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Game Pricing Strategies: A Hypothesis

Pricing expert Tom Hunter analyzes the 300 year-old pricing scheme that the majority of video games use, and makes suggestions regarding a better way, citing the subscription-based cable industry as a model of particular merit.

Pricing strategy is an integrated discipline. It requires understanding the design of the game, the market, the competition and many other factors. If all those factors are taken into account then the full value of the game can be realized. Maximizing the value games can change markets, create new market leaders, benefit game developers, unlock new artistic possibilities and help create great games. That is a lot to claim for one part of a marketing strategy, but events in other industries have shown this to be true time after time.


Some of the Elements of Pricing Strategy

Pricing strategy is an important but underappreciated part of game development; price can be a very powerful tool in marketing, and also in making more creative content possible. Technological change is making more creative pricing strategies possible, and the industry will benefit as they are adopted.

Experience in other industries and in the game industry itself shows that pricing strategy is one of the most powerful tools available to a publisher. Pricing is an equally powerful tool for developers if they think about it during the development process. If pricing strategy comes late in the development process opportunities to get the maximum benefit from good pricing strategy are lost to both publisher and developer.

Common Pricing Strategies

The most common pricing strategy is fixed price at point of sale. Most games are sold once at a retail location, or ordered through a website, the pricing strategy behind this is borrowed from book publishing, and it's hundreds of years old.

A variant on this strategy is start the price high and as the product gets older drop the price. This strategy can be extended all the way to eventually re-releasing a game as part of a bundle of games. In this way a game can be sold to both the people who are happy to pay $40 or $50 for a brand new game and later on it can be sold to people who will not pay that much but are willing to spend a few dollars on a game that is new to them. Sadly for most game developers this strategy only works well for games that are popular in the first place.

Beyond this there are many other pricing strategies, subscription pricing, rental, advertising, and even merchandising but they are targeted at certain game types, market segments or venues, and do not have the influence of fixed price at point of sale.


Thou Shall Have No Other Pricing Strategy Than Mine

In 1708 this Bible was sold exactly the same way this copy of Madden Football was sold 300 years later. The model for pricing games was created for a different industry (book publishing) more than 300 years ago and it has fallen behind the times. In 1708 this Bible had to be printed by hand driven machinery, carried in a horse drawn wagon for at least a day, loaded on a ship to make a hazardous voyage to the New England colonies and travel further by boat, wagon and on foot to reach the buyer. Middlemen had to be paid in cash at the time of delivery; there were no credit cards and no 30-day billing or subscription service.

Content was cheap to develop and very expensive to deliver. A single price, single payment model was the only thing that made sense in the world of 1705. It made keeping track of the money and the inventory simple at a time when communication and distribution were very expensive.

In 2005 we have exactly the reverse situation. Content is expensive to develop and dirt cheap to deliver. But the pricing model we use most often has not changed since 1705, or perhaps since 1600. The model is old and because it does not take into account the changes in technology and distribution it commits the cardinal sin of bad pricing, it leaves money on the table.

By its nature the static price will be more than some customers will pay, but less than others, this is a problem with the strategy itself. Good research and the best marketing efforts cannot stop this from happening, though it can minimize the impact.

Because the transaction is finished and closed we can't sell the customer a follow on product or an expansion without marketing expense and other effort on the part of the publisher, and even worse we make the customer go through a purchase process all over again. This is a bigger problem for retail locations than Internet purchase, but either way it puts the onus of action on the customer, who has many demands on his time.

The finished transaction prevents us from using the value in the content to make money in creative ways. When a game is delivered to a store, or delivered to a customer by mail for play on a machine not connected to a network it is static like a book. The developer or publisher cannot make changes in what they are selling the customer, even if the customer asks for changes and expresses a willingness to pay for them.

In a game that is on a machine connected to the Internet we can change things, we can add, alter or unlock content. But if we are locked into a model where we charge the customer once for everything there is no reward for doing this. Our product is dynamic but our pricing is static. The one time fee actually prevents us from further development of the game, and it prevents the customer from buying more of something they like.

Developing innovative pricing is worth the effort. Price is very influential in business, and most of the really great business success stories have elements of pricing strategy in them. The first companies to develop a pricing strategy that integrates their games, changing technology and other factors will see great rewards.

