Maybe Super Cheap Video Games Are Helping, Not Destroying, The Video Game Industry
from the hello-price-elasticity dept
One of the early economics lessons you learn in any competent intro econ class is the concept of elasticity. The basic concept is how much does demand increase for a product if you lower the price. If a product is highly elastic, decreasing the price can often earn you more money. A simplified version of this: I have a widget that I want to sell for $100 dollars, but only one person is willing to pay that price. With that pricing, I'd make $100 (gross) on the widget. However, if I were to drop the price to $1, let's say 1,000 people are willing to buy at that price. Then, I'd make $1,000 (gross) on the widget. So, even though producers often fear lowering the price, if there's strong elasticity, lowering the price can often make you much more money (and, yes, the marginal cost matters here as well).We've seen over and over again that video games appear to have very high price elasticity of demand. Two years ago, we wrote about some experiments by Valve, where it tried lowering prices of games by 10%, 25%, 50% and 75% -- and saw the increase in sales at a stupendous rate. While the 10% decrease only resulted in 35% higher gross revenue (already pretty good!), at a 75% discount, the gross revenue shot up by 1470%. Think about that, for a second. Basically, dropping the price by 75% increased revenue by almost a factor of 15. Not bad.
Last year, we saw a similar experiment that also had great results. An online video game store in Sweden tried dropping its prices by 75% and saw an increase in sales of 5500% (in unit sales). When looking at the gross revenue, it appears that it came out approximately to a similar 1300% increase.
And now we have some more examples. Capitalist Lion Tamer points us to an article that looks at some super popular iOS (iPhone/iPad) apps that drastically cut their price, but saw their gross revenue shoot way up because of it.
Street Fighter IV for iOS recently slashed its price by a breathtaking 90% overnight, from £5.99 to 59p. Within 48 hours its position in the overall Top-Grossing chart (that's the list of all apps, not just games) instantly rocketed from 116 to 2. Coincidence or magic? You decide. But that's not all.And yet, time and time again we hear how execs at big entertainment companies feel the need to keep raising prices. Hell, we just mentioned how Nintendo's President Reggie Fils-Aime was complaining that cheap games might kill the industry. Apparently, they don't teach basic economics to folks who become president of Nintendo.
And just to reiterate -- we're monitoring the Top-Grossing chart, ie the one measuring money made, NOT the ordinary numer-of-sales one, where SFIV currently sits comfortably on top of everything else. What that means is that the game's sales have increased by dramatically more than 1,000% (because it would have had to sell 10 times as many just to hold the No.116 position at the new price, never mind climb 114 places).
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Filed Under: business models, economics, price elasticity, pricing, video games
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Coincidence or magic?
To the uninformed, basic economics in action can appear indistinguishable from magic.
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Re: Coincidence or magic?
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Re: Coincidence or magic?
maybe we will one day stop listening to ad`s and idiots who call themselves experts
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Re: Coincidence or magic?
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I'd agree with that
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Re: I'd agree with that
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Re: Re: I'd agree with that
I also buy a lot of games as imports because they're so much cheaper than games here in Spain. The average new release in Spanish stores is around €70 ($95 US), not much cheaper on the few dedicated Spanish online stores and don't typically go down in price very quickly. A new game in the UK is around £50 ($80 US) and all but the most popular games will drop to around £20 ($30 US) within 6-12 months. Guess where I buy my games? Not Spain, that's for sure.
Now, if the typical release price was around the £30 mark, I'd find myself making many more snap purchases. The price would likely not drop quite as quickly, as there's a much smaller gap between £30 and £20 as there is between £50 and £20, so people would be less incentivised to wait as I currently am. If the savings would actually make their way on to the online services as well (e.g. I can download Bioshock on XBox Live for £20, but it's £8 on online stores), then even more casual purchases would likely result.
Price is one of the most important aspects for many people. I absolutely refuse to buy Sonic 4 because it's ridiculously priced, but I bought Dead Space on my iPhone on a complete whim because I saw it was reduced to £1.79 and I got both Phoenix Wright and Street Fighter 4 when the 59p sale came through. I doubt I'm have bothered buying any of those had they been their normal prices, and I'm now even less likely to buy Sonic because I have so many other games to play instead. But, had Sonic 4 been a reasonable price, i would have bought it on day 1...
