How Free Became the Right Price for Games

Revenge of the Econ Nerds!

It seems counterintuitive that developers would be hard at work creating games just to give them away for free! But free is the right price and here is why.

Why is free the right price?

Economics, dammit! I hated economics in business school. It seemed the most useless drivel, with its impossibly idealistic, perfectly rational man nonsense. I don't know anyone even remotely rational when it comes to spending money, but here I am spending my professional life working at the left edge of some 

price elasticity of demand

 curve from business school. So here is your economics lesson from a Wharton economics flunky.

Something is considered price elastic if the demand changes with price. Video games fit nicely into this definition. Love Halo?  How much do you love it? Do you love it enough to buy a $79.99 special edition? Maybe. What about $59.99 at launch? Probably. What about  6 months after launch, once its a bit cheaper? Sure. What if Halo's price was $1,000 and never went down? I don't think many people would buy it.

Now let's take brain surgery. How much do you love brain surgery? Not much. But if you have brain cancer and surgery will save your life, you will probably pay, almost regardless of price. And if the price of brain surgery all of a sudden went down dramatically, you would still not elect to have unnecessary brain surgery. That is what my nerdy, economically-minded friends would call price inelasticity. Demand isn't sensitive to price. 

Games in Boxes: How to Make Money

During the prehistoric days of gaming, if you wanted to buy a game you went to store and bought it... like a can of soup. Remember? Gaming companies hype their games for months, maybe years, gearing for a big launch. They spend millions on marketing and release games at full price ($49.99 to $59.99) also offering special editions for the fans that want to pay more. In other words, console game companies start at the top of the price elasticity curve, and over time, work their way down to discounted price points like $39.99, $29.99, $19.99 capturing price sensitive fans, gift givers and people who care less about the game then the "day one" faithful. The curve looks like this:

 

Would you buy Call of Duty at $500?

 

Would you buy Call of Duty at $500?

Those points on the curve are typical price points. The area under the curve is the revenue. With physical products there are distinct price points where a company can make money. Even the biggest fans, the one that might buy the $14,999 

Bioshock 2 Uber Edition

, are still limited in what they could pay you. Downloadable content (DLC) has given created a little hybrid model for paid games, but you still need the expensive game first. Likewise, those who want to pay less than the price of the game at any given point, either have to wait or will likely never buy it. This limits profit potential.

Console publishers work from the top of the curve down. They have big infrastructure costs in development, distribution and marketing. A high end game can easily cost $50 million to develop and another $50 million to market. But  with connected platforms like Web and mobile, there is another way to bring games to market. Small teams could make high quality, small content and distribute it at very low fixed cost. This changed the entry point on the price elasticity curve.

Mobile Games: Free is the Right Price

To reach a huge audience, free is the right price. Look at the left side curve above. See the "unit" line go ballistic as price approaches zero? That happens because free is a very special price point.

Nobody will not buy your product because of price when it's free.

Equally important, with in-game purchase and consumable items, the biggest fans of a game can continue to spend an unlimited amount of money. You might only been able to spend $100 on a special edition of your favorite console game but you can easily spend thousands of dollars on Clash of Clans. Interestingly this also changes the role of the marketer and game developer. In paid games, marketers "sell" the game and make the company money. In F2P marketers drive trails, the download, while the game must "monetize" - delight the player enough to stay and spend money.

There you have it, free to play, explained by a marketer with remedial economics knowledge.

If you want to make money in this free2play world, contact us at fly@gamechangersf.com 

Phil ShpilbergComment