The Very, Very Basics of Pricing Your Game

[lumpley]

Hi.

This comes mostly out of a conversation I had with my little brother (Drew Baker, and check out me namedropping) when I was deciding how much to charge for Dogs in the Vineyard.

I made some pictures. Pop this page open in another window to follow along.

Fig 1 should be familiar to all of us - certainly to all of us selling our games or intending to. It's a little drawing of how as you increase your price, demand for your game falls off, in terms of how many you sell. The red line is the demand curve for your product. It shows just how changing your price changes how many games you sell.

How much money your game brings in = your price x how many you sell. That's the area of the green rectangle when you charge the green price, the area of the blue rectangle when you charge the blue price.

Straight outta high school econ.

Fig 2 is a little drawing of what happens when demand is "at 45 degrees" - when increasing your price decreases your sales by an exactly corresponding amount. When that's the case, changing your price doesn't change the amount of money your game makes for you. That's to establish the baseline for the "steep" and "shallow" of figs 3 and 4.

Fig 3 is a little drawing of what happens when increasing your price just a little causes a big fall-off in sales, and decreasing your price just a little causes a big increase in sales - when the demand curve is shallow. When that's the case, decreasing your price increases the money your game makes for you, on account of how very many more people buy it.

And fig 4 is a little drawing of the opposite, what happens when increasing and decreasing your price changes your sales only a little - when the demand curve is steep. When that's the case, increasing your price increases the money your game makes for you, on account of how the increased price more than makes up for the few sales you lose.

The killer question for your game, of course, is which is the case? Yes, you'll sell more games by decreasing your price. But, will you make enough more sales at the lower price to be making more money? Or are you better off charging a little bit more, knowing that you won't lose all that many sales?

Also to consider: is it only the money to you? For some designers, an additional sale is worth way more than the cash it brings in. Will one sale now become many additional sales in the future? (That's why we give away review copies: we hope that giving away one game will lead to people buying many.) Is the warm feeling you get from reaching more people worth whatever money you lose by lowering your price?

And then there's a whole raft of questions about how you might change the demand curve itself: by promoting your game how? By supporting it how? By getting it into retail? Into distribution? In translation to other languages?

I can't answer any of these questions for you. Even if the very, very basics weren't the limits of my expertise, you'd still have to research and examine your own particular goals, game, and circumstances. Me, I'm pretty happy with my sales and the money I'm making - but maybe Alternate Universe Me is happier still!

-Vincent

[Valamir]

Fig 3 and Fig 4 are known as Elastic and Inelastic demand respectively.

Elastic referring to peoples NEED for the product.  Elastic products tend to be luxuries people want but don't need...so their demand is very dependent on price.  Inelastic products tend to be things people can't live without...so their demand isn't very dependent on price.

Another useful concept is SHIFTS to the demand curve.  That's where the rust colored lines in Vincent's figures actually get redrawn farther to the right (an increase in demand that has nothing to do with price) or to the left (a decrease in demand that has nothing to do with price).  Shifts can be a result of increasing promotion, increasing or decreasing market size (i.e. the hobby is growing or shrinking), or even the substitutability of the product (i.e. if all movies were permanently banned some fraction of those entertainment dollars would find their way into RPGs.  If a brand new cool entertainment form was invented...like say...computer games...some fraction of dollars currently dedicated to RPGs would find their way to that use).

I think Indie RPGs are in a pretty unique situation regarding the demand curve.  RPGs in general can be considered something of a luxury.  Nobody really NEEDS another RPG...not in the same way that you need to fill up your gas tank every week or two or buy groceries...so we'd expect the demand curve to be fairly elastic...meaning very price sensitive.

