Indie developer Jason Rohrer recently published an editorial on Gamasutra arguing that game prices should rise, not fall, after release dates. It’s an interesting concept, but Rohrer’s reasoning for the shift is flat-out wrong, a misinterpretation of the phenomena that he claims bolster his argument.
The current model has games released for their full MSRP, typically $60 for a big-budget game. After the first month’s sales, where the bulk of revenue is made, price drops and sales will periodically occur to clear out inventory, gain additional revenue, and reach audiences who aren’t willing to pay $60 but might fork over $40, $30, or $20.
Rohrer feels that there are several flaws with this model:
- Gamers are incentivized to wait on purchases, knowing that price drops will eventually come. A game’s launch week is thus relatively weaker.
- The expectation of price drops and sales effectively “decimat[es]” a game’s community, since many would-be buyers wait; the player community is weaker as a result.
- Early adopters who pay full-price are “kick[ed] in the teeth” by sales and price drops; a game’s most avid fans are cheated by having to pay more
- Sales, in his opinion, reduce revenue in the long run.
On its face, nothing is inherently false here. Many consumers (myself included) may hold off purchases until price drops or sales. Those who argue against a state’s sales tax holidays (a perennial debate in Massachusetts) use this same reasoning: the holidays don’t increase spending; they merely concentrate it into a specific timeframe. It’s also possible that consumers may regret spending $60 on launch day if they see price drops shortly thereafter.
In this system’s stead, Rohrer proposes periodic, publicized price increases that would reward early adopters and generate sales spikes before the increases. He uses Minecraft and Garry’s Mod as supporting examples; Minecraft, developed by Mojang AB, has achieved massive success despite gradual price increases since its alpha release, and Garry’s Mod’s daily purchase volume has trended upward since it first launched in 2006.
Unfortunately, Rohrer’s suggestion, while curious (like the concept of Giffen goods), runs counter to economic reasoning, and his examples are unique cases that can’t be used as models.
Garry’s Mod is simply a game that has remained at a constant price of $10 and has been discounted during Steam sales. The game’s growing long-tail sales are due to its popularity and accompanying network externalities. It doesn’t support Rohrer’s argument at all.
Rohrer doesn’t recognize why Minecraft, in particular, has succeeded. The game was a phenomenon, and its widespread popularity led to huge network externalities. As its community grew, its value increased; the game was worth more. Its sudden (and enduring) popularity was a change in consumer preferences. In short: its demand curve shifted.
With that shift, its equilibrium price – the sweet spot where Mojang could maximize revenue – increased, so Mojang dutifully increased Minecraft’s price to take advantage of it. This isn’t a case for revolutionizing the videogame pricing model. It’s Economics 101.
Another concern Rohrer raises is that price drops and sales are a “kick in the teeth” for early adopters. To quote his editorial:
Even in economic terms, the extra utility of playing the game early, at release, is not big enough to offset the extra cost for most people
The amusing aspect of this assertion is that Rohrer’s own experience as a developer proves him wrong, and blatantly so. Consumers are reasonably well informed, and they know that there will be price drops in the coming months. The fact that they still choose to purchase a game at full price shows that, in economic terms, the utility of playing the game early outweighs the savings they would make by waiting.
Price drops occur for two reasons:
- For brick-and-mortar retailers, it’s important to clear out inventory
- They enable publishers/developers to net additional revenue from consumers whose willingness to pay is below the $60 MSRP.
While Reason #1 doesn’t apply to an online service like Steam, Reason #2 is common sense. A developer can either choose to just get launch day revenue… (see picture below)
…Or it can choose to gain additional revenue, grow and rejuvenate the player community, and reach consumers who can’t or won’t pay $60 by instituting price drops:
Rohrer’s last assertion, that Steam-like sales reduce overall revenue, has yet to be proven or disproven. That’s a question for econometric analysis, and those analyses either have yet to be done, cannot yet be done, or simply aren’t available to the public. Certainly there is variation in the industry; major publishers like Activision and EA use price drops with predictable regularity, whereas Nintendo is well known for leaving games at their MSRP for years. Each has their advantages, but nowhere is Rohrer’s assertion supported.
Rohrer is going to implement his proposed pricing model with his upcoming release The Castle Doctrine. Hopefully the game will be a financial success, but even that case, given the unusual PR Rohrer has generated with his editorial, cannot necessarily be taken as conclusive evidence one way or the other.
On an endnote: Rock, Paper, Shotgun has its own editorial questioning Rohrer’s idea. It addresses different points, particularly the culture around Steam sales, and it’s worth a read.