A Dive into the Profitability of Arcades

Understanding Arcade Operations: The Key to Success

Like anything, owning and operating arcades and arcade games can be highly profitable if you know what you are doing. Just like any investment, you want to engage experts in the subject as there is a real science behind it. Just like realtors can advise on the real estate market and financial advisors can advise on the stock market, buying and operating games can be complicated if you don’t know the ins and outs of the business. 

Pros and Cons: Owning Equipment vs. Route Operators

First, there are several types of arcade game operators. Some owners purchase or lease a location and then purchase or lease their own games, often with other attractions or offerings. Then there are route operators who typically don’t own their own locations but rather own equipment placed at your location on a revenue split. How you decide to align your own business will depend on how much of the daily operations and initial investment you want to take on. 

Pros of owning your own equipment: 

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  You get to choose the game selection.
  
  You get to keep 100% of the profits.

Pros of using a route operator:

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  They are responsible for the initial investment.
  
  Operators can often rotate games between locations to give your customers new games/variety.
  
  They are responsible for the ongoing maintenance and game repair.

The Crucial Role of Maintenance and Repairs

Speaking of game repair, as with everything now, the old adage “They just don’t make things like they used to” also goes for autos, homes, and games. Even brand-new games will break. These games are costly and take a beating. Daily use often abuses computers, screens, buttons, switches, and mechanical parts. The good thing is often, that means you are busy and making money, but it also means that you need to be able to repair your games and do it quickly. Think of it like a car (some games also have similar price tags). It won’t last long if you don’t change the oil and perform ongoing maintenance on your vehicle.

If, by luck, it does last, the resale/trade-in value will be highly diminished by your lack of maintenance. Even a brand-new car can have issues right off the lot. Your games are the same way. You either need to be able to repair and maintain your games, hire a mechanic (aka game tech) to do it for you or find an operator who will do it for you instead of a portion of your profits. This is simply a cost of doing business, and you need to budget and account for it. Technical schools like Betson Technical University can teach you or your team how to fix and maintain games if you decide you want to take on that responsibility. 

You can’t change the oil in your car unless you have tools and oil. To operate an arcade, you will need essential tools to start and back up parts. Any manufacturer or distributor can tell you the most commonly ordered parts of each game, and you can keep some of those parts in stock. A well-stocked parts and tech area in your location will save you thousands in shipping and operational costs. A broken game makes zero revenue per hour and zero revenue per day that it’s broken.

Most arcades make the majority of their money on weekends and holidays. Suppose your game is making an average of $250 per week, and you need a $50 part to get the game operational, and it will cost you $50 to overnight the part. In that case, you can likely fix the game and still salvage most of your revenue if you can get it operational before the weekend. Does anyone really WANT to pay overnight shipping charges? Heck NO! This is why proper planning and back-up part stocking can save you tons of money overall. The game will get operational quicker with in-stock parts, and you will save the expedited shipping cost. That said, most of the time, if you are aware of your revenue numbers, you will see that the cost of expediting that part, 9 out of 10 times, is worth it. 

Game Selection: Using Data Over Desire

Okay, so you have decided you want to own your own games and take on the repair and maintenance that goes along with it. You will plan ahead, be well-stocked on parts and tools, and hire or train a game tech at your facility. Now what? What games do you choose? How do you decide what games to pick? Do you let your kids pick? Do you pick what you like and think is fun? 

Let me digress and tell you a quick story….When I owned my own facility, I loved going to trade shows and playing all the new games (truth be told, I still love that!). But I would go to my distributor rep (who I now get the privilege to work with), and I would tell him that I just played the most amazing game, and it was so much fun, and I just HAD to have it! And he would do his best to talk me out of it if it wasn’t a good-earning game. If you get a chance at the next show, ask him or me about this game I just had to have, and he will remember the fight I put up about it. Some of these games actually never even made it to market. I quickly learned that I had to use the data to make these decisions, not my instincts or what my kids thought was fun. 

For most people, this is an investment. Something that they want to be profitable. Sometimes, the most profitable games will make you scratch your head regarding what YOU think is fun. I can’t tell you how many times I hear from people asking about the “classics” and “retro” games. You can make some scenarios work for you, but in most scenarios, these games belong in your basement or man cave, not your profit center. When choosing who to buy games from, find someone who will be honest with you about games and their profitability and tell you things you may not want to hear. And listen. 

Analyzing Game Types: Redemption, Video, and Merchandisers

Now you have your most important person, your game tech, their parts, and their tools, and an honest games distributor rep who will guide you to the right, profitable games. Let’s talk game mix. When talking about games, we generalize into three main categories, each with some subcategories. The main three categories are

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  Redemption games—In these games, you can win tickets (paper or electronic) that you can then redeem later for prizes.
  
  Subcategories include pushers, large wheel-type games, ring/ticket cranes, sports games, carnival/skill wall games, and multi-player games.

• 
  Video games—These are longer-playing games that are played just for fun. You don’t win anything other than high scores and bragging rights.
  
  Subcategories include VR games, motion drivers and games, non-motion games, shooters, environmental cabinets, dance games, and bar games.

