Lots of buzz today about Gabe Newell’s DICE Summit keynote. Gabe noted that price promotions on certain games on Steam have dramatically lifted sales. He emphasized that when Left 4 Dead was recently discounted by 50% (to $25), the discount increased sales by 3,000%. He added, “We sold more in revenue this last weekend than we did when we launched the product” and claimed that brick-and-mortar sales were unaffected by the Steam promotion. Gabe concluded that video games are probably too expensive, in general. (There was more to the presentation, including some comments about the evils of DRM, but I’m more interested in focusing on the pricing stuff right now.)
A couple of caveats, before I write anything further. #1: Gabe is one of the smartest people in this industry, and he has much more experience than I do. I’m not questioning his intelligence or judgment in any way, but I’m also not foolish enough to believe that his keynote statements encompass the sum total of his thoughts on this matter. More importantly, I’m not foolish enough to believe that Gabe is without agenda. He clearly wants to sell games for a lower price (for one very obvious reason related to the retail ecosystem, in particular.) This keynote presentation was an opportunity for Gabe to advance his agenda, not to share the full scope of his thoughts on pricing strategy or on Valve’s unique position in the industry.
Caveat #2: In my gut, I’ve long suspected that many console video games may in fact be over-priced (at their launch and later on in the life-cycle.) But I don’t know for sure, partially because the data that is needed to prove this assertion simply does not exist in sufficient quantity yet, at least to my knowledge. More on that… now.
Price Promotions Increase Sales… Duh
So a major price discount resulted in a huge revenue spike for Left 4 Dead, long after it was initially launched. Awesome. This is completely underwhelming information, and Gabe certainly knows it. Video game publishers (and indeed, consumer product companies of all kinds) have been price skimming for a very, very long time. After an initial launch window, you sacrifice revenue per unit to increase demand and generate more revenue overall. In doing so, you take advantage of the fact that some consumers have a higher willingness to pay for your product than others do. Rather than give up the extra revenue from those first customers by starting right away with a low price, you instead drop your price in increments, over time.
When a product is discounted in this manner, you can only prove that it was “over-priced” at launch by proving that the launch price (and subsequent window of “premium pricing”) resulted in a permanent loss of customers who would have been willing to pay less, and that the (direct and indirect) profit generated by those lost customers would have exceeded the extra profit generated by customers at the higher price. In other words, the fact that Left 4 Dead generated a ton of revenue when it was discounted may be an indication that it was initially over-priced, or it may be a testament to the game’s quality and longevity (and an example of a well-executed price waterfall!)
Other Launch Price Considerations
There are plenty of other factors that might lead one to believe that a game should have a lower launch price. For example: a multiplayer-only game that will live or die by the online population it attracts might certainly be better off with a lower launch price, so that it’s more likely to reach critical mass. Another example: a publisher attempting to gain market share in a very competitive space might attempt to do so via aggressively pricing its products. Take Two famously tried this against EA’s Madden and actually seemed to be making ground, before EA pulled the rug out from under Take Two and put that experiment to a definitive end.
There are other good reasons you might launch a game with a lower price. Simply assuming that doing so will dramatically increase lifetime revenues for the game is probably not one of those good reasons. In fact, in a market with fairly standardized prices, launching with a lower-than-normal price might actually harm a game. It could theoretically send a poor quality signal to consumers, resulting in lower than expected sales. This is less of a problem when the vast majority of potential customers have a high degree of knowledge about a product, but given that a large percentage of video games are purchased as gifts by people who don’t necessarily read Kotaku or Metacritic, price/quality signaling is a valid concern for a publisher.
It’s Easy to Drop Price but Nearly Impossible to Raise It
Part of the challenge that video game publishers face is that dropping price is easy, but raising it is nearly impossible. Consumers are happy to purchase a game at a discount but rarely willing to pay more than the “fair” (aka launch) price of the game; rare phenomenon like Wii Fit being notable exceptions.
There’s certainly the risk that pricing too high in the beginning could cause a catastrophic loss of momentum for a game. But it’s generally hard to prove that this risk outweighs the risk of under-pricing. Furthermore, price cuts can quickly turn into a slippery slope. Once a significant number of titles are being launched at lower-than-currently-normal prices, it may become impossible for publishers to reverse course even in the event that dramatically greater lifetime revenues do not materialize. Consumer expectation levels will have been set. As such, many publishers are reluctant to let this particular rabbit out of the hat. Can you really blame them?
How Used Games Figure Into the Equation
Some might argue that lower prices would significantly reduce used game purchases and rentals, but it’s not immediately clear to me why that would be the case. If new games were generally selling for $40 instead of $60, who’s to say that used game prices wouldn’t simply drop as well? And if they drop, why should we believe that used game sales will diminish? Consumers who buy used games don’t think of them as “dirty” or “less worthwhile” products — they think of them as great bargains (which they are, since the vast majority of new games offer no benefit over their used counterparts.) And I’m afraid that most consumers won’t forgo a great bargain — at any margin — out of loyalty to publishers and developers unless they believe that the aforementioned bargains are driving publishers out of business. Current revenue shortfalls notwithstanding, just try to convince the average consumer that EA or Activision are at risk of going bankrupt!
Publishers who want to reduce used game sales in retail will do so via enhanced services and/or multiplayer offerings that make you want to hold onto the disc — not lower prices. Longer-term, the transition of more sales to digital marketplaces will be a factor to consider, but retail isn’t going away anytime soon, so let’s talk about what matters now, shall we?
I need to emphasize again that I’m absolutely willing to believe that video game prices may be too high. I simply reject the flawed assertion that a big bump in revenues from a long-delayed price cut equals “proof” that launch prices are too high. It isn’t proof. It may be the opposite of proof. (See my earlier comments on price skimming.)
I’m personally more interested in the ways that publishers can use advertising-supported games, virtual item-based games and/or subscription-based games to pursue price-sensitive consumers. All of these are exciting (and rapidly growing) areas that give us new ways to think about entertainment and value. I think that the (medium-term) future of the video game industry looks like a solid combination of those things, plus traditional console game sales at prices near today’s prices, plus cheaper (but smaller-scoped) games like those found on XBLA. There’s enough wiggle room in there for publishers to experiment; they don’t need to experiment by launching AAA games at $25 (which, as Gabe knows, isn’t really possible anyway given the current economics of the retail ecosystem.)