However, the nice thing (from a suppliers perspective) is that niche products tend to be much more inelastic.  By definition you don't have a very big market, but the market you do have tends to be pretty hard core.  Hard core customers are much less price sensitive than casual customers.  So even though RPGs are pretty much a luxury, I think, on the whole, they enjoy a much more inelastic demand curve than say Luxury SUV's

Indie RPGs are pretty much a niche within a niche.  The market for Dogs or PTA or Universalis is a very small subset (currently) of the overall RPG market.  That should make the demand curve for indie RPGs even more inelastic than for RPGs in general.  This means that while incremental increases in price will result in fewer sales, the drop in sales should be relatively lower than the drop in sales for a "mainstream" RPG from a proportional increase in price...which in turn should be relatively lower than the drop in sales for Luxury SUVs from a proportional increase in price.

This suggests two things. 
1) Most indie publishers could increase their price by a couple of $$ and feel pretty confident that their overall revenue will increase because sales won't drop that much, and
2) If we (meaning the Forge et.al.) are successful at bringing our games to the attention of the broader gaming market we can expect our demand curve to Shift to the right (good) while simultaneously getting less inelastic (not so good for priceing).  This is really just the common sense knowledge that the more we compete head to head with traditional RPGs the more buyers will expect the game to be priced using the same standards as traditional RPGs.  Further, if we are successful at bringing our games to the attention of the broader non-gamer mainstream public we can expect our demand curve to Shift to the right (good) while simultaneously getting even less inelastic yet.  In other words, once indie RPGs are out there in the mainstream competing with MP3 downloads, DVDs, alcohol, strip clubs, casinos and resort vacations for people's entertainment dollars we would expect to see the demand curve flatten (become more elastic) and hense more price sensitive.

So, contrary to the usual "parallel shifts" that are assumed in most basic econ text books, the farther we push the demand curve to the right (i.e. the more mainstream and less niche we get) the flatter the demand curve will get.  This suggests some interesting things for pricing policy for designers really trying to sell into the mainstream market as opposed to designers selling primarily to the niche within a niche indie-rpg market.


The above discussion also leaves out all talk of Supply Curves which are just like Demand Curves only with the opposite slope (so that they cross like an X).  We can also talk about the elastisity of Supply Curves which just means how many suppliers will jump into the business if prices go up, and how many suppliers will drop out of business (which is the game industry equivelent of cutting back on production) if prices go down.

Again I think its safe to say we'll see the same pattern.  As long as we're talking about niche within a niche indie-rpgs the supply curve will be pretty inelastic.  Most of us publishing games here on the Forge would still be creating games even if we had to give them away for free...and I doubt we'd see the number of indie-games being sold rocket through the roof if the price increases.  The supply curve isn't wholey inelastic, of course, as evidenced by the number of folks "getting into" publishing now that they see its possible to make money at it.

Once you get more mainstream this effect is exaggerated...witness the number of Traditional game companies that have or will go under because they can't push prices to a profitable level.  Witness how quickly mainstream entertainment companies like Hasbro and Topps were to jump into the industry once the demand curve shifted out into the mainstream consumer for certain products.

Of principal interest to us as indie-publishers is the old maxim that the greater the supply AND THE GREATER PERCEIVED SUBSTITUTABILITY the lower the price will have to be.  This leads us to two conclusions.
1) The more successful we are, the more indie-publishers will jump into the business the more supply (i.e. number of new games released) there will be and the more trouble we'll have maintaining pricing power.
2) The surest way to maintain pricing power in the face of increasing supply is to DIFFERENTIATE ones own product from those of competitors.  In a truly commodity product (like true commodities like Oil and near commodities like PCs) you have very little defense against market saturation.  When I can buy a computer from Dell, HP, Gateway, Acer, et.al. and they're all (pretty much) the same...price becomes the key deciding factor.  If RPGs are perceived like that...that I can buy PTA or Dogs or MLWM or D20 Eberron, or Vampire part Deax, or Savage Worlds, or etc, etc. and expect to get the same level of value for my entertainment dollar then we get into big trouble from a pricing stand point.  This is pretty much what happened with the deluge of third party d20 product.  One publisher's d20 supplement full of new feats, skills, and prestige classes was largely interchangable with another publishers d20 supplement full of new feats, skills, and prestige classes.  This meant that the products had a high degree of substitutability and so the increase in supply meant a decline in the price customers were willing to pay. 

