One of the early economics lessons you learn in any competent intro econ class is the concept of elasticity
. The basic concept is how much does demand increase for a product if you lower the price. If a product is highly elastic, decreasing the price can often earn you more money. A simplified version of this: I have a widget that I want to sell for $100 dollars, but only one person is willing to pay that price. With that pricing, I'd make $100 (gross) on the widget. However, if I were to drop the price to $1, let's say 1,000 people are willing to buy at that price. Then, I'd make $1,000 (gross) on the widget. So, even though producers often fear lowering the price, if there's strong elasticity, lowering the price can often make you much more money (and, yes, the marginal cost matters here as well).
We've seen over and over again that video games appear to have very high price elasticity of demand. Two years ago, we wrote about some experiments by Valve, where it tried lowering prices
of games by 10%, 25%, 50% and 75% -- and saw the increase in sales at a stupendous rate. While the 10% decrease only resulted in 35% higher gross revenue (already pretty good!), at a 75% discount, the gross revenue shot up by 1470%
. Think about that, for a second. Basically, dropping the price by 75% increased revenue by almost a factor of 15. Not bad.
Last year, we saw a similar experiment that also had great results. An online video game store in Sweden tried dropping its prices by 75% and saw an increase in sales of 5500%
(in unit sales). When looking at the gross revenue, it appears that it came out approximately to a similar 1300% increase.
And now we have some more examples. Capitalist Lion Tamer
points us to an article that looks at some super popular iOS (iPhone/iPad) apps that drastically cut their price
, but saw their gross revenue shoot way up because of it.
Street Fighter IV for iOS recently slashed its price by a breathtaking 90% overnight, from £5.99 to 59p. Within 48 hours its position in the overall Top-Grossing chart (that's the list of all apps, not just games) instantly rocketed from 116 to 2. Coincidence or magic? You decide. But that's not all.
And just to reiterate -- we're monitoring the Top-Grossing chart, ie the one measuring money made, NOT the ordinary numer-of-sales one, where SFIV currently sits comfortably on top of everything else. What that means is that the game's sales have increased by dramatically more than 1,000% (because it would have had to sell 10 times as many just to hold the No.116 position at the new price, never mind climb 114 places).
And yet, time and time again we hear how execs at big entertainment companies feel the need to keep raising
prices. Hell, we just mentioned how Nintendo's President Reggie Fils-Aime was complaining that cheap games might kill the industry
. Apparently, they don't teach basic economics to folks who become president of Nintendo.