Why Software Companies Should Slash Their Prices
Posted on 4th Feb 2010 at 11:09 by Antony Leather with 26 comments
Value. It’s a funny word, and never more so when applied to the IT industry. In fact it’s so tricky to place in this fast-moving online world that it’s usually only spoken of as “perceived” value and that’s about as accurate as we can get. Saying a piece of software - be it a game or operating system - is good value is even more of a convoluted statement.
How do you compare one piece of software to another? Features? Price? The space it takes up on your hard drive? How would you predict how well a product might sell and factor that into the pricing?
For most of us it comes down to cold hard cash and whether we can find something that’s as good or better, for less, or even for free. However, only a handful of companies have grasped the fact that if you lower the price of software enough, sales will skyrocket so high, they’ll make many times more profit than if they priced it twice as much, however popular the software may be.
Take for instance Windows 7. Windows operating systems have traditionally cost upwards of five times the amount you might pay for a new PC game. Even if you bought an OEM copy, chances are you paid more than £100 for it in the few years after its release. Part of the problem behind Windows XP refusing to die was that it was pretty easy to pick up an OEM copy for less than £60. If you’re a casual gamer, web surfer and social networking junkie, then why fork out any more for Vista or Windows 7 when £60 will sort you for the next five years?
Whether or not Microsoft priced Windows 7 accordingly or if they finally woke up and realised they could sell a shed load more copies by dropping to the price so that your average PC enthusiast could upgrade their entire operating system for the price of a couple of games, is a tricky one to call. I like to think it’s the latter but whatever the reason, the fact you could pre-order Windows 7 Home Premium for £49 just before Christmas meant copies sold by the bucketful.
In fact in less than a month, it accounted for four percent of the total OS market share. It took Vista seven months to do the same and it now accounts for ten percent which is already half as popular as Vista which was released all the way back in November 2006.
A lot of this is down to Window 7 being a better operating system than Vista and a worthy upgrade from trusty old XP. But I think a lot more came from the price which, at £49 for a combined 32bit and 64bit package and something you’ll probably use several hours a day for years, is a pretty good deal.
Another example is Steam. In a recent weekend half price sale of Left 4 Dead, sales increased by an astounding 3000 percent. Yep that’s three zeros. What’s more, this actually beat the launch sale figures which is just insane. Clearly the perceived value idea was spot on here, no doubt thanks to it already being a popular product but by halving the price, Valve successfully increased sales by 30 times.
When you think about it, say DiRT 2, Mass Effect 2 and Alien Versus Predator or any other three games you liked cost £29.99 each and you were standing in your local game shop or browsing Steam now. How many would you buy? I’d probably get one as splashing out nearly £100 on games is a bit much all in one go.
Now what if they were £9.99 each? I'll take all three please and you can thrown in Call of Duty: Modern Warfare 2 and Borderlands for the same price while you're at it. You’d quite easily end up buying games you wouldn’t normally, just because you can. It's not quite ever-increasing returns as there will be a point where the price is too low and the curve starts to level.
What I would say to the software companies is: This just goes to show why piracy is so popular. Plenty of people probably want to buy your products. All that hacking and cracking and bypassing updates and security can be a pain in the rear end, or so I’m told. Do a bit of research. Drop your prices and you could sell more copies than you ever dreamed.
How do you compare one piece of software to another? Features? Price? The space it takes up on your hard drive? How would you predict how well a product might sell and factor that into the pricing?
For most of us it comes down to cold hard cash and whether we can find something that’s as good or better, for less, or even for free. However, only a handful of companies have grasped the fact that if you lower the price of software enough, sales will skyrocket so high, they’ll make many times more profit than if they priced it twice as much, however popular the software may be.
Take for instance Windows 7. Windows operating systems have traditionally cost upwards of five times the amount you might pay for a new PC game. Even if you bought an OEM copy, chances are you paid more than £100 for it in the few years after its release. Part of the problem behind Windows XP refusing to die was that it was pretty easy to pick up an OEM copy for less than £60. If you’re a casual gamer, web surfer and social networking junkie, then why fork out any more for Vista or Windows 7 when £60 will sort you for the next five years?
