Super profits from the arcade

I just spent a week down on the Mornington Peninsula with the kids over the school holidays. I tried to keep my mind on kite flying and mucking about at the beach, but I came a across a small business that I found just fascinating in how they generated their revenues.

On first glance it appeared to be a games arcade with lots of video games and machines that you thump, prod or throw balls in. I was surprised to find that they didn’t have much food or drink for sale, but they did have lots of prizes in cases you could win.

It may sound weird but at the end of half an hour or so, I suddenly had an epiphany about their business model. They weren’t selling arcade games, they were selling primitive plastic gifts at outrageous margins.

Consider this:

1. We purchased tokens from a machine, to put in the arcade games. Roughly $1 per token with a volume discount (eg. six tokens for $5).
2. When you finished the game (or even part way through) the arcade game started spitting out a string of tickets, the length depending on your score.
3. At the end of playing all the games, you gathered up all your tickets and fed them into another machine, which spat out a receipt with the number of points you had earned.
4. You swapped the receipt for a prize (eg. 10 points got you a sticker book, 40 points got you a tiny plastic pool table).

All these steps (and opportunity for mechanical problems) seemed a bit strange to me, which got my antenna up. I then did some quick mental calculations and I realised that the prizes you could “win” were overpriced roughly tenfold, but it was difficult to notice because we were so distracted from the original cash spend. For instance:

• A $15 metal car was worked out to $250.
• Tiny Sticker Book worth a dollar worked out to $10.
• A single lolly worth 50c was $1.

The business model innovation of turning the purchase into an experience and abstracting the cash spend from the purchase, allowed them to generate super profits in a traditionally highly competitive commodity market.

Makes me wonder what lessons I can find here for improving margins in my business?

To read more Brendan Lewis blogs, click here.

Brendan Lewis is a serial technology entrepreneur having founded: Ideas Lighting, Carradale Media, Edion, Verve IT, The Churchill Club, Flinders Pacific and L2i Technology Advisory. He has set up businesses for others in Romania, Indonesia and Vietnam. Qualified in IT and Accounting, he has also spent time running an Advertising agency and as a Cavalry Officer with the Australian Army Reserve.