Sales, price segmentation and outrage

We could read on MMO Fallout that those who bought Shadow of the Tomb Raider for full price are outraged over the fact that the game now costs just half as much, only a month later. Please note that it’s not an MMO where being there at launch is special and provide advantages over latecomers. Those who buy it now enjoy the very same product for half price.

While the PR is maybe bad and such visible customer outrage could be avoided, the goal of sales were always price segmentation. This simply means “sell the same stuff high to the rich/enthusiast and low for the poor/barely-interested”. This sounds like a rip-off. You get a worse price for the same product just because the seller assumes that you can afford it.

You probably consider this practice evil and want to ban it. The EU banned several instances of such practices. Drug re-import is a hot topic in the USA. Nobody likes price segmentation.

I do, because it increases the GDP, therefore the well-being of everyone. To understand why, you must understand that all products have fixed and variable costs. In short, the fixed cost is the cost of creating the first product, the variable is the cost of creating copies. For something like a natural resource or a service, most of the costs are variable. For example a waitress has hiring costs and training costs, but this is in the magnitude of one month salary. So if you have a waitress for a year, her costs are 90% variable. But the more advanced the product is, the costs of development are getting higher. For digital entertainment and software, most of the costs are fixed.

If the product sells in N copies, then the price must be V+F/N to break even. If you can’t sell for this, you go bankrupt. Price segmentation is realizing that this is only true on average. The individual customer can pay less or more. Imagine that you can only sell a game for full price because such segmentation methods are banned. Let’s say the development cost was $10M and operating the servers and paying for the digital download provider is $5/copy.

If you can sell 100K copies, than you must price them $105. Except this sentence makes no sense. The amount you can sell of a flexible product like a video game greatly depends on the price. Let’s say there are only 50K people who are ready to pay this price. Bang, you are bankrupt.

However if price segmentation is not banned, you might not go bankrupt. You sell 50K copies for $105, so you recouped $5M production costs. Then you drop the price to $55 and you can sell another 80K copies. That’s another $4M. Finally you drop it to $25 and sell 100K more copies. Now you have $2M more, so you paid for your fixed costs and made $1M profit. If you would have opened with $25 price and sell all 230K copies for that, you’d only make $4.6M, you can start writing the “with heavy heart we must announce that…” letter to your customers, including the ones who would gladly pay $105.

Imagine price segmentation as pushing a cart together. The strong pushes more than the weak, but they both push and the cart is moving faster (or at all) this way compared to the strong pushing the cart alone. By buying for full price, you support the developer more than the guy who buys on sale, but he still supports it.

This isn’t leeching. The poor still contributes to the common good by carrying a portion of the fixed costs. That portion does not need to be paid by the rich. If we’d ban this practice, the prices would go up. For example the mentioned game must be sold for $205 if no one can buy it for less than $105. Except 50K copies wouldn’t sell for $205, so the price needs to be further elevated.

I agree that this case wasn’t the nicest implementation. The company should provide at least a marginal benefit for those who support them more and make his practices somewhat transparent. For example they could add extra costumes or whatnot to the original version of the game to reward those who don’t wait for the sale. But the main goal is solid and good.

Author: Gevlon

My blog: https://greedygoblinblog.wordpress.com/

20 thoughts on “Sales, price segmentation and outrage”

  1. The issue with price discrimination is that it erodes Consumer Surplus, which is the only thing you should be worrying about.

    As an individual consumer, GDP is irrelevant to me. In fact, I’d argue that GDP is irrelevant anyway, because the extra money I didn’t have to spend on Game X will be spent somewhere else. Whether the the makers of Game X go out of business or not isn’t my concern, and out of my control regardless. We could give them all the money they need to profit, but poor management, expensive advertisement campaigns, etc, could lead them to squandering the money. It’s literally not your problem – if the invisible hand of the market can’t fix it, that’s the company’s fault, not yours.

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  2. This outcry is not about price segmentation. It is retail psychology.
    Everyone expects games to get discounted some time after launch, but they don’t expect it to happen early and prior to the first seasonal discount window. The main outcry is driven by an irrational dissidence where the pricing strategy did not meet the buyers’ expectations. Week 1 buyers chose to pay full price for immediate access instead of waiting an unspecified period for a discount. They feel as though they were tricked into paying more because that waiting period was a lot shorter than they expected.
    As a one-off measure, this is a simple revenue maximisation technique, but it has harmful implications for future releases by introducing deflationary expectations. In future, full price-week 1 buyers may decide that they can wait a month for a discounted purchase, creating a self-fulfilling deflationary prophecy. By driving a culture of early discounting, revenues on future releases could be harmed.

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  3. @Azuriel: there is one thing that “you” care. The other is if anyone should care if you are upset or just tell you to stop crying. If something is good for GDP, the proper answer to one’s outrage is “QQ moar” while if it’s bad, it’s “justified outrage”

    @retsep: Fixed and Variable

    @Dobablo: these expectations can be managed by transparency. By clearly saying that the game will go to a 30% sale on Nov 1.

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  4. I don’t think the price segmentation is the issue, but the time span.
    Most people wouldn’t care if the game would be reduced in the Christmas sale, but people will be mad just a month after release without an early adopter advantage.
    Especially for a big game with long development time where waiting an additional month is little but means 50% off.