Whether or not Microsoft priced Windows 7 accordingly or if they finally woke up and realised they could sell a shed load more copies by dropping to the price so that your average PC enthusiast could upgrade their entire operating system for the price of a couple of games, is a tricky one to call. I like to think it’s the latter but whatever the reason, the fact you could pre-order Windows 7 Home Premium for £49 just before Christmas meant copies sold by the bucketful.
Operating system market share a month ago
In fact in less than a month, it accounted for four percent of the total OS market share. It took Vista seven months to do the same and it now accounts for ten percent which is already half as popular as Vista which was released all the way back in November 2006.
A lot of this is down to Window 7 being a better operating system than Vista and a worthy upgrade from trusty old XP. But I think a lot more came from the price which, at £49 for a combined 32bit and 64bit package and something you’ll probably use several hours a day for years, is a pretty good deal.
Another example is Steam. In a recent weekend half price sale of Left 4 Dead, sales increased by an astounding 3000 percent. Yep that’s three zeros. What’s more, this actually beat the launch sale figures which is just insane. Clearly the perceived value idea was spot on here, no doubt thanks to it already being a popular product but by halving the price, Valve successfully increased sales by 30 times.
Did you splash out in the Steam sale? I know I did.
When you think about it, say DiRT 2, Mass Effect 2 and Alien Versus Predator or any other three games you liked cost £29.99 each and you were standing in your local game shop or browsing Steam now. How many would you buy? I’d probably get one as splashing out nearly £100 on games is a bit much all in one go.
Now what if they were £9.99 each? I'll take all three please and you can thrown in Call of Duty: Modern Warfare 2 and Borderlands for the same price while you're at it. You’d quite easily end up buying games you wouldn’t normally, just because you can. It's not quite ever-increasing returns as there will be a point where the price is too low and the curve starts to level.
What I would say to the software companies is: This just goes to show why piracy is so popular. Plenty of people probably want to buy your products. All that hacking and cracking and bypassing updates and security can be a pain in the rear end, or so I’m told. Do a bit of research. Drop your prices and you could sell more copies than you ever dreamed.
26 Comments
Discuss in the forums ReplyThere's also the argue of "Cost" vs "Worth" - as in "how much does that cost?" compared to "how much is that worth". For example, a 32GB iPhone 3GS SIM free costs £800, but comparing features like for like with other current gen handsets, it's worth only £400 to £500.
i still occasionally buy games at full price but very rarely.
i'm sure there was an article on bit-tech about percieved value of games, was very interesting...
I agree that you can't just associate correlation with causation, but I don't really see what that has to do with the topic. I mean, it is safe to assume that lowering the price increases the sales, since that is exactly what happens everytime there is a Steam sale (or even just weekend deals). Now, unless Valve time these sales with the tide or planetary organisation, I can't really see what makes the idea that low cost equals high sales so dangerous.
I wouldn't have bought a single £20 game on Steam over Christmas, but I ended up spending about £30 instead. Sure, this doesn't all go to a single developer, but that is still £30 in the industry that normally wouldn't have been there. I bought at least one game every day of the Christmas deal (except the second to last and last). It's a joke. £3 for a game I don't even know much about is hardly a massive loss if it turns out bad.
I wonder how well MW2 would have sold if it was going for a tenner? Or even £20? I would have a copy, that's for sure.
That's more my thinking, it's about people buying things when they wouldn't normally, you're essentially reaching a new audience by doing nothing but lowering the price. If MW2 was £20 instead of £40 I would have bought it too, as would many other people I know who aren't keen on the MP aspect of COD but liked the single player mode in MW and wanted to give MW2 a ago. Those Christmas deals were very unhealthy for the wallet!
For example:
Game A and Game B are equally desirable titles.
Game A launches at £50 and after a month has sold 20 copies. Game B launches at £10 and after a month has sold 80 copies. Now Game A is discounted to £10 and over the next month sells a further 80 copies as a result. Meanwhile Game B sells 20 copies, still at £10 a copy.
After two months both have sold 100 copies, but Game A has pulled in £1,800 and Game B only £1000. Which was the more successful strategy? Even if Game B offered the same 80% discount (i.e. sold for £2) and got the same sales increase (400%) it's second months sales (£640) would still put it behind Game A overall (by £160).