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Re: I'd agree with that
Never get steam....
Your wallet will hate you forever
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Re: Re: I'd agree with that
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Re: Re: Re: I'd agree with that
There's a correlation there, my friend....
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Re: Re: I'd agree with that
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Re: Re: Re: I'd agree with that
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And with a marginal cost of zero...
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Re: And with a marginal cost of zero...
I would say that from the company's perspective, it can't ignore the fixed cost of creating the game. If it costs millions of dollars, that's just that much off their bottom line.
The solution, of course, is not to build a million dollar game, but a cheaper game that is actually good. Then sell it for a more nominal amount that causes as little pain as possible to consumers.
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Re: Re: And with a marginal cost of zero...
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Re: Re: And with a marginal cost of zero...
The content industry has been slow to embrace that concept. We hear cries from the movie industry that new business models will make it impossible to produce $200 million movies. Lots of industry egos are based on the concept that you have not arrived in Hollywood until you have worked on a $200 million movie. They have all forgotten that the objective is to make good movies. Good movies and expensive movies are not necessarily the same thing. If a movie is good and develops a fan base there will be ways to monetize it.
One problem for both games and movies is that when you are spending massive amounts of money, you can't take chances. Therefore we see a lot of sequels in both the game and movie industry. They simply can't afford to take changes because of the size of the investments. It is the small independent outfits that are doing the innovation.
When a company has a massive fixed development cost and a near-zero marginal cost of production, it has a huge problem. Its operation is flying in the face of basic economics. The only way this type of business can exist for long is to rely on artificial monopolies, and the easiest way to accomplish artificial monopolies is with government support.
Economics always wins in the end. Either the artificial monopolies go away or the system becomes totally dysfunctional. I think that rampant piracy is one of the symptoms of a legal system that is far out of whack.
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Re: Re: Re: And with a marginal cost of zero...
You can no longer count on government support for content. Games, Music, e-book, movies, etc are all loosing their monopoly status. There is to much competition from to many sources.
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Re: Re: Re: Re: And with a marginal cost of zero...
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Re: Re: And with a marginal cost of zero...
The fixed costs to create the game do not increase with the number of sales, so any increase in gross revenue works for it. If you were selling cars, you have to consider the manufacturing costs so the car cannot be sold for less than the cost to build it, but that is not a problem in digital sales so the smart thing to do is decrease the price until you maximize gross revenue.
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Re: Re: And with a marginal cost of zero...
To put it bluntly, the real reason all of this is dangerous is that the best games often cost a great deal to make. How much does it cost to make a game like Bastion? Not that much. But it still costs a significant amount. How much does it cost to make a game like Crysis 2? Even more.
Whether Crysis 2 is better than Bastion is a complicated question, but the real problem is that you can't survive on games like Bastion alone.
Now, it may or may not be true that dramatically lowering the price on your product may increase your gross, but the real problem is whether or not that is a stable situation - fundamentally, if every game is cheap ($20 or less), I'd be a lot more likely to try out new games. But I have only finite amounts of time; so, to put it simply, if the entire market did that, then they may very well lose sales from me overall as individuals who make the best games, because I would have bought their game anyway for $50-60 even though I'd only buy, say, a Bethesda quality game for $5.
Worse, if I have more games than I have time for, I may well stop buying games altogether. And what happens then?
I dunno if the current strategy is optimum, but it seems to me like having the price initially high, then price dropping over time likely squeezes out more money from consumers as every time you price drop you get a spike of interest.
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It is also important to consider that while revenue may go up, you have to compare it to the profit margin on the other side. Obviously, if companies were pricing their products with 500% profit margins, perhaps they are just priced over the market. Supply and demand, the very basics - price over that, and you may hurt demand.
It isn't magic, but it is certainly easy to for educated MBAs to think they were the first to discover sale pricing.
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Madness!
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Re: Madness!
Madness? This! is! ECON!
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Re: Madness!
pirates sicken me, THEY WOULD EVEN DOWNLOAD A PIZZA
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Re: Re: Madness!
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Pizza via IP?
--Paraphrased from a 20+ year old newsgroup post that lurks in the dusty depths of my memory.
