Thursday, February 19, 2009

Gabe Newell

Gabe Newell is a smart man.

I know, sometimes he can be annoying, but that doesn't make him any less smart.

To me, the single most important thing he's done at Valve, by far, is that he's never cheapened the brand. Ever, in my memory. They release highly polished, well-tested games that focus on gameplay. They have had so many chances to cash in on their success, to eat the pie instead of making it larger, but Newell has always focused on growing the size of the pie.

I think that's a crucial concept that most gaming companies miss entirely, and it's not just gaming companies. Tell someone that they get to eat more of the pie, and they're jubilant--"I get more of the pie!"

They're missing the point, of course. Instead of asking "How much of the pie do I get to eat?", they should be asking "What is the size of the pie?" In the long term, pie size almost always wins out over slice size.

Anyway, I think Newell understands this better than almost anyone, and it's a key reason that Valve has been so incredibly successful.

Today, conveniently, during the DICE keynote, he talked about pies.

Specifically, he talked about a pricing experiment that Valve conducted last weekend with Left 4 Dead. They lowered the price by 50% (to $24.99).

What happened?

Sales rose by 3000%, and "revenue far eclipsed the game's sales during its launch window." Plus new Steam customers rose by 1600% over the "baseline."

Each one of those new customers is increasing the size of the pie.

Did retail sales drop during that period? No. This was not cannibalization, according to Newell, because retail sales held steady.

Here's more. Steam also had a holiday sale, and here are the results (thanks to the G4TV liveblog, which you can read here):
10% sale = 35% increase in sales (real dollars, not units shipped)
25% sale = 245% increase in sales
50% sale = 320% increase in sales
75% sale = 1470% increase in sales


We're never going to know the answer to this question, but how would next-gen console sales have been impacted if 360 and PS3 games were launched at $49.99 instead of $59.99?

It was a double whammy. The consoles cost more, and so did the games. Yes, the Wii is very cool with motion control, but if it had launched at $399 and had $59.99 games, would it be anything right now but a novelty?

Price isn't the only reason a product succeeds in a mass market sense, but in most cases, it's one of the reasons.

Remember ESPN NFL2K5? Boy, I do. It's still my favorite football game--ever. What was most remarkable about the game, though, in a historical sense, wasn't its quality: it was the price.


Remember, NFL2K4 only sold 360,000 copies. NFL2K5? Over 2.5 million.

I, um, wonder if that pricing strategy worked.

Yes, there was some cannibalization of Madden sales, and Madden was also discounted far earlier than usual. But that pricing strategy is even more appropriate today in an environment where downloadable content is promoted so heavily. Madden doesn't need to come out at $19.95, obviously, but if it came out at $49.99 instead of $59.99, total sales revenue would be higher, I bet, and there would be a higher installed base to purchase downloadable content.

Look--$59.99 is an an entitrely arbitrary price point. Is there any reason to believe that it represents the ideal price to maximize sales revenue?


I thought using pricing to maximize sales revenue was the whole point.

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