Great Rewards

Ford and GM Build and Change an Industry with Price

In 1908 Henry Ford rolled out the first Model T car. Pricing strategy was an important part of Ford's concept for the car. Ford wanted to produce a car that most people could afford, when the car rolled out it cost $850, a reasonable price at the time. Ford's strategy was built around reducing production costs so that he could continue to gain market share by reducing the price of the car. This strategy worked brilliantly, the price of a model T would eventually drop to $300. The model T became famous, it became the first car to sell 1,000,000 units, it was a media phenomenon and it got millions of Americans driving their own car for the first time. By the time the last Model T rolled off the assembly line over 15 million had been built and it was the most popular car of all time until surpassed by the VW Beetle in the early 1970s.

Ford used price to grow the market, making automobiles available to millions of people who could never afford them when they cost $2,000 or more. He also used price as a competitive tool driving competitors into bankruptcy as his car dominated the market.

But Ford missed a cardinal rule of pricing:

If You Have One Price, It's The Wrong Price For Everyone.

Ford would not have agreed with the bold statement above. He wanted to build cheap transportation believing that was what people wanted and needed.

Ford's Model T is a great example of how design, production costs and price are closely related. Ford was designing to reduce production costs, among other things that meant he needed to use the fastest drying paint to move production along quickly. By 1914 Model Ts “come in any color you want, so long as it's black” because black dried fastest and pushed the price down. Ford's pricing strategy of one price for everyone was now the wrong price for anyone who wanted a car that was not black, because the pricing strategy forced Ford to offer the car in black only.

General Motors wanted to surpass Ford and become the number one car company. They did not believe “one price (and car) fits all” in fact it realized that Ford's strategy made Ford Motor Company vulnerable. To compete with Ford it developed a strategy eventually articulated as “A car for every purse and purpose.1

The management team at GM broke new ground in pricing strategy. They linked price, marketing, design and other factors in new ways. The developed a product for every market segment from Chevy to Cadillac, with a price aimed directly at the income level of the target market.

GM pioneered breaking the market into segments with a product and a price for each segment. Customers flocked to buy GM cars, cars which met their needs and appealed to their sense of style and taste at prices that were aimed at them. By 1927 GM surpassed Ford as the largest auto company in the World. Not only was it larger, it was far more profitable in large part because of its understanding of pricing strategy.


That was Then, This is Now

Almost 80 years later a new battle for market dominance broke out, this time in the sports game segment of our own industry. (Now is Then) Once again price was a key part of the strategy.

Sega was competing with EA in the lucrative sports game market. In spite of a good game it had a much smaller share than the dominant Madden Football franchise, selling 361,000 copies of its ESPN 2K4 game in 20032. Fans of sports games tend to stick with the title they bought in the previous year. This presented Sega with a serious marketing problem, how to grow in a market where customers are loyal to a different product.

In 2004 Take Two Interactive became a marketing partner for Sega. They spotted an opportunity to use pricing strategy in much the same way that Ford used it in the Model T era. Take Two would use a dramatically lower price to gain market share and grow the market for sports games. A major struggle developed for control of the sports game market as Take Two tried to gain market share from one of EA's crown jewels, the Madden franchise.

The console market was at a mature stage in its cycle, the current generation had been introduced in prior years and the next generation would not come out for another year. So development costs were at the low point in its cycle as well, making it possible for Take Two to get a decent profit at a much lower price point. In this case pricing strategy was influenced the technology cycle, competitor pricing and the quest for market share. The strategy worked well, Take Two sold 2.7 million copies of its ESPN series for $20 each, a dramatic increase in sales and revenue.

This was a classic case of using pricing strategy as a competitive tool. Take Two used price to increase market share just as Ford had, and like Ford it increased the size of the market as a whole. Longer term when the next generation of consoles came out Take Two planned to increase the price with the expectation that most customers would stay with the product they were now accustomed to3.

Take Two's strategy was a serious problem for EA. The Madden Football games are responsible for roughly 10% of EA's annual revenue. EA could either match Take Two's price and see its sports game revenue decline by 60% or it could maintain its price and watch its market share erode. In fact it split the difference and dropped its price to $30. The price drop helped EA sell 10% more copies of Madden Football in 2004, but it lead to a decline in revenues for the product.

However in this case there was a third party involved, Players Inc., the licensing and marketing subsidiary of the NFL Players Association. Players Inc. receives a royalty payment for the use of the players likenesses which is partially based on the revenue coming from sales. It is illegal to use the likenesses of the players without a contract with Players Inc.

EA built a counter strategy that was centered on Players Inc. buying exclusive rights to the use of the images for a number of years. The result is EA has sole rights to use the images of the professional football players represented by Players Inc. and it has been able to preserve its price point as a result.

Take Two stole a page from Henry Ford's playbook when it set the ESPN game price at $20, and it worked for a year. EA's response eliminated the threat from Take Two by gaining control of IP needed for the games. Pricing influenced the deal between EA and Players Inc. as well, EA paid for exclusive use assuming it could get a certain price for its games.