In reality, the disparity would be greater, because Game A will have planted the idea in everyone's head that it's "worth" £50 in that first month, whereas Game B is "worth" only £10. A reduction from £50 to £10 is (obviously) bigger than from £10 to £2. More importantly, the Game A reduction will take it from "unaffordable" to "affordable" for a number of would-be buyers, whereas the Game B discount merely takes it from "affordable" to "cheap."
Sales may provide (massive) spikes in sales, but they're just that; spikes. You've got to look at lifetime sales figures and profit before deciding whether setting a lower selling price from the off is going to pay off in the long run.
While I appreciate what you're saying your example only holds up when you put a massive disparity in price between the 2 titles. If you take the same example but have Game A at £50 for a month then £10 for a month, and Game B at £25 for a month then £10 for a month, then Game B ends up making more money. Even if Game B goes as low as £20 for the first month it'd make as much money as Game A given the sales figures in your example.
And more than I planned.
And one "just-to-try-it". (Mirrors Edge)
Even though company strategists don't like it, pricing does influence the attractivity.
Who'd buy a Dacia if it weren't for the price?
And Win7 will be the first OS i've bought since stopping buying pre-builds.
Shame you need professional just for the network settings though ;)
On the other hand, I just tried to find Total Immersion Racing - , the £3 I paid was nice, down from Xplosiv's £4.99 but nobody's getting a cut in the industry as I bought through eBay- that's their fault for deleting it. That's totally different from the £3 I paid for the first AvP through Steam where they are getting a few pence and providing continuing dev support on an 11 year old game - win-win all round in the case of the latter.
another example: if wow was $2 a month i would still be a subscriber, but it is too expensive @ $10 a month. this keeps a lot of the casual gamers off the servers, as only the hc player are willing to pay that much month to month.
@hugoB
good example, but the "profit maximization" equation has to be considered across the whole company, not just per game. its like a band that gives away a single to increase sales of the album. if you get a reputation for really good games priced cheaper than everyone else, you are going to wind up selling way more copies than everyone else over all, and you will have a better brand image. if you can reinvest that money into making more games then you can make more money producing 10 "high value" games instead of just 2 "game of the year" games that sell for 5 times as much per copy. (of course this also falls back on my feeling that the games and entertainment industry relies to much on pretty pictures and not enough on content. . . make better games and movies, not prettier ones)
Though I also believe that 40-50 pounds is far too much to pay. I haven't bought any games for a long time simply because I cannot afford to do so. The one exception to the rule is Dragon Age: Origins. This is a game that I wished to play, but could not due to it's price. Then I found it on Amazon for £16 and snapped it up.
I think that £30 for a game at release is a fair price to re-coup expenses while not pricing it out of the range of most people. Then dropping the price to £20 after 4 months so that the few of us that cannot afford the £30 still have the chance to experience and enjoy the game.
A) Because it's way too expensive to get a new version (unless you're a student) and it still works just as well.
C) its good to be a student
If you then plotted costs versus profit, you'd end up with a skewed bell shaped curve@ too low a price and you don't make enough money per copy, too high a price and you don't sell enough. and the highest point would be the cost 'sweet spot'
Don't really know where I'm going with this but I've always assumed that there are whole departments in companies that just sit down and try to estimate this graph...
Another interesting point you didn't quite mention but that proxess hinted at: piracy. I think what a lot of people don't realise is that areas where piracy is endemic like. Asia or Russia, the people are just too poor to afford games at full retail price. I come for Malaysia where a £40 games can be 10% of someone's monthly salary (probably a lower middle class income). In terms of McDonalds, it would cost 30 value meals or 230 ice cream sundeas . If games were £10, it would literally open up new markets of 'pirate gamers' in these areas.
Firstly, we all have a price we will pay for anything.
Secondly, the convenience.
If a new game releases @ £30 on PC it will sell, but likely to very few people.
@ £25 the sales increase.
@ £20 the price enters the appealing price range.