• 
  Merchandisers – These are games that you physically win or get something from directly.
  
  Subcategories include Crane/Claw Games, String Cutting games, Win Every Time (candy/duck cranes), Photo Booths, etc.  

Maximizing ROI: Game Mix and Strategic Planning

Now, let’s start talking about Return on Investment (ROI). Not every location will be the same. Your game selection and how you price your games, ticket payouts, etc., will depend on your market. Who is your primary audience? (Please don’t say 2 years old to 99). Of course, you will likely have people of all ages visit your facility, but you must build it with a specific age group in mind. Adults will not go on a date night to a kiddie facility. Teens and young adults don’t want to hang out with 8-year-olds. Your games, attraction choices, food selection, lighting, sound, and pricing will all be driven by this specific vision of this one primary, specific market. We also need to know if you are working primarily with repeat business in a small local market or a large tourist market that is unlikely to have a lot of repeat business. 

Let’s talk about the game mix. Your merchandisers will tend to have the shortest ROI. They tend to be less expensive upfront and usually make good revenue. The next best earning category would be redemption games, with video bringing up the rear regarding ROI. Obviously, there are exceptions, but I am speaking in some generalities for now. Generally speaking, we like to aim for about 60-70% of your game room as redemption-style games, 20-30% as video games, and 10-15% as Merchandisers and Cranes.

Why put in Video Games if they are the lowest earners with the lowest ROI? There is more to operating a game room than just a quick ROI. Your customers must feel like they also got a good value or won’t return. Most arcades depend on return business to stay profitable. If I give my child $20 and they blow through it in 10 minutes with nothing to show for it, I am unlikely to return. So, in the mix, the quick ROI on the merchandisers balances out the longer ROI on the video games. And the longer play value of the video games balances out the shorter play value of the merchandisers. Your game mix and the value the customers feel will directly affect your profitability. 

Next, we need to discuss redemption. Besides games, toys are my next favorite part of this industry. In my FEC, I wouldn’t allow my employees to open the redemption boxes until I arrived, as it was like Christmas every week. Again, this part of the business goes towards the value the customer feels and their likelihood to return. You can adjust two metrics to affect this part of the business and how guests feel about it. One is the price per game versus the amount of redemption tickets earned. This is your game room payout. In general, we would like to see this at around 30%. So, for every $1 earned, you will give .30 worth of tickets. If the game costs less, it gives out fewer tickets. If it costs more, it gives out more tickets.

Some subcategories of games will give out different percentages. We aim for 10-15% on skill wall-type games. These are games that are fun to play, with or without tickets. They usually have a longer play value in terms of length of play. These are alley rollers, basketballs, etc. In the 20-25% payout range, we see games with a decent play value but are generally more for redemption tickets. And in the 30-40% range, we see the quick games. These are wheels and things that typically involve a single spin or button, and the game is over quickly. These generally should have the highest ticket payout. 

The 2nd metric is your redemption prize markup. This is how much you mark up your prizes. In the above example, if the customer brings you those .30 worth of tickets, what is the value of the item they can buy with that. If you did a 2x markup in your redemption, they would buy a .15 item. So, in this example, your overall cost of goods sold is around 15%. You can choose to have a standard markup throughout your redemption counter, or you can have it graduated, with a higher markup for cheaper items and less for high-end items. 

Lifecycle Management: When to Update Your Arcade Collection

Now you have your game tech, parts package, chosen the right games, with the right mix, with the right payout, with the right prizes, and the right markup. Just sit back and collect the money, right? NO! Again, these games are like cars. After a certain mileage and age, they will start to lose value. Not all games are created equal. There are a couple dozen basketball games on the market right now. The purchase price will not be the same for them. The amount of revenue they make will vary widely. The amount of maintenance they require will vary widely. And the amount of trade-in value or resale value will vary widely. 

These are just some generalized scenarios to show that sometimes the initial cost of the game doesn’t correlate to your profit margin in the end. Choose known earning games from reputable companies that stand behind their games and will maintain a resale or trade-in value. These games will make you the most money, cost you the least in ongoing costs, and give you a little on the back end to roll into a new game. Every couple of years, you will want to consider trading in/upgrading your bottom 10-15% of earning games for new games to keep your game room fresh and earning well and maximize game trade-in value. 

How do you know which games your lowest earners are and what to trade in? You will also want to consider a game card system when you purchase your games. It will not only earn you more money toward your bottom-line profitability and offer you flexibility in pricing and promotional structures you wouldn’t be able to do otherwise, but it will also give you the ability to see and analyze your data and make informed decisions.

The Dynamic Arcade Industry: Staying Ahead of the Curve

In this ever-changing industry, with new games and products coming out every year, this industry will allow you to evolve and grow continually with time. It’s not a stagnant, “set it and forget it” business. It can be very profitable and lucrative, with ROIs for games ranging from a couple of weeks to a couple of years. Even the longer ROIs are still a great investment and return compared to most industries. Make sure you do your homework and make investments based on data, not emotion. In conclusion, arcade games have repeatedly shown that they are not just about entertainment but also about generating smiles and revenue for those who dare to press ‘start.’