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  5. The usual way of grabbing more of the consumer surplus is a premium edition with some vanity items (or an additional companion/DLC where appropriate for the game). The article hints that the real reason for the sale may be poor overall sales for the game, so better capture those sales now before the holiday season arrives with a lot of new releases and sales of other games.

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  6. The argument seems to be that this is not leeching because if the poorer portion didn’t provide 50% of the product’s cost, there would be no product.

    I’m actually fine with there being no product in that case. If a game studio’s business model straight up requires price segmentation to even remotely support itself, something is definitely wrong. The fact that the studio is open to situations as described is proof that someting is wrong.

    Managing expectations should be the baseline behaviour, obviously. However, in this specific case, it should be evident that the product in question basically sucked to the point of it requiring an accelerated price cut. As a result, people that paid the full price up-front, expecting past Tomb Raider excellence, are basically swindled out of their money.

    Nothing anyone can be sued for, naturally. Caveat emptor. However, and that’s the thing, the whole point of having any price segmentation at all is to cash in on those “emptors” that don’t “caveat”.

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  7. You are leaving out the human factor.

    The early buyers obviously value the product at the price they paid, or they wouldn’t have bought it in the first place.

    Their outrage doesn’t come from economic standpoint, it comes from the social world.

    They bought an expensive product and can brag to everybody how rich they are by casually telling friends how good the game is. This is an important part of every sale, from cars to bread.
    By devaluing the game they introduce several effects. First, others can buy it now. It’s exactly the same product, so all the bragging goes to shit.
    What’s even worse, now the “poors” can laugh at the “idiots” who bought the game at twice the price. The bragging flow reverses, everybody now says how smart they are for catching such a good deal.
    People paid for their status as early buyers. The distributor took that status away and, being a very large company with massive marketing team, they know exactly what they’ve done.

    Fear of a loss is the strongest motivator in sales. This trick will cost them very, very dearly in the long term as everybody will fear becoming scam victim in their next release.

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  8. @Maxim: you are assuming that they released the game for X and now they are forced to sell for X/2. I assume they released the game for X/2 but they ripped the fanbois off for X.

    @Stawek: true, this is why they should have managed it better. But the main action is still solid.

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  9. Price discrimination is bad for exact same reason that you promote it for: it allows bad, otherwise unsustainable products to survive on the market.

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  10. @Gevlon: Quite an interesting assumption to make (that they released at X/2 and not X), especially since the release price is standard AAA pricing, same pricing as its predecessors, the reviews are mixed at best, and steam chart show lower peaks than predecessors.

    All evidence I can find in a quick search smells of desperation discount. Esp. considering the bad marketing this move brings.

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  11. there is one thing that “you” care. The other is if anyone should care if you are upset or just tell you to stop crying. If something is good for GDP, the proper answer to one’s outrage is “QQ moar” while if it’s bad, it’s “justified outrage”

    I do care if there is an erosion of Consumer Surplus, or if there are consumers who turn into corporate apologists, because that sort of thing will affect me down the road. Companies that succeed in price discrimination become more powerful, and will be able to use that leverage to squeeze consumers more. In the process, your own utility decreases. It’s a net negative, even if you like the company!

    You have continued to assert that price discrimination somehow positively impacts GDP, but have not explained how. If I were willing to spend $60 on Game X but only paid $30, I can walk over and purchase Game Y for $30 too. How is that any different (or worse!), GDP-wise, than paying $60 for one game? If you are arguing that Game X simply wouldn’t be made otherwise, then fine, but why should we subsidize a clearly unprofitable enterprise in the first place? I still have the original $60 and I still want at least $60 worth of games. There will be plenty of other companies willing to supply me products.

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  12. @Azuriel: ??? I wrote down how the game can be profitable with it and not without it. Ergo, price discrimination allows barely profitable things to exist. Things being created is the GDP.

    It is profitable as long as people buy it any way. The fact that it wouldn’t be profitable without segmentation is irrelevant.

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  13. @Gevlon
    ..?
    It seems we both agree that they tried to sell an x/2 value product for 2x price. So what is your objection, exactly?
    My position is that this move reduced Tomb Raider’s ability as a brand to price-segragate going forward, and will ultimately hurt the franchise more than whatever short-term benefit they had by ripping off their most devoted fans in the moment.

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  14. @Azuriel
    All good and well in your arguments. Sure, consumer should not care if GDP is higher or lower. He should care however that certain games are not created. It’s really easy to scale free-to-play so that you can play milk almost infinite money from a “whale” and those people support the whole game just so that “freeloaders” can play the game. Single-player story-heavy RPG cannot simply create a “better” version of a game and sell it for more. If they could make it better, they would have made it better at the beginning. If they also cannot use discounts to bring in as many people as possible, they will go out of business. You will then say:

    “…if the invisible hand of the market can’t fix it, that’s the company’s fault, not yours.”

    Yeah, but if I don’t get my RPG games, that is my problem, and if you say no to discounts, I would have to pay a few times more for those games. That makes them even more uncompetitive (why would I pay 200$ for a 50-hour game, when right next to it is a free-to-play that can be played for months). Invisible hand of the market will destroy any semblance of diverse (I dislike the word, but I have to use it) gaming offering.

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