In a recent PA Report titled "How Valve “devalued” video games, and why that’s great news for developers and players", Ben Kuchera proclaims that "Valve has done something magical: The company has found a way to charge less, and earn more." I am going to attempt to demystify this magic.
The first thing to keep in mind is that you may set the price of your game, but your customer picks the price they are willing to pay. Assume you are making a console game and plan to charge $60 for it. There are some customers that are happy to pay that $60 to get your game. There are others that think "meh, I can wait". These customers wait for the eventual price drop, sale, plan to buy a trade-in, or (unfortunately) pirate it. Their value of your game is less than the $60 you set, so they will not buy it. They have picked some price in their head that they are comfortable paying (of course, it is more dynamic and random than that, but you get the idea). This is why getting rid of used game sales or eliminating piracy through DRM will not result in vastly higher game sales. A recent article arguing against getting rid of used game sales has it right, "The Price is Wrong."
This is also why Free-To-Play (F2P) works so well to boost revenue. You are giving customers the opportunity to spend as much money with you as they want. If they want to spend $50, they can do that. If they want to spend $5, they can do that. There are also some F2P games that give customers the opportunity to spend thousands of dollars. For more insight into this, check out "How much is your game worth?"
Customers use their awareness of a product, their perception of a product, their affinity towards a product, and the perceived scarcity of a product to pick the price they are willing to pay.
In order for a customer to purchase a product, they first need to be aware of it. Customers cannot buy something they don't know about. If I asked you to pay $100 for a game you have never heard of, your first reaction might be "No way, I am not paying that!" However, if you have heard enough about this awesome game and become more aware of its value proposition, you might consider it.
A customer's perception and expectations also play a big roll in determining price. Most console games come out at $60. If you come out at $100, you are breaking their perception of what something should cost and they are less likely to buy. Or if you release an iOS game for $20 when others are priced from $1 to $5, you are breaking their perception of what a game should cost. Similarly, if you offer an insane deal of 75% off the normal price, you are breaking that customers perception of price and they are more likely to buy.
Affinity plays a big part in picking the price. Basically, how much do they love you and your game. Are their friends playing it and enjoying it? The higher the affinity the more someone will usually spend.
Scarcity is another factor. Now scarcity does not really work with a digital item since you can never run out of it. But this could also be applied as a time constraint. For example, we are offering this game at this price for a limited time. Knowing that a price is temporary definitely influences a customer's purchasing decisions.
So how does Valve boost revenue while lowering prices? First, they drop the price. This will automatically cause more people to purchase it because you have hit their price. Second, they heavily promote it boosting awareness of the sale. Third, they give the customers insane deals which breaks their perception of what to expect. This incentivizes them to buy even more. Fourth, they do not really have any control over affinity, but the social networking aspect of steam (seeing what others are playing) helps boost affinity. Fifth, they post the sale for a limited time "Get it now, it won't be here tomorrow!"
All of these factors work together to significantly boost their revenue even though they are dropping the price. You can do this too in your own pricing. One danger I do see is that you can only go so far breaking a customer's perception. If you do it enough, you "reset" their perception. This is exactly what is happening when Ben Kuchera says Valve has "devalued" video games. In his article, he even mentioned people waiting for the next sale. If this happens on a wide enough scale, it could result in lost revenue (even though revenue is boosted during the sale). This means that someone might pay $60 for a game but will wait for an upcoming sale. Valve has said they are not seeing this temporal shifting of revenue. They believe this is because the sales are boosting awareness and affinity for purchases after the sale concludes. Still, this is a slippery slope and it is something to closely monitor.
So there is no great magic going on. Just good sales and marketing. Of course this is not to downplay what Steam can do. They have a digital platform where they can change prices and sales on the fly and gather data from a sample of 32 million users. Most of us would love to have access to a platform like that.
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