For us the message is resoundingly clear and drives home exactly what we've been doing here all along.  If your game is just like d20 or GURPS...go play d20 or GURPS.  If you want your game to NOT be substitutable and thus not subject to the same degree of pricing preasure due to increasing supply that plagues d20 products...it had better be unique.  It had better be about something and do that something in a way no other product does.  You can't play Dogs in the Vineyard with d20 and that's why DitV's price has little correlation with d20 product prices.  Or to put it another way, Vincent doesn't need to give a rip what an equivelent sized d20 product routinely sells for, because his game isn't interchangeable with d20.  But if you're game is essentially d20-esque...you do.  Which is yet another reason not to waste your time designing something that's "just like d20 only different".

Ain't Econ grand...

[lumpley]

Thanks Ralph!

Check me on this. Here's us Forge publishers. As we get bigger in the world, our demand curve shifts to the right and gets more elastic: there are more of us making more hot games every year, so our customers are increasingly saying "game A and game B are both guaranteed awesome plus fun - I'll buy the cheaper one!" But as long as our games remain out of competition with the "big name" lines, our pricing doesn't have to follow theirs. That is, as we get bigger, our pricing is increasingly an issue, but an issue that we collectively have power over. So far so good?

Then I'm seeing the near future as a time when our pricing gets, like, institutionalized. We have a freedom in pricing our games now that we'll gradually lose over the next however-many-couple-few-years. The good fight against a standard array of indie rpg prices is, sadly, a losing one.

All of which to say that decisions we individually make about pricing now will take on long-term and indie-scene-wide significance.

Make sense?

(And then as we get even bigger, in the more distant future, maybe we will have to care about how much a NWoD book costs - but that's beyond my vision.)

-Vincent

[TonyLB]

I'm not sure I'd go so far as to say institutionalized.  That connotes hierarchy to me, though perhaps it's not what you meant.  What we've said so far doesn't prove to me that we're headed for a hierarchy.

What's going to happen is that, as the demand curve becomes increasingly elastic, our decisions are going to become interconnected.  Right now, if I offer Misery Bubblegum for $10, that does roughly nothing to (say) Matt Wilson's sales of PTA.  If, ten years from now, our market is much more elastic, and I offer MB-v3 for $10 then Matt may well have to lower his prices  as a response, to get in the newly shifted optimum for his curve.  The introduction and pricing of Product X induces changes in both the shape and position of the demand curve for Product Y (technically, I think, this is about how people balance their demand by substituting other products ... demand becomes more elastic in each individual product as other products are viewed as reasonable substitutes).

So, gradually, indie publishers become not just a group of people who happen to chat.  We become a society, in the sense that we can take real actions that have direct consequences to other people.  And if we want to survive, we'll need some sort of sensible structure to that society, because otherwise it's vulnerable to terminal feedback loops of all types.  That can be a hierarchy ("Ron sets pricing policy!" ... okay, that was just a wild hypothetical, you all know that, right?  don't hurt me) or it can be a well-structured anarchy ("Here's the information you need to understand the consequences of your decisions, now the choice is yours") or any of a number of other systems which, frankly, I'd just embarrass myself misphrasing.

Fascinating stuff though.  Vincent, thanks very much for bringing this into the light of conscious consideration.  Neat!

[lumpley]

Tony: yes, institutionalized in precisely that non-hierarchical sense. We'd lose freedom not because some few of us would be dictating policy, but because all of our decisions would increasingly bump up against all of us.

-Vincent

[Michael S. Miller]

Hi, Tony.

I think the hierarchical type of pricing you were talking about is called "price fixing" and is illegal in the U.S. Not that we'd do what Ron tells us to, anyhow. 8^)

[Roger]

there are more of us making more hot games every year, so our customers are increasingly saying "game A and game B are both guaranteed awesome plus fun - I'll buy the cheaper one!"

