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Insider: Planning for Operating Costs

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Welcome back, readers! Today's article is happening because one of the popular local games stores (LGS) in my town is closing down this month, which took a lot of players by surprise.

It's a pretty common misconception that Magic is a wildly profitable business. I keep meeting people who want to open up a store and think they'll make a killing. The fallacy begins with the idea that good profit margins on singles translate directly to a lot of money to be made. While that isn't necessarily wrong, the biggest oversight I see a lot of people making is failing to account for operating expenses.

Operating Expenses (n).
The expenditures that a business incurs to engage in any activities not directly associated with the production of goods or services.

Practically, we can break this down into several categories:

  • Rent
  • Utilities
  • Internet
  • Phone
  • Insurance
  • Employee Wages/Benefits
  • Garbage

These are monthly expenses (or weekly, in the case of wages) that take away from your bottom line...and they add up.

The first thing we need to do is establish a baseline for these costs. The baseline should be as realistic as possible. I will discuss where my estimates come from (as your costs may vary), as well as any calculations I do.

Rental/Lease Cost

As the biggest aspect of these costs is the monthly rental or lease costs it's critical that these be accurate. For this I suggest you check out a website like LoopNet or something similar that has commercial property listings in your area. While rent is often negotiable, there are some typical baselines based on the area you're looking at (same with personal housing) and for this article we'll look at those baselines.

In this case I'll assume I wanted to open a shop near the old LGS mentioned above (area code: 29607). Searching the typical retail lease prices, I see that they are broken down into dollars per square foot per year. So to calculate our yearly lease price we take that number, multiply it by the total number of square feet of the location, and then divide it by 12 to get a monthly lease cost. In the case of this LGS we can see prices around $12/square foot/year.

Say I found a nice retail space of 1500 square feet. That would equate to a room 25 ft. wide by 60 ft. long, providing me adequate play space and room for a nice counter.

Then my rental price would be: $12 x 1500 sq. ft. / 12 mo. = $1500 a month.

Utilities

These costs may vary a good bit as well, given that each area will have different power and water rates. But you can typically look this information up online, and hopefully you can find something like this (again I'm using this LGS's rates).

The good news is that many game stores have shifted hours, and the most demand will often comes at non-peak times (M-F 8am to 5pm) which means you get lower rates. Now we do have to estimate our power usage. Keep in mind that it will likely differ based on the season, with summer tending to be the most demanding.

It's difficult to find information regarding the typical power usage of a small business or micro business (one with less than five employees that isn't running a lot of power-hungry equipment). What I could find is that a lot of small businesses use around 15,000-25,000 kWh per year. If we go with the middle (20,000 kWh), then our monthly average is around 1667 kWh per month. Say your store is open from 2 pm to 10 pm. This means your power rate breakdown will be 37.5% peak hours and 62.5% off peak.

So our equation is:

(1667 kWh * 0.375 * $0.245/kWh) + (1667 kWh * 0.625 * $0.098/kWh) = $255.26 per month in electricity.

Internet/Phone

Around here we only have Charter for internet. Their current prices for internet are phone are:

  • Internet - $39.99
  • Phone - $29.99

Insurance

This is another difficult one to calculate. According to Google, a small business may pay something like $500 a year for general liability. This would equate to $42.50 per month.

Employee Wages/Benefits

So I'll estimate that one would pay US federal minimum wage (though it is important to note that some states/cities have differing minimum wage laws). That is $7.25 per hour. Current federal laws dictate that an employee who works more than 30 hours in a week is legally entitled to employee benefits, specifically healthcare. So assuming you don't want to pay for healthcare coverage (which will likely be upwards of $200-$300 per month) we'll assume your sole employee only works 27 hours per week.

This means your cost is:

$7.25 / hr * 27 hrs/week * 4 weeks/month (on average) = $783 per month

Garbage

Garbage collection can be an optional (or may be included with the rent), but if it isn't it will typically run around $20/month.

Total Monthly Operating Costs

If we add up everything above we get a total monthly operating cost of $2,670.26.

Taxes

One last important expense to keep in mind is taxes. We can find a chart for small business tax rates here. Note this will be based on your actual Taxable Income (your total income minus any deductions). Looking at this chart, the smallest tax rate you would have is 15% (assuming you make less than $50,000 in taxable income per year).

Income Generation

Now let's look at the "fun" part, the income generators. As you have to buy all the things that you sell (save for tournaments) you will likely have varying profit margins. For this we want to take a weighted average of said profit margins to create an overall "generic profit margin" and simplify the math a bit. With that, I've taken some guesstimates based on information I've seen dealing with various dealers and stores.

Product Profit Margin Percent of Total
Singles 45% 40%
Sealed Product 30% 30%
Snacks 50% 5%
Tournament Fees 25% 25%
Average 35.71%  

So basically your typical profit margin for a sale is a little under 36%, which to be honest is very good (as many industries operate on significantly lower profit margins).

Sales Required to Cover Operating Costs

To calculate the sales required to cover our operating costs, we use the following equation:

Operating Expenses * (1 - Tax Rate) / Profit Margin = Sales required to cover operating costs

In our case, this amounts to: $2670.26 * (1 - 0.15) / 35.71 = $6,356.99.

So this means that one must sell $6356.99 worth of products just to keep a store open. If you don't have another employee, this number drops to $4,493.28, however, that means you will have to give up a lot of time to run your business.

Conclusion

The purpose of this article wasn't to dissuade anyone from opening up a store. However, it serves as a strong reminder that the costs of keeping a business open (let alone profitable) are often much higher than many realize.

Besides one of our LGS's shutting down, I've heard of a few other store owners closing up shop (mainly on Facebook, but some on QS). I know personally how much money many of these owners pour into their stores—seeing one close down is very disheartening, both for the local players and the owner(s) themselves.

So for anyone contemplating opening up a store, I simply suggest that you do some research and run the numbers ahead of time. If you don't think you can consistently sell this much product in a month (and again that doesn't include paying yourself), then you really should rethink putting up all the money and time needed to open a business.

David Schumann

David started playing Magic in the days of Fifth Edition, with a hiatus between Judgment to Shards. He's been playing Commander since 2009 and Legacy since 2010.

View More By David Schumann

Posted in Business, Finance, Free Insider, ION Academy, Timeless Info

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4 thoughts on “Insider: Planning for Operating Costs

  1. Hi David, I like your analysis it made me think about a few of my cost, that different from your list and I would like to add a few things that people often do not take into consideration. Your own salary have to be counted, also opportunity cost or interest on the overall value of the inventory.

    1. Mr. Jette,

      You definitely bring up some good points. I do agree that your own salary needs to be accounted for, however, my original intent was to show the standard operating costs ignoring that aspect, specifically because I don’t know what kind of salary you (as a store owner) would want to draw. As for opportunity cost, I agree that it’s something that needs to be considered, however, it in itself is not an operating cost it is instead in it’s own category. Lastly, the interest on the overall value of your inventory is definitely an operating cost, but it’s one that is heavily based on what you (as a store) have as your inventory that it’s cost needs to be looked at on a case by case basis (as opposed to a more over-arching review like I did here), but I definitely appreciate you bringing it up because it is another one that needs to be considered.

  2. These are great – I’d like to see more of these articles as they seem to answer some really specific questions I’ve had about starting an LGS in my area. Specifically, how to compete with others doing the same thing.

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