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Long term?
Right now, the reason why lowering the price works is people are expecting these games to be expensive. So, when the prices take a dramatic cut, they jump on it.
I do agree there are a number of people that wouldn't even consider a game unless the price is below a certain point. There are even people that would get low price games for s&g's just to check them out. But what if every game was always this low?
I'm not advocating high price games; as a gamer, I'd love to see cheaper games. But in hindsight, if games were always just $10, would we see the same revenue boosts? Maybe ... but I'm biased as a gamer; I'd have less trouble buying games at $10 (hell, I'd probably have hundreds if they were just $10). I guess that would answer my own question. lol
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Re: Long term?
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Re: Long term?
You're not an entertainment executive, are you?
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Re: Re: Long term?
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not so sure
most of these companies know their cost structure (high up front costs, low distribution costs), they know their distribution window (usually measured in days for medium quality games), and they know their customer (fickle gamers). yes, they could sell more copies cheaper, but once the word gets out that the game is a dog (a possibility for any game) sales dry up almost immediately.
from a consumer aspect i agree completely, from a business perspective the facts as presented don't quite work out.
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Re: not so sure
Ultimately, the consumer aspect is the business aspect. Especially today when consumers can easily get any game for free if they so choose. A company whose business model is to trick people into buying "dog" games by cramming them down their throats quickly at a high margin may be able to make money for awhile, but in the long term they are doomed.
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Re: Re: not so sure
personally, i like the basic games like minecraft and creeper world, but i know people who like halo which cost millions of dollars to create. i really don't want my choices to be limited to cheap flash games.
revenue > expenses = good (more games developed)
revenue
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Re: Re: Re: not so sure
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Re: Re: Re: not so sure
And then:
in order to create the blockbuster hits, you currently need to spend a lot of money on rendering engines, artists, game play specialists, programmers, marketing, etc
Those two points conflict very much so.
Minecraft is for all intents and purposes a 'blockbuster' game. It has netted insane profits for the 'team' that developed it. It is just another example that you in fact do not need to spend millions to make something people will love. I do however think that to an extent, games that do cost a lot to make and are very polished will always have their place in the market.
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Re: not so sure
http://2dboy.com/2011/02/08/ipad-launch/
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Re: not so sure
OK, we are talking about selling information that is automated largely and with fixed overhead costs. Sure, there are support costs and what not that grow with each new sale, but we do have near fixed overhead.
So to finish out your analysis:
$10K gross by selling 1000 @ $100 will be the case to be compared. The cost per item here is not .9 but an even lower number when we amortize. In other words, the 90 cents you stated was the cost of 1 item is roughly the cost of all 1000 items as well (fixed overhead), leading to a new per item cost of .09 cents. We can skip the rest of the math details, because the bottom line is that revenue will largely equal profits in this case. And, generalizing, essentially profits will be directly proportional to revenues for any near fixed overhead situation.
Now, there is another element not covered in the article that argues a bit for keeping prices high initially. The total profit over the life of the item might very well go down if we trade off for more profits today at greater volume/lower cost; however, any such analysis and conclusion for a particular product is not predictable. There are too many variables at play in any condition (eg, how will competition, average disposable income of customers, tastes, productivity increases, business model adjustments, etc, all play out over the next say 5 years). And we also can't forget that $1 today is worth more than $1 tomorrow because the dollar can be put to work.
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Gross vs Net
Once you realize that with downloaded games, your only significant cost is game production (not per-unit production cost), price elasticity comes into it's own. You incur a small bandwith fee, which could be minimized by the proper application of bittorrent.
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Re: Gross vs Net
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Re: Gross vs Net
The costs of distributing a video game aren't the significant ends of the costs. If we only spoke of the marginal costs, you would be right. But when the fixed costs (development) are the big end of the project, you cannot just work on marginal costs alone.
If it costs you $10,000 to develop something, and 1 cent to reproduce it, do you sell it for 2 cents and declare a profit? Nope. You are still $9999.99 in the hole. If the market is only for 10,000 units total, you have to sell it for $1.01 just to break even.
