From the August 14, 1995 issue of Smart

New Sales Channels for Software Force Merchandising Changes

By David English

Software sales in the 1990s are rapidly expanding beyond the specialty stores into the mass merchant and noncomputer specialty stores. And that expansion is causing major changes in the approach software publishers take to the market, especially in the areas of pricing and packaging.

Fairfield Research estimates that of all the 1994 CD-ROM software purchases at retail, 54% took place in computer stores (such as CompUSA), 23% took place in software specialty stores (such as Egghead), and 23% took place in other kinds of stores (including mass merchants, consumer electronics stores, video stores, office superstores, and media superstores).

By June of this year, the "other" category had gained the largest market share with 56%, while the computer stores and software specialty stores had declined in market share to 35% and 9%, respectively. Even with a declining market share, computer stores and software specialty stores should continue to grow at a healthy pace. According to Link Resources, overall sales of CD-ROM software will expand from $710 million in 1994 to $4.2 billion in 1997.

Despite the opening of so many new channels, the vast majority of sales for most software companies come from the traditional computer and software specialty stores plus the quickly expanding mass merchant channel.

"Right now, the alternative channels aren't generating a ton of revenue for us, because they have issues that are outside our business models," says Ileana Seander, vice president of sales at Maxis. "So we haven't been able to participate in a lot of them. The nice surprises for us have been places such as Wal-Mart and the success that they have had in the last year."

The continued movement of software into the mass merchant channel is already putting downward pressure on software prices, according to Tom Gross, vice president of merchandising-mass channel at GT Interactive Software, which manages the software sections in more than 1,700 Wal-Mart stores. "The average selling price is about $40 now—maybe even a little more than that," he says. "Even though Wal-Mart is having tremendous success at that price point, that's really not a mass consumer price point. It's not an impulse buy."

Once the mass merchant channel drives software prices down to the impulse-buy level, the video, music, book, and other specialty stores are likely to expand their software sections. This could force down prices even further.

Because most alternative channels don't carry the number of titles that the computer and software specialty stores carry, software is fast becoming a hits business. "If Carmen Sandiego were brought out today, it would never make it," says Tom Hanson, vice president of home sales for MECC. "It would be in and out in 90 days at the most. When it came out, it had the luxury of being out on the shelf for probably a year before most retailers even knew they had it."

A hits business encourages alternative retail channels to sell software: If most of the business comes from the top 20 titles, then many stores will simply choose to carry the top 20 titles.

In addition, the influence of the mass merchants is helping to diminish the importance of in-store detailers and heighten the importance of packaging. "It's getting to where we're going to have to fight our own battles on the shelf with clever packaging that really talks to the customer," says Rene Courington, vice president at Sanctuary Woods.

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