Death of the MSRP

This weekend, I purchased Risk for the iPad.

Now, most people who know me would likely say, "Of course you would! You seem just like the nerdy type who would love Risk!" The truth is, however, that I only recently "got into" Risk.  As I grew up, I was told games took forever, and I simply didn't have the time nor friends who were interested in playing (no, instead, we played Magic: The Gathering while growing up).

But, a few months ago, there was a sale on XBOX Live for Risk: Factions, and I jumped on that as a fun diversion.  The game was half off ($5 instead of $10).  I took a chance on it.  When I beat it, I noticed the Risk game on the iPad was $7... I thuoght about buying, but decided that $7 wasn't quite the right price for me.

Then, this past Easter weekend, EA Games put it on sale for $1.  I had been watching the game, waiting for it to go on sale, and $1 was exactly the right price for me... even cheaper than I would have been willing to pay.

In both cases, the developer of the game controlled the price.  And when they wanted to spur sales or get people talking, they dropped the price.  With the iPad game, it wasn't even to get sales of that game but instead the price reduction acted as a loss-leader for getting people to look at all of the EA games on the device and maybe pick up one of those.  The developer was, and is, in full control of the price.

 

So, in our current retail environment, we have this thing called the MSRP, or Manufacturor's Suggested Retail Price.  It is some magical number that is supposed to be the value of the product's production plus all the various parties who are supposed to recieve some kind of profit or reimbursement for their skills/time/idea/shelf space, etc.  For physical goods, this makes sense... there is a fixed cost and a variable cost for each and every unit manufactured.

But what happens once all of those development costs are recouped? Profit - lots and lots of profit.  Because there is a percieved value of an item, it can stay at that cost until it makes a slow movement down the the pricing structure... unless the product is a flop and stores have to put it on clearance in order to make a quick buck while getting it off the shelves.

 

Digital changes all of that.  There is no manufacturing costs.  Digital retailers don't have to keep things in stock, they just have to keep a few megabytes of data lying around.  This new model is based on percentages; for a certain cut of the revenue, the retailer will fulfill the order for your digital wares in their system.  So now, what is the MSRP?

If we take Risk for the iPad as an example. According to AppShopper.com, Risk for the iPad has changed prices 16 times since its release in December of 2010. Once, it increased it's price twice in row!  The app has sold for $6.99, $4.99, $3.99, $2.99, and $0.99.  All of these prices would have been set by EA themselves.

With digital, the content producers get to all kinds of things with their products.  A few lesons to be learned:

1) The first price is the price the content producers think something is worth.  This is the dollar amount that makes the investment worthwhile on the market place.  It recoups the cost of the development of the product, the license, payment to the creators, funding of marketing, etc.  This number is almost never just pulled from the sky; comparable products are researched and the success of the product hinges upon its success at this dollar amount.

2) There are two kinds of consumers: (A) the consumer that the digital product is intended for.  This is the consumer who will happily purchase the product at the original price because they understand the value.  A physical Risk board game has a MSRP of almost $40 (though Amazon sells it for closer to $25); so for a long-time Risk fan, the initial price of $7 is simply too good to pass up - they know exactly what they are getting and are excited to part with their money in return for the goods. (B) the consumer that the digital product might be intended for.  This is the consumer who might be interested in the product, but they simply don't know if it's something they want or need, and their uncertainty manifests in trying to decide if the proposed price is the right value for the wavering interest.  These customers, depending on their past history with the digital producer or the platform of the product, will have to be convinced of the value in some way.

3) When a company reduces the price of a digital product, they aren't saying it's not worth the original value; they are saying "hey, we want your attention." People talk when prices drop.  People who were indcisive before have to think about it again (well, I didn't want that game for $7... but do I want it for $5?).  There are at least 2 very valid reasons for reducing the price to get attention: (A) the company wants your attention for something else they are doing.  For example, try Risk for $1!!! And if you like that game, maybe you will like these games, too... or (B) the company truly believes in what they are selling and truly want more people to experience their product because - crazy enough - they believe their product really is worth people having.  The beauty of digital products is that once all the bills are paid, prices can be in flux to help the second set of customers re-evaluate what they think the product is worth.

4) As the customers, we - now more than ever - get to tell the companies what we think a product is worth.  For a lot of companies, the digital distribution model is the first time they ever get to directly control their pricing structure.  No longer do the have to set a MSRP and then let the actual retailer control the sales and incentives, now they get to change prices at a whim, as a strategy, or even as a real and honest thank you to their customers.  And, in doing so, they get to learn what customer really will pay.  The amazing thing is that even after something like Risk goes down to a dollar, EA is able to move it back up to $7 - and people will still pay that price for it.  It's an amazing study to see companies getting to discover more and more about their cusomers.

 

So here's where it gets really messed up; not only are customers enjoying the value proposition of things being only a dollar... we are voting with our money to say that some things are worth MORE than the MSRP.  There is a trend in video games for "collector's editions" or titles.  The typical value of a disc-based video game is between $50-$60.  This is the price that most new games are sold for.  But it was just a few years ago that I spent $150 for my copy of Halo 3, with the helmet.  When Marvel vs Capcom 3 came out and there was a collector's edition announced, I pre-ordered it without caring or knowing what the "bonus" was going to be.  It didn't matter to me; I was more than willing to part with my extra $10 to tell Capcom "I want this game and I want you to make many more of it."  I was willing to go the extra mile with my money in order to make the product a success for the company.

It's only fair, imho, that if we take advantage of a company's sales (thank for the $1 Risk), that we reward them in the future.  If they are willing to give us value at the cost of their own profit then, when the time is right, we as consumers get the opportunity to reward them for a job well done.  Because, ultimately, this is a capitalist economic environment.  And if we only take advantage of cheap prices, then the company will cease to exist because they don't have the revenue to keep on making great new things for thier customers.

So I, for one, welcome the death of the MSRP.  To all the companies out there that make things I exchance money for, thank you for all the value and deals you set up for us.  But don't forget to let us reward you every now and then - you just might deserve it.