You may have the proverbial "infinite distribution", but you don't have an "infinite marketplace". So within that marketplace, you have to recoup your up front costs, your fixed costs, your variable costs, and your marginal costs on each of the units you intend to sell. Oh yeah, you might want to actually make a profit.
So if the game company has a staff of 100 people working on a project, and it takes two years to bring to market the completed mega-game, it should be understood that there is no viable business model that says they can sell it at 99 cents.
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Someone isn't doing a good job targeting their audience appropriately... :)
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Re:
Guess Adblock continues to do its job then. And, you've re-assured me that there's no value in the ads shown here. Arguing that I should enable them is useless since I'd never click and generate revenue anyway...
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That's not what happens though. The severe drop in price, while it has boosted "certain kinds" of games that normally wouldn't be as widely distributed as they, has also resulted in lower quality cheap games that bombard you with social networking addons and advertisements; and they usually have a very short play-time.
The reason games sell for $1-$10 instead of $20-$50 is because they CAN'T sell for $20-$50. No one would buy them. For the more expensive games I buy, I tend to follow their development ahead of time, and check reviews before purchasing first. Sure it'd be nice if a new game cost half that amount because then I'd worry less about wasting my money on a 4/10 rated game rather than make sure it's a 8/10 game, but good games tend to have big budgets which need to be balanced with big pricetags, usually.
Mobile platforms are for puzzles, repetitive settings, short and few levels, and generally shallow games. Certain games actually do take many years to produce, and their high price tag is usually worth it. Besides, after a month or two of release the price tends to drop by $10-20, and I don't mind paying 3 times more for a game when I tend to play that game 10 times longer than the latest appstore trendsetter.
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Re:
But that's missing the point here; any popular title is going to sell well because they have the marketing and industry coverage behind them. The real question is, could they charge less than the standard $60 at their release and make more money? I know I sure as hell won't spend $60, but once those titles come down to $20, I'm all over them. If they launched at $20 and were still making a profit at that price, their opening day sales would be like nothing we've ever seen before. They wouldn't be able to keep the title on the shelves.
If you were following one of these 8/10 games through development and launch and it came out for $10, are you saying you wouldn't buy it? Because I'm quite confident that you still would. If the game was great, people would hear about it and the price would have no bearing on them purchasing it. This is why pre-orders are so rampant, price doesn't matter to rabid fans. It's the casual purchasers you need to sell to, and having a more reasonable price is a great way to get them to part with their money.
Look at the Wii; 2+ years after launch it was still difficult to find. You could sit back and say Nintendo priced it too low because the demand was too high and so they missed out on a lot of profits. But did they? They had the #1 selling console by far and they still made money with each sale (unlike their competition). Having that kind of market penetration has its values, like brand recognition ensuring a lot of those customers also buy the next iteration and a huge paying customer base that they could leverage in to high licensing costs for releasing games for their system. If they were only looking at short-term dollars and sales, they'd have neither and their system may have been dead within a couple years of its release. Instead, it continued to out-sell all its competition for many years after launch.
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Re:
Angry Birds - $1.00 (Played for countless hours)
Zenonia 1 - $5.00 I believe? Played all the way through
The Battle for Wesnoth - $1.00
Zenonia 2 (See Zenonia 1)
Final Fantasy Chaos Rings - $13.00 Tons of content.
You can argue that oh these aren't your types of games, but quality content exists at a low price point, and ranges from "puzzles, repetitive settings, shallow games" to actual in-depth games.
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Re:
Yes, why not?
Example: Give the game client away for free. Allow single player and lan (or limited online play) for free. Charge money for playing on a massive server with millions of other players and extra content.
That could work.
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I guess some of the MMOs have switched to a model like this (LotRO, DnDO) and are doing pretty well.
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Re:
You just spout off stuff like "party line" and "cult", and attempt to repeat it enough times in desperation to get people to believe you.
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Dear Mike
The ironic thing is that very little of what I read here is news to me, however your method for delivering information is so effective that I retain it from techdirt far more often than the original source. This story is a prime example of a great educational resource and I will be archiving this article, as well as others, to teach my children when they enter public school in a couple years.
Thank you for providing such valuable information.
Reader for life,
_Lucas Short_
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Back in the 90s, I remember buying a Nintendo 64 for around 1200 francs (about 230+ euros?), and games for like 300/200 francs (45~30 euros) and I did buy a lot of games.