There's an effect in economics called "brand monopoly" (at least, I think that's what it's called -- I can't seem to find any reference that supports me.  If a better label exists, please let me know) which simply means that, for example, Nike has a monopoly in making Nike sneakers.

I would suggest that this is a predominant factor among RPGs in both the mainstream and indie markets.  Only WotC can make "real" Dungeons & Dragons (tm) products.  Similarly, only Ron Edwards can make a game by Ron Edwards, and only Vincent Baker can make a game by Vincent Baker.

Will consumers pay a premium for a game by Vincent Baker over a game by some unknown author?  The data seem to support that conclusion.  Because this behaviour is fundamentally monopolistic (and thus non-competitive) , I wouldn't anticipate strong interactions between product pricings.

But I may well be wrong -- such are the dangers of making predictions.


Cheers,
Roger

[lumpley]

Here's another way I can say it: what I'm predicting is that over the next little while our customers are going to develop strong expectations about what we charge for our games, which they are going to enforce upon us, by choosing which games to buy. This is how I understand (and here's what I hope you'll check me on, Ralph) that our big, shared demand curve is moving to the right, but becoming more elastic.

Which leads me to say: maybe we should include, in our individual decisions about pricing right now, the consideration that we're establishing expectations we'll have to live with in the future.

(Which is, yes, counter to your prediction, Roger, I think. You're predicting that we'll each keep having our own little independent demand curve, we won't really develop a big shared one.)

-Vincent

[Troy_Costisick]

Heya,

And I believe the Forge Booth at GenCon will play a large role in this.  It is the only place where so many Indie games can be physically found together with prices displayed up front.  It's the one place where customers can physically compare one game to another before buying.

Quick question, Vincent.  Do you predict size (length/thickness) will still matter to customers when gauging an Indie book's value?  Or will it be other intangibles like author reputation?

Peace,

-Troy

[lumpley]

Quick question, Vincent. Do you predict size (length/thickness) will still matter to customers when gauging an Indie book's value? Or will it be other intangibles like author reputation?

I predict that actual play will keep being the main thing that matters.

-Vincent

[Jared A. Sorensen]

Do you predict size (length/thickness) will still matter to customers

Oh, they may say it doesn't...but it does.

BURNED!

- J

[Brennan Taylor]

There's an effect in economics called "brand monopoly" (at least, I think that's what it's called -- I can't seem to find any reference that supports me.  If a better label exists, please let me know) which simply means that, for example, Nike has a monopoly in making Nike sneakers.

I would suggest that this is a predominant factor among RPGs in both the mainstream and indie markets.  Only WotC can make "real" Dungeons & Dragons (tm) products.  Similarly, only Ron Edwards can make a game by Ron Edwards, and only Vincent Baker can make a game by Vincent Baker.

Will consumers pay a premium for a game by Vincent Baker over a game by some unknown author?  The data seem to support that conclusion.  Because this behaviour is fundamentally monopolistic (and thus non-competitive) , I wouldn't anticipate strong interactions between product pricings.

Roger, this is just called "branding."  Vincent has built his reputation, which for a small publisher is the same as his brand. That's what people are paying for.

To inject some anecdotal yet real-world evidence into the discussion, my experiences at IPR demonstrate that the indie game market pricing is still pretty elastic (I think I'm using that term correctly). Publishers at the moment have a lot of latitude in pricing, but I would say that the $20-$30 range is where most consumers are expecting to see digest-sized indie games priced (because most of them are priced in this range). A couple of publishers have gone cheaper, in the $10-$20 area, but usually these are much shorter books. Size/thickness is a factor, if only from the perspective of perceived value. If I pay $35 for a book, and get a 26-page booklet with a 1-color cardstock cover, I'm not going to be happy (this really is me speaking personally).

[Valamir]

what I'm predicting is that over the next little while our customers are going to develop strong expectations about what we charge for our games, which they are going to enforce upon us, by choosing which games to buy. This is how I understand (and here's what I hope you'll check me on, Ralph) that our big, shared demand curve is moving to the right, but becoming more elastic.

