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Success Through Imitation, Not Innovation

Computer software and game maker keeps prices low and saves on advertising by aiming for impulse-buy market.

March 15, 2000|KAREN E. KLEIN

George Johnson was a pioneer in the video game industry in the early 1980s, after he sold his magnetic tape recording and manufacturing business, and he has seen computer software design and production evolve from the earliest stages into a mature industry. Though the technology has changed radically over the last 18 years, Johnson's basic business plan has not: Produce budget-priced software "for the masses;" keep everything in-house; and rely on profits rather than investment capital. Selling under the brand names Swift and Star Shine, Cosmi Corp. produces more than 6 million pieces of software annually and is one of the country's top 10 software publishers. Johnson was interviewed by freelance writer Karen E. Klein.

At the time we started developing video games, there were about 500,000 home computers installed across the country. There were so many different operating systems before MS-DOS, and then Windows became dominant [so] that we had to design and package our software to run on three or four systems.

It was always our aim to produce budget-priced software, and we're really the only company left that makes $10 to $15 software on purpose. We spent a great deal of time designing a business plan that is still right on target today, and it gave us the confidence to persevere when things got tough.

Our plan was to achieve maximum leverage with vertical integration and remain privately held. Because we are highly leveraged--meaning our capital investment is low and we haven't gone into debt with investment bankers or venture capitalists--we have a return on investment that is more than 1,000% annually.

When you're privately held and highly leveraged you have to survive by being profitable, and we have been profitable more than 44 quarters in a row. One way we've achieved profitability is by integrating our operations vertically, so that we're involved in as many of the production processes as possible.

Most software producers are like book publishers: They don't create the programs, they have products submitted by software designers and they decide which ones they want to produce. We don't do it that way. In fact, we don't outsource anything.

We have our own programmers in-house, we do the manufacturing in-house, the sales, the marketing, the financial collection, the product distribution and fulfillment, and the back-end customer service and support. This allows us to maximize our inventory turnover because we don't produce a finished product until we have an order for it.

What drives production scheduling around here are purchase orders. We don't invest in a warehouse full of inventory that may or may not sell, and we can still provide excellent customer service because with all the production in-house, we can turn the orders around quickly.

Another piece of our business plan was to produce only items with large-market potential. We wanted to achieve high gross margins--over 60%--with economies of scale, be on a level playing field with our competition and retail our software for under $10. We realized we couldn't do that and also be market leaders.

It is not our job to innovate as much as imitate. We watch what is selling, then produce an enhanced version of the same product at a budget price. The advantage you have by being second is that you can focus very specifically on function. Our customers want easy, one-item software that does a specific application to fulfill a specific requirement. If they buy our Greeting Card Magic or 3-D Virtual Reality Architects or Travel Maps USA, they don't want a big, complicated program with 300 pages of documentation to read and loads of applications. They make an impulse purchase because the price is so low and they want to achieve one thing with our software.

Because our product is an impulse purchase, we don't have to do a lot of consumer advertising to get people into the retail stores to buy our product. They are already in the store and they buy our software because it catches their eye with well-designed, colorful in-store displays and promotional offers, which are very important for us. We did a buy one, get one free, and buy two, get three free promotion last fall with 14 titles and we shattered an Office Depot sales record by selling 15,000 units in a single day.

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If your business can provide a lesson for other entrepreneurs, contact Karen E. Klein at the Los Angeles Times, 1333 S. Mayflower Ave., Suite 100, Monrovia, CA 91016 or at kklein6349@aol.com. Include your name, address and telephone number.

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AT A GLANCE

* Company: Cosmi Corp.

* Owner: George Johnson, chief executive

* Nature of business: Computer software publisher

* Location: 2600 Homestead Place, Rancho Dominguez 90220

* Year founded: 1982

* Web site: http://www.cosmi.com

* Employees: 100

* Annual revenue: $25 million

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