Game Prices Are Falling: Did We Really Think This Through Edition

The argument for lowering game prices is an easy one. When I saw Ubi lower prices at the end of the year, I was about to write a post about the erosion of price and how it was about time we figured it out. We are the most expensive form of media not only at Wal Mart, our number one retailer, but in the entire market. The argument is supported by the history of other media. Films on tape first came out at USD99 and the purchase market really wasn't there. Sales didn't take off until the price was cut by two thirds. DVD's on the other hand were introduced at an average price of USD 20 and the market took off immediately. We don't even have to go outside our market to find precedent.

I remember when we were releasing Tomb Raider 2. The sales of Tomb Raider doubled when we cut the price from USD 49 to USD 39, trebled at the cut to USD 29 and then quadrupled at the cut to USD 19. As an econ major, I saw the market was clearing dictating USD 19 as the proper price for a game. I suggested Tomb 2 be cut into four games of four levels each and sold for USD 19. The CEO of the group promptly lit me on fire and tossed me out the third story window. I thought he was wrong. I was sure he was wrong this year when I saw prices eroding during the fourth quarter. Then I started to look beyond what I thought was common sense and the stuff they taught me at UCLA. I found people who study pricing philosophy. They believe the lower prices did not drive the sales of the games, it was actually the higher prices. In fact, the same theory explains why Gamestop can be so successful undercutting new games by only USD 5.

One of the best explanations I've seen is in Dan Ariely's book, Predictably Irrational. I know books are foreign objects in the hands of most gamers, but you can get the relevant information in the first chapter of this one. Ariely explains:

We are always looking at things around us in relation to others. . . . we not only tend to compare things with one another but also tend to focus on comparing things that are easily comparable - and avoid comparing things that cannot be compared easily.

The funny thing is, when we do these comparisons, we tend to pick the middle price. He talks about a number of experiments he conducted and gives a few real world examples. One quick reference is to a restaurant consultant. The consultant explained in a New York Times article that he could raise a restaurants revenue by adding high priced dishes. The people would not necessarily order the new higher priced dishes, but by putting them on the menu, he increased the sales of the second most expensive. In comparison, they were less expensive. Another example involved a breadmaker at Williams Sonoma. When the company introduced the product, bread makers were new to the market and no one had anything to compare it to. There was only one model and it cost USD 275. It failed to sell. The company then introduced a similar "upgraded" breadmaker for USD 475 and it didn't sell either, but sales of the USD 275 breadmaker took off. It seemed like a bargain. Ariely calls this the decoy effect.

We see the same thing all across all markets (he even proves it out in romance). It shows up in price comparison's posted in stores, generic medications and even within a store when the discount is advertised next to the price. It also shows up in games. Fortunately for us, our consumers compare games to games, not broader media. If they did compare them to broader media, they would be perceived as a rip off. When they do compare them within the category, the behaviors play out as Ariely would predict.

A normal console game is priced at USD 60. However, in the era of Xbox Live, used games, Gamefly and free online games they become the decoy. A USD 55 game would not be so appealing, unless there was a USD 60 game for comparison. The same can be said of a gamefly subscription or USD 10 game on Live. We unknowingly see the same effect with special editions. When a special edition comes out for Fallout 3 or GTA 4, it actually serves as a decoy, increasing sales of the USD 60 price. These small changes can drive incremental sales, but look what happens when the price is lowered to USD 40, as Ubi did last Christmas. The floodgates open. Consumers see this as a tremendous bargain. They are able to compare the brand new, high quality game for two thirds the price of all the others. A clear bargain. This re frames the argument in favor of 2k's football prior to the NFL exclusive with EA. 2k's football did not sell well because it was priced at USD 20. It sold well because Madden was priced at USD 50. But what happens if all prices are reduced?

If all prices are reduced, we will lose our decoy. For a while, the perception of reduced value will cause a significant increase in sales. But then, like in the DVD market which plateaued and is now on the decline, consumers will become conditioned to the lower price and value will only be perceived in still lower prices. In the DVD market prices have fallen as low as USD .99. In fact, Wal-Mart's best selling DVD's are priced at USD 5.

I am not saying we should raise the price of games - necessarily - but perhaps it is too early to lower across the board. Rather than lower the launch price, what would happen if we shortened the period we hold full price? Games could continue to be released at USD 60 and the hardcore will continue to buy. But if prices were reduced within a month or so, and then again, and then again, as a matter of course, we would be able to bring in a new audience. Each successive price drop would serve as a decoy to the next and new releases would be decoys for all. The market would continue to see increased value in USD 50 and USD 40 games, rather than take them for granted.

Maybe books aren't so bad after all, and maybe Charles was right - well not with the lighting on fire part.