Higher Prices = More Business?

Gaming is one of the biggest and fasting growing markets. It used to be that Nintendo was god, controlling 75% of the market in 1986. Today, they still have a presence, but compete on a different level than Microsoft’s Xbox 360 and Sony’s Playstation 3. (This is actually funny because in the book The 22 Immutable Laws of Marketing, authors Al Ries and Jack Trout argue that according to the law of duality, eventually two companies will dominate a given market and the others will fall by the wayside. Only time will tell if this