What Is Next?

Companies that integrate innovative pricing strategy with their marketing and product design make huge impacts in their market. A good pricing strategy is often a key element in major changes across whole industries. Though each industry has its unique attributes much of this has been done before, and it's worth looking at other industries for ideas, and even for a look at the future of pricing in games.

Cable (CATV) is an industry that deserves a close look from anyone who is designing, producing or marketing games.

There are several reasons for this:

  • Cable and games are after the entertainment dollar.
  • Cable is delivered over a network, more and more often games are delivered the same way.
  • Cable is older industry with deep pockets; cable companies have had more time to develop market segmentation, technology and pricing to maximize profitability than the game industry. In many ways cable has been where games are going.

Cable TV started out as a business offering TV service to places that were out of range of broadcast television. Originally having cable was actually considered a hardship, because you had to pay for what everyone else got for free.

As the technology in the cable systems improved it became possible to offer more content on cable than the broadcast networks provided. Premium subscriptions were offered and snapped up by the public. Cable became a profitable business and spread across the country.

Over the years technological improvements allowed cable to offer more services using more complex and profitable pricing strategies. The result is growth in the industry and a widening array of services for the customer

This same combination of technology and pricing is likely to happen to the game industry, and the industry will benefit when it does. As games make more use of the content delivery methods currently used by cable the game industry will be able to make use of the pricing strategies used by the cable industry.

August 2005, the entertainment section of Comcast's web page offers different options ranging from movies to music, covering kids shows as well as the news and weather. All together it segments its market six ways, and have content specific to all 6.

Comcast offers 7 different subscription packages at price points ranging from about $8 to nearly $100 a month. They offer various additional content for an additional $7-15 a month. Like the game business it offers a wide range of entertainment, but at a much wider range of prices. They also offer one time purchase options for on demand services such as movies or popular shows. You can get premium services for Major League Baseball, NASCAR and other sports for a fixed fee that covers the length of the season. These many packages make it easier for a Comcast customer to choose and pay for exactly what they want. In turn Comcast is able to sell the maximum amount of content to its subscribers. It's a win-win situation that could not be achieved without multiple price points.

The same trip to EA's website shows 4 major segments. EA's site is far more interactive than Comcast's with samples of games available for download, free games, articles, opinion polls as well as articles and game descriptions. EA's web presence reflects it's younger, more technologically sophisticated, more male customer base. It's more sophisticated than Comcast4 in just about every way, until you hit the EA store button. Once there you get a list of games and each game has a price, and you pay your money and the game is delivered by mail to your address. Aside from the Internet ordering system it's pretty much the same select, pay, deliver system that has been used for books for the last 300-400 years.

Because cable delivers its content over a network it can constantly adjust the product it delivers. It can also adjust the price. It is possible to sell the same movies and events available through pay-per-view as part of a subscription, in fact that is what was done in the early 1980s, before the cable companies developed the more sophisticated strategies they have now. But that forced customers to pay money for things that they did not value at all, as well as for things that they did value. A customer who might give you $5 to watch a concert did not want to pay $15 month for a concert and a heavyweight championship fight, and so instead of $5 the company got nothing.

By creating pay-per-view the cable industry was able to get that $5 from tens of millions of people, many times a year.

The creation of On Demand has had even more dramatic results. In some cable systems On Demand has grew 300% year on year from March 2004 to March 20055. After 3 years of growing availability it is already worth hundreds of millions, and is forecast to be worth over $1 billion within 3 years6. Pricing is a big part of the success of On Demand. Prices range from free to $3-4 for a movie, up to $119 for MLB Extra Innings, a premier baseball service.

Combinations of new technology and innovative pricing structures have created much more interesting content as well. One of the important truths of content creation is that you can't build what other people cannot buy. Innovative pricing structures help customers buy what they want by removing price as a barrier, and this creates an environment with more artistic freedom because it's easier for new content to find its market.

Advancing technology has allowed minicams to be placed inside the race cars on the NASCAR circuit. These camera views can be called up on a TV set equipped with digital cable and the right software. People who want these views pay a one off fee that gives them a year of access to the camera views. This maximizes the value to Comcast, and it also provides the best value to NASCAR fans. If NASCAR fans had to subscribe to a package that included Lifetime and the Shopping Channel to get these camera views they would be paying for something they did not want. If Comcast could not charge for the camera views then the cameras would never get into the car.

