The Irrationality of Pricing
Posted by Ben Zeigler on August 5, 2009
Digital distribution has brought many massive improvements to the world of gaming. It’s generally made things easier to buy and opened up exciting new business opportunities. However, it has brought with it one giant item of confusion: Pricing. Up until about 4 or 5 years ago pricing of games was generally pretty simple and uniform ($50 +- $10 depending on platform, or $20 if your game was explicitly budget-priced). It was this way because of the combination of distribution cost and inertia. In contrast, pricing and perceived value in today’s world is all over the place. You get weirdness like Trine PC being $10 more than Trine for PS3, despite the fact that the PC version doesn’t require a royalty payment to Sony. Peggle is $5 on the iPhone, $10 on Steam, and $20 on Popcap’s own site, despite being an identical game and all being digital. And I haven’t even gotten to DLC yet, where the pricing is so random and the users so confused that it leads to random accusations of developer cheating when blogs misunderstand the small size of executable code. The platform owners, the publishers, the developers, the press, and the users all claim they know the RIGHT way to price and value gaming content in today’s world, but they’re all wrong. There are at least 4 completely distinct ways of pricing and valuing games, and they’re mostly incompatible.
One value model is based on cost of production. The theory here is that the more expensive something is to produce, the more you should charge for it. It makes intuitive sense to developers and publishers, but the gaming public has no concept of how expensive games are to produce and will be upset when their guesses about relative development costs are wrong. The user-preferred equivalent to tieing it to development cost is tieing it to hours of gameplay. Many players (especially the younger set with more time then money) value playing time strongly, which is where that nebulous and always incorrect “replay value” number comes from in reviews. The negative effect of this value model is that it tends to lead to games that are artificially lengthened and have shitty superflous multiplayer modes. A third model is to price and value games relative to similar and successful already released games. This works well for clones within existing genres and on established platforms (ie, this is why everythins is $50), but is no help for new genres or platforms. This means that it’s even harder to get new genres and platforms approved for publishing. The last model is to make a pricing decision purely based on achieving maximum total profit, which is possible because the physical cost is very low. Assuming a neglible distribution cost (ie, old PC games on Steam) selling 100,000 copies of a game at $5 is better than selling 40,000 copies at $10, but not as good as selling 30,000 copies at $20. The problem with this approach is that the empirical data for this is really lacking (Valve desperately needs to release comprehensive sales numbers for steam games), pricing for the maximal short term profit can lead to customers feeling ripped off and lower your profits on future releases.
So what happens when these pricing models interact? Developers and platform holders always trot out “increased development costs” to explain the rise in game prices, but this model makes the least sense out of the 4. Frankly, development costs have no useful relationship to final game quality, given the long history of high-cost flops in our industry. Why should the end user care at all about how hard the game was to make? Every time someone in the industry tries to use production costs to justify price it just irritates users. Never say this. Beyond that one, the other 3 models are all fairly reasonable. Given theoretical economics the pure-profit model is always the best, but that ignores the significant psychological drawbacks to it. Ask Hellgate London if player anger over perceived pricing disparity can be a problem for a game. It’s a great model for pricing re-releases of old games, though. Basically, you want to balance economic optimization against player expectations. Players go in with expectations of pricing relative to other games (and some relative to other time-taking entertainment activities), and if you don’t meet those expectations players are going to be unhappy. If the price is too low some people won’t buy it out of suspicion, and if it’s too high players who can easily afford it won’t because they don’t want to feel ripped off. The worst part is, given the huge variation on value in today’s market no matter WHAT price you pick it will be compared to an existing product and will not meet the expectations of some percentage of players. Given today’s market, I think the best solution is probably to be as transparent as possible about your pricing, in an attempt to manage player expectations. Given that there are no unified standards for valuing games, you want to ease them into whatever pricing decision you do make.
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