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Game Pricing Strategies: A Hypothesis 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 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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