Exactly right.  For instance say I'm going to play four 5 4-hour sessions of either PTA or Dogs and I'm confident that the ole "effort in vs. fun out" ratio is pretty much identical between the two, and PTA sells for $10 while Dogs sells for $20.  Right such a difference in price would have some effect on relative sales volume between the two.  But because a significant portion of customers for both are games whores who are going to buy both of them anyway regardless of what the cost, the effect won't be AS GREAT as it will be down the road.  As the curve gets more elastic (i.e. a greater portion of customers for both games are more mainstream and less niche) then people are going to choose with their dollars which games are worth it to them and which aren't.  Which simply is a long way of saying "as our games start to be percieved as real products, we'll be subject to the same pricing considerations that real products (like shampoo and toilet paper) are subject to)"


Roger raises a key point about Branding.  Branding is perhaps the numero uno way companies seek to achieve differentiation.  Is a Ford pick-up truck pretty much interchangeable with a Chevy pick-up truck.  Yeah...pretty much.  But just try telling that Ford or Chevy die-hard truck guy.  This is why the Xerox and Kleenex people HATE it that people say "I'll make a Xerox copy" even when the machine ain't a Xerox, or "pass the Kleenex" even when its generic store brand tissue.  WotC's key strategy for years has been to create brand awareness around D&D and d20, although to an extent the run the same risk as Xerox given the number of non-gamers who equate "D&D" with "Roleplaying" as if it were a generic term.

The interesting question than becomes "what is our brand".  As noted, I think to a certain extent, we are.  Forget our little vanity imprint, WE are our brand.  When you buy Sorcerer and Troll Babe you're buying Ron Edwards (no one really give a rip what the name of his company is).  When you buy Bachannal you say "hey that's a Paul Czege game".  The day Vincent announces Red Sky AM is for sale alot of people are going to buy it because its a Vincent Baker game.

This actually suggests something about how we should be labeling our games.  Perhaps we should take a page from Spike Lee and make sure OUR name IS the brand name..."A Ralph Mazza Joint" as it were rather than hide behind obscure Imprint names that no one really cares about anyway.


Brandon's last point is also correct.  Elastic and Inelastic demand refers to the slope of the demand curve...but, by definition, curves have varying slopes depending on where you measure them (there's actually fun stuff you can do with derivatives on formulas that define curves but I've long forgotten the math on that).  So he's quite right when he points out the idea that beyond a certain range demand can drop of sharply.  On a graph using his numbers you'd expect to see the portion of the line between $20 and $30 to be near vertical, meaning each incremental change in rise (price) has little impact on run (volume).  Get above $35 and the line swoops dramatically back to the left becoming nearly horizontal, meaning each incremental change in rise (price) has tremendous impact on run (volume).

[Ben Lehman]

Brennan's observations about the 20-30 dollar range may have been affected by IPR's shipping policy (free shipping over $25), which effectively muddles the price of the whole 22-28 dollar range.

yrs--
--Ben

[timfire]

Brennan's observations about the 20-30 dollar range may have been affected by IPR's shipping policy (free shipping over $25), which effectively muddles the price of the whole 22-28 dollar range.

While this is true, I'm going to once again bring up the fact that if we start charging over $25-30, we're going to start getting compared to all those $35 8.5x11 hardback supplements and second-tier core books.

To my perception, it seems that these discussions here at the Forge tend to examine the pricing of indie games in isolation. I believe this is a mistake. We must view ourselves as part of the larger RPG market (at least for the time being---it has yet to be proven that we can truely break away and attract a significant number of non-gamers). I think one reason we seemingly have so much leeway is because at to this point we have priced our books so much below the cost of mainstream RPGs. But I believe as we start pricing our books closer and closer to mainstream prices, we will be increasinbly be compared to mainstream books.

And while I don't want to drift the thread, the one area mainstream books have us beat in in production values. Unless we increase those, I believe we'll see a big drop off in the curve around the $30 mark.