It’s definitely an interesting time in the games industry. There are numerous acquisitions in the market, certain products are still difficult to find, and dozens of games are just over the proverbial horizon. That said, today I’m here to talk about the concept of pricing. As you may be aware, the standard “MSRP” of a modern AAA (triple A) title is moving to $70 (including Microsoft games). This is approximately a 17% increase over the $60 price point – a price position that hasn’t moved since it settled in during the mid 2000s. This activity comes at a time when it seems traditional price activity has been upended by inflation and reversal of norms. Sony, for example, recently announced they are raising the price of the PlayStation 5 in multiple regions. Meta, the makers of the Meta Quest 2 (formerly Oculus Quest 2), recently announced the VR headset would be going up in price across (globally). What gives? What’s going on with pricing and have AAA games truly justified the launch day price of $70?
Take a quick look at a social media thread, or check out some recent games publications, and you’ll see a healthy debate about the cost of AAA games. The most common criticism I see from socially connect “gamers” is that modern video game makers have done nothing to justify a new price tag a $70. I’m here to tell you today that they didn’t do anything to justify a price tag of $60 either. In fact, they don’t justify a price tag to you, me, or anyone else. Why? Because the practice of price application doesn’t work that way. For the record, it never did, despite comments from game makers that the scale & complexity is why they are raising prices.
In order to understand how a price is determined, we have to look at the factors that go into the “shelf price” that you ultimately see when a game (or anything) is released (e.g. F2P, $40, $70, etc.). It’s a bit more complicated than this, but for today let’s just concentrate on the basics (in no particular order):
- Cost to produce the product / game
- Business goals (e.g. loss leader, margin leader)
- Target market size and their ability to “absorb” the price tag (pay attention to this one)
- Competitor pricing
- Perception of price tag, perceived value (e.g. people believe higher cost means “quality”)
- Ongoing considerations (e.g. future marketing plans and promotions)
- Economic factors (e.g. inflation, interest rates)
As you can see in the above, there really isn’t a consideration of “justifying” the price to consumers. The company doesn’t go out and ask permission to charge a certain price. Instead, setting a price is a complex combination of factors, the least of which is trying to justify it to buyer. Instead, settling on a price tag is more a strategic business decision (with pros and cons) than it is a justification of value. (Note: Advertising isn’t justifying the price, it’s just marketing.) The bottom line is that after a price is set, acceptance of said price is primarily the role of the buyer (not the seller). This point (the point about the buyer) seems to be the most difficult for people to accept. A developer / publisher could charge $1000 for a game and we’d all probably agree that’s ridiculous, but it would also be perfectly acceptable to do. It’s up the potential buyers to reject the price, thus forcing an eventual price change. This brings us to our next question: What exactly is going on with game pricing today? In order to understand today, we need to look to the past for answers.
Game Pricing Prior to the 2000s
Prior to the 2000s, game pricing worked a lot more like the traditional market. If you were looking for a game, you would often find shelf price disparity between retailers. Taking into account inflation, games were generally more expensive, not less. Take a look at Street Fighter Alpha 2 in this flyer for Toys ‘R’ US (1996):
In today’s economy (2022), that price tag equates to approximately $138.00. Take note of the other new releases, Donkey Kong Country 3 and Madden 97. They both come in at 59.99. Point being, new releases in 1996 were not only more expensive, but retailers (and publishers) typically used a broader range of MSRP compared to the 2000s (retail price). It should also be noted that the “older” titles on the flyer are still coming in around $52.99 ($102.00 in 2022 dollar value). In the late 1990s, cartridges were not a “cheap” distribution method thus publishers were selling that inventory (to retailers) at a much higher per unit cost than today. In turn, retailers needed to charge a comparatively “hefty” shelf price to cover their purchasing costs.
Game pricing in the 2000s started to change when compacts discs became the leading distribution medium. CDs (and later DVDs) were more affordable for publishers to distribute and combined with a combination of other economic forces (competition, rising cost of game development, pricing strategy, shift in preferred revenue), retailers settled in at a “AAA” price strategy of $59.99 USD. Keep in mind that $59.99 is still less expensive (when correcting for inflation) than most high value games of the 1990s. This could be an entire topic all on its own and we need to move on. If you want to read more about it, check out this Ars Technica article on the matter.
Game Pricing Today (2020 and Beyond)
Now that we’ve taken a short trip down history lane, it’s time to return to the original topic: Why is $70.00 ($69.99 USD) now the established entry level price for games sold under the scope of AAA development? Before we get into it, we need to establish something up front: A price strategy is not (directly) set by aggregate profits (large or small), especially in a project based industry like video games. Now that we’ve established that, let’s talk about that modern gaming price tag.
Unfortunately, the answer isn’t too exotic. I actually revealed the answer above in the bulleted list, and the same still applies now. Triple-A release prices are what they are because of a combination of above factors, but we need to emphasize two of the above factors: cost & price absorption.
When it comes to cost, I’ll keep it simple. Creating a “AAA” game costs anywhere from about $25M (million) USD to anywhere in the hundreds of millions of dollars. Next, throw in the need for post launch content & support and you’re looking at multiple years of costly expenses. You can read more about the exact details here, but the bottom line is that project based industries need to set the selling cost based on the expenses of the project team. As for price absorption, there’s no doubt that the available market has grown. What was once a small, upcoming market is now a massive global phenomenon with billions of customers. This factor has helped put the brakes on what should have been the normal inflationary increase in game prices. I’ll say it again: Even at $70 USD, games are less expensive than what they were in the 1990s when accounting for the mathematics of inflation.
When it comes to price, the rest of the bulleted factors (above) will be applied, but we need pay special attention to this fact: The market will almost assuredly absorb a $70 price tag at the same rate of a $60 price tag. “But price affect demand, right?” Yes, price and demand are often opposing forces. What truly matters is impact. Does the $70 price tag impact demand enough to create a repeatable negative result on revenue? The answer is likely “no.” We already have the first-movers (Sony, Take-Two) and there are no signs of a reversal. We can sit here and debate all these other details, but one fact remains: If a vast majority of the market will hand over X dollars as easily as handing over Y dollars, there is no compelling reason for publishers to sell “AAA” games for under market value. Add in the weird phenomenon of competitive pricing (a competitive force that encourages “AAA” publishers to move their top price games in relative lock-step with each other), and we end up with the $70 game.
Before I wrap up this article, I believe it is important to point out that games receive significant discounts relatively soon after launch. It doesn’t matter if someone is playing on one of the consoles, or PC, games are discounted approximately 3-6 months after their release. In the most extreme examples, games are marked down only one month after hitting market. Discounts are applied so quickly that it’s probably fair to argue the $70 launch price is the price buyers will pay for being early adopters. In traditional lifespan economics, early adopters almost always pay the highest fee for entry. In case you might be thinking this doesn’t apply to Nintendo, you can be assured it does, it’s just less pronounced. Additionally, many game providers are moving to game services (catalog services like Xbox Game Pass) instead of asking buyers to pay for each title. The point is, the way we pay for games is changing. Keep in mind that this article is primarily focused on those games that fall into the category of “premium AAA title.” The modern video game market is obviously more than just $70 “AAA” titles. We now have choices that range the entire span of prices, from premium “full-price” titles to “free” experiences that cost the buyer nothing to install. The choice is yours! No one if forcing anyone to buy anything on launch day, and publishers will react accordingly to what the market will support.
If you’d like to discuss this in more detail, you can always hit me up on Twitter.