@ £15 the price is very appealing
@ £10 we're hitting bargain prices
@ £5 the price is almost too good to say no
@ £2 you will find it hard to say no even to games you may not like. At this price it's such a bargain that even the plain curious say yes.
I can't count how many times I've walked into Game, looked at the chart section and found nothing worth buying, then very briefly scanned over the budget section not even movng any games cases forward to see what lurks behind the front rows and walked out game-less. I also fnd the whole look and feel of the bargain sections (and certainly the second hand section) as extremely tacky and trampy. But with Steam I just feel like a bargain hunter and very pleased when I discover a bargain. With Steam you don't get the Mastertronic or Platinum labels as well, maybe that helps with the psychology.
At £2-a-game I don't give a monkeys if the game isn't perfect, I don't care if it doesn't hold my attention for longer than 1 hour, I appreciate that even @ £2 the creators get something back for their work - and this is especially true for indie titles. in fact acouple of quid to experience a game you wouldn't normally think of playing is a total bargain.
The best bargains to be had are usually publisher packs. These can contain a range of games from old to new, cheap to expensive but usually you will get a couple of gems that are worth the pack price alone and then all the extra games are added bonuses that sit in your games list for a rainy day.
... this post was created on my iPhone in bed ... I can't wait for my friggin iPad (or other tablet) because long posts are a chore!!
+2 on that; I've little interest in being 24/7 cannon fodder for hardcore online players, so the SP is the bit I'm interested in and I'm sorry but I'm not paying £39.99 for 5 hours of gameplay. On a related note, how come neither MW nor MW2 ever enter the Steam sales?
D) Much like 7, for something you use as much as Office it's really not that expensive either. Surely £70 every decade isn't that damaging?
97? You've beaten me, my last new version was 2000, but then took the Home and Student deal on Office 2007 (and let's face is MS doesn't care how you divvy up the licences, £20 each in a student house if you wanted a legit original, and you fight over the CD at the end of your course) just because the version before is the one businesses tend to upgrade to, and I want to know the differences.
To be honest Office help is now online in lieu of a manual so you don't even need to buy a book anymore, but it's just good to have your own original, and in a multi-user pack as well if you have more than one machine. It's perceived value that you just can't get away from. OpenOffice on my CV means nothing as well as costing nothing. £60 is a small price to pay to keep your software skills up.
Whether AvP '10 is good or bad, it's the second cheapest brand new game I will have bought in at least three years, at £16, if it's not as good as the £3 Steamed-up original then I won't feel short-changed.
...my company is on office 2003, and have just barely upgraded form office 2000.
I think the usual reason to upgrade is because the old version isnn't bugfixed any more, not that the new one is soooo cool.
Changing the look and feel on the latest Office hasn't made them any friends either. Noone likes to teach old secretarys new tricks :D*
Xir
*with no offense to any secretaries
However the way prices are handled at the moment (£30-40 at launch, dropping steadily as time passes) is likely the best option from an industry standpoint. The "value" a game represents is always going to differ from person to person, so having prices drift lower over time is a good way to maximise profits from the "must-have-now" crowd while still being able to pull in sales from the bargain hunters. Offering "premium" editions, where appropriate, is another sensible move.
Where the industry is going wrong is with copy protection - while the more enlightened companies do remove it after a few months (the most enlightened, of course, don't use it at all) it has the effect of sticking two fingers at their most loyal customer base, who pay the highest price and receive the worst gaming experience as a result.
Works just as well as what ? 2007 ? If you are writing 'Hello World' saving it to a .doc and emailing it to yourself its just as good. For anything else, no.In fact the last time I tried to install it was on someones PC and they had Vista and it threw up CTL3D32.DLL errors. But then I suppose you are going to say you aren't using Vista or later and are using Windows 98 because it 'Works just as well' ?
What is "best" in such cases needs to be decided by individuals using their own criteria. If the "latest and greatest" has something that justifies the £60-80 then go ahead. However there can be downsides (including higher resource usage, new bugs and - an Office speciality - new incompatible file formats) so just splashing out can cause problems, especially for businesses.
I ask why have they raised their prices for us? Do you not want my money? After the currency conversion these now end up 50% more than in the shop and I no longer buy retail games.