you into higher-margin used games. Games that they bought for a low price, are selling for a price that is close to new, and games where none of the revenue has to go to anyone who actually made the game itself.
The other side of this coin is that GameStop is providing a service, and based on the company’s ongoing success that service is valuable to many people. They will take your old games and turn them into new ones. Every game that is a success at retail owes at least part of its sales from people who paid for it using their existing games. GameStop is simple and convenient, and no aspect of this process is hidden. They tell you exactly what you’ll get for each game or system you trade in, and you then decide if it’s worth it to you. You can even look up trade-in values and used game prices online.
And if they want to sell you a used game, so what? Saving $5 or $10 per game by buying used is a good way to save a few bucks. The argument about whether the customer has an ethical obligation to purchase the game in such a way that the creator makes money is a complicated one, but in terms of pure cost to the player there is absolutely value in buying lower-priced used games.
This business model isn’t unique to GameStop, GameStop is merely the first store that focused on games and perfected the methods to derive the most value from buying and selling games to players. Amazon does the same things, and many other retailers have experimented with used games and trade-ins.
The business of selling new, boxed games to players is a tough one in which to make a buck, and companies like Walmart that sell games do so at least partially to get you into the store to buy other products with higher margins, or to purchase accessories that offer hefty markups.
If you are a company that sells video games, you are looking at that 46 percent profit margin on used games with very hungry eyes. The issue that is in the news right now is the idea that GameStop is putting in place a system that rewards dishonesty, but pretending the company has ever taken a neutral approach to whether you buy a new or used game is revisionism.
So just remember that GameStop clerks are not your friends, and they are not there to sell you what you want. A situation in which you walk in and buy a new game you didn’t pre-order is a lost opportunity for GameStop; they want you to trade in games they can then resell at a higher markup and use the credit to buy a used version of the game so they don’t have to share the revenue with anyone else.
Be aware of this reality when you go into a GameStop, and be ready to walk out and go someplace else to get your sealed copy of Resident Evil 7 if you encounter too much resistance. If you ask to buy Titanfall 2 and the clerk reacts to your question with another question — which is usually “did you pre-order?” — you also have the ability to leave and go to a store that will answer your question with a yes or no, and take your $60 very happily.