Nowaday, every games are like 60 euros, if not more.
Then i discovered steam, with its massive discounts and I have more games on my steam list than I have on my consoles.
On my wii, I have like 7 games, and they weren't worth 60 euros each. Lesson learned, on my xbox, I only buy USED games for 40~20 bucks instead of 60~50 bucks, and I do have a lot of xbox games now : 6.
Amount of games I bought total : 13.
On the N64 alone : 28.
The reasons I don't buy games anymore? well, convenience of having to go to a store first, but also the price.
Just to talk about cjstg's point of view, that's pretty much what has been explained with the elasticity : if the blockbuster works at such a high price, and they wont get more from selling for less, then why do it?
consumers are happy with the high price, then they buy. if decreasing does attract more customers, it might not make up for the loss of a lower price.
However, I don't think the rendering engines now a day cost that much, considering they use the same engines for multiple games, at most some licensing fees.
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Nintendo has always been the worst
Steam is still DRM, it's just a little more reasonable.
Meanwhile, nintendo's been cruising on the "we're like apple and our customers are suckers" model for a long time and it's been quite well known, just like this comic: http://www.cad-comic.com/cad/20080721
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Re: Nintendo has always been the worst
The 360 and PS3 clearly aren't going after [the casual gaming] market, so why shouldn't Nintendo go mop up?
And that's why they're shitting money out of every orifice.
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Re: Nintendo has always been the worst
It's not something that really gets in your way, and if you put up with it, it provides added value through the fact that your games will always be there on any machine that has Steam. It's not "just a little more reasonable". It's something that the users feel that makes sense and like.
DRM that treat users like criminals put gamers off. Steam doesn't give that feeling.
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Re: Nintendo has always been the worst
SHOCKED i tell you SHOCKED.
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Time for some education
Believe it
http://www.youtube.com/watch?v=GOMI0BxB0yA
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Here is what I would like to see. We all remember when video games unanimously jumped from 50 to 60 dollars, claiming inflated development costs. Why do we as consumers never see this formula IN REVERSE. I'm really not an expert as this message may be evident of, but I do feel that a competitive pricing model for video games is ultimately what needs to happen. I'm a huge Street Fighter fan for example, but paying $60 dollars for a fighting game makes no sense fiscally for me anymore.
Continue to overcharge and people will continue to make Gamestop profitable; by looking for used copies to save the bank versus funding the development of the game. Or piracy, but let's not start with that.
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Buy From The Bargain Bin
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Re: Buy From The Bargain Bin
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When i first ran into Steam, it was for Halflife 2. Expensive game on release.
Game prices were about the same for them all on Steam - $29.99+ and actually most were $39.99+
Didn't buy any... other than having HL2 physical media.
Steam dropped a lot of games to $9.95 or less on some.
Bought 6 of them. At $39.99 I would have bought none of them. Either way, it only cost Steam a bit of bandwidth.
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Re:
Then, in the Steam Christmas sale, I saw ME2 Deluxe for £14.99. I bought it on recommendation. AS part of their SquEnix week, I bought Batman: Arkham Asylum for a measly £3.74 (down from £15).
That's two purchases I wouldn't have made at the £29.99 price point, and in the current markets, cheaper is selling more simply because of the lower disposable incomes.
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Classic
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Re: Classic
It's like they're saying, "I only want to make a fortune by ripping people off. I REFUSE to make a bigger fortune by giving my customers value."
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The secret
Note: I would pay $50 bucks for Portal 2. Valve is also my vote for benign dictator, while we're at it.
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Free and working
side thought: Riot games League of Legends comes to mind off hand
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Glest
Foobillard
FlightGear
Globulation 2 (So cute)
Maniadrive
VDrift
UFO: AI
Ultimate Stunts (anybody remembers the 1990 game Stunts?)
Drascula: The Vampire Strikes Back
And so many others.
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Discounts aren't the same as permanent lower price
When your price starts at 75% less, there's no opportunity here.
In addition it will most likely to lead people to think that the product is lower quality.
And when it comes to video games, when a player want a game he'll buy it as long as he thinks the price is matching the value of the product.
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