It seems like a no-brainer, but even after the technology to allow people to buy what they wanted came into existence the pricing structures did not change. It was a big leap for CATV to move towards pay-per-view and then On Demand content and pricing, and it required changes in technology, in billing systems, management attitudes and customer behavior. But it worked, the cable companies have more revenue and we have better TV as a result.

Towards a Better Model

The increasing number of broadband connections is making new methods of distributing content more and more attractive to game publishers.

Games are already sold over the Internet, and increasingly they are delivered over the Internet. The Internet lowers distribution costs, and it also creates new distribution options. Sending the whole game at once is no longer necessary, in the case of MMORPGs it's not even possible, and they account for a big slice of game revenue that is passing over the Internet.

Attitudes are changing as well. More and more people in the game industry are disappointed with pricing as it exists today. In April the Gamasutra Question of the Week was: "Do you think that retail prices for next-generation games need to increase?” A significant minority of the people who responded called for changes in the way games are priced, either to grow the market, to combat piracy, or increase innovation in game design. In fact it's likely that more creative pricing would do all three.

Attitudes also get in the way of change, and much of the conventional wisdom is based on myths about price and pricing Technology that makes it possible. On August 8th , 2004 the New York Times ran an article titled: “You Can't Buy Love With Bargains.” It was not dating advice, it was busting a common myth about pricing, that your customers will be happier if they pay less.

Now it is true that people like to pay less, but it's not true that people will become happier with your game if they do pay less. Price and satisfaction are not linked that way. In fact there is evidence that in the case of luxury goods exactly the opposite is true. You can't make customers happy by reducing price, you can't make them unhappy by increasing price, and price affects purchasing patterns, not customer satisfaction.

A second myth is that business goals interfere with artistic freedom, and that adding business considerations to game design reduces the freedom to be innovative in design. Designers may react to an attempt to bring pricing strategy into the design process with hostility, based on this myth.

In fact in every historical case mentioned in this article creative pricing strategy has allowed and encouraged creative design and innovation. GM's sophisticated pricing strategy encouraged the development of features like electric starters, and introduced the concept of car designers when Harvey Earl designed the 1927 Cadillac La Salle7.

Innovative pricing goes hand in hand with creativity in cable TV as well. It's not an accident that cable has innovative, edgy programming. They know that they can get paid for it. Broadcast TV has a much simpler pricing strategy with one option for revenue generation (sell advertising) and this constrains them, they cannot make a profit on programs that mainstream advertisers don't want, and they cannot appeal to niche markets.

Conclusions

The case of Ford using pricing to enlarge the market, of GM using it to gain market dominance, of Take Two enlarging the market and capturing share, and of the cable industry creating new markets and increasing its size and profitability all show the power of pricing.

Ford's loss of its dominant position to GM, and Take Two's loss of access to the IP held by Players Inc. shows the complexity and the importance of flexibility and sound strategic thinking when dealing with pricing.

The lesson is clear; companies with good pricing strategy grow faster and become more successful than those that treat pricing as an afterthought.

The most flexible pricing strategies will be available to games that are designed with pricing strategies in mind. Price drives design decisions now (how many readers are involved in game projects that cannot be sold to a paying customer?) but a more sophisticated approach can influence design decisions that can make the pricing of a game more flexible or less flexible. As a simple example games may have multiple endings, or they may not. A game that has multiple endings provides a pricing strategist with opportunities that are not available if there is only one ending.

A sophisticated approach to pricing and design does not benefit the publisher alone. In the above example, if a second ending can be sold separately it allows the designer the freedom to design multiple endings.

Creative game designers who want to innovate should be demanding more creative pricing structures. Publishers who want to enlarge the market and increase profitability should also welcome more creative pricing. The steady increase in broadband connections to game consoles and PCs makes it possible to break a pricing model that is 300 years old and does a poor job of serving an industry that needs constant innovation to thrive. Its time that the pricing strategies we use reflect and support the creative energy that drives the game industry.

 

End Notes

1 http://www.gm.com/company/corp_info/history/gmhis1920.html

2 All sales numbers from NPD unless otherwise noted.

3 Announced in this press release, Dec. 6 2004: http://www.gamasutra.com/php-bin/news_index.php?story=4657

4 This is not criticism of Comcast, they are after a different market and it would be strange if its site looked like EA's.

5 http://www.ncta.com/industry_overview/CableMid-YearOverview05FINAL.pdf

6 Kagan Research Video On Demand A Strategic Economic Analysis: http://research.kagan.com/keo/databooksdetailpage.aspx?DatabookID=16

7 http://www.gm.com/company/corp_info/history/gmhis1920.html

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