The impact of dynamic pricing on current console sales can be observed in the latest reported figures for major console and software sales. The data is consistent with well-established technology adoption patterns.

In Pricing in the Video Game Console Market, Liu (2010) observes that Sony used a policy of “price skimming” when it launched the original PlayStation in 1995. Microsoft did the same with the original Xbox, cutting prices early in order to reach casual gamers and price-conscious consumers. We refer to this segment as “late adopters,” following Rogers’ adopter categories in the Diffusion of Innovations, which include late majority consumers and laggards.

Late adopters, as we have previously mentioned, have a lower economic status, are less educated about the products they are purchasing, and are much more price sensitive (see page 128 of Innovation and Marketing in the Video Game Industry). As such, capstone titles and advanced features are less important to this segment. However, network effects and word-of-mouth recommendations can influence late adopter purchases.

Dynamic Pricing and the Launch of the Xbox 360 Slim

The launch of the new Xbox 360 Slim attracted two types of customers, early adopters (and close followers) who purchased the new Slim units, and late adopters who purchased older Arcade units at a significant discount as retailers like Walmart and Target clearanced remaining legacy Xbox 360s.

The new $200 Arcade Slim will be less appealing to late adopters in the short term, but it could appeal to the “early majority” segment, which is somewhat less price sensitive. That should help Microsoft during the important holiday season, when sales of video game consoles surge and they release Kinect, Halo Reach, and other high value items. Microsoft will also benefit if existing Xbox 360 owners choose to upgrade to the new Slim units. In addition, both Microsoft and Sony are benefiting from an increase in HDTV adoption.

If Microsoft maintains its dynamic pricing policy, consumers should see Arcade Slim consoles drop in price early in 2011 (and possibly sooner) to match the price of legacy Arcade systems.¹

Myopic Pricing and the Nintendo Wii

Unlike Sony and Microsoft, Nintendo has chosen to maintain a myopic policy when it comes to home console pricing. It has dropped the price once - in 2009 – by a modest $50. Nevertheless, Nintendo’s low manufacturing costs give it room to maneuver and we have long advocated that Nintendo follow an aggressive pricing policy as a way to reach late adopters.

Research has shown that price elasticity in video game hardware declines over time (Nair 2007), and therefore the longer Nintendo waits to drop the price of the Wii, the harder it will be to attract late adopters. Liu (2010) assumes that dynamic pricing and penetration pricing (starting with a low price to gain market share early in the product life cycle) are mutually exclusive. However, Nintendo’s initially low manufacturing costs placed the Wii in a strong position to take advantage of both markets. Although the Wii’s initial low price helped Nintendo become the market leader early in the cycle (it also benefited from important product and marketing innovations, discussed at length in the book), it has failed to respond to changes in consumer purchasing behavior.

A key characteristic of late adopters is that they are less likely to purchase more than one console, whereas early adopters and close followers often acquire multiple consoles. As a result, Nintendo’s failure to adapt to changing market dynamics could reduce its ability to reach this valuable market, which accounts for nearly half of all console purchases.

Footnotes

¹The Xbox 360 Arcade was originally marketed as the Xbox 360 “Core” and was priced at $299. In 2007, Microsoft replaced the Core with a similarly configured “Arcade” at $279. In 2008, Microsoft cut the price of the Arcade to $199, followed by another price cut to $149 in early 2009. In July 2009, several large retailers clearanced remaining Arcade consoles and bundles for between $79 and $129 after rebate.

References

Liu, H., “Dynamics of pricing in the video game console market: Skimming or penetration?,” J. Marketing Res., 2010.

Nair, H. “Intertemporal Price Discrimination with Forward-Looking Consumers: Application to the US Market for Console Video-Game,” Quantitative Marketing and Economics, Volume 5, Number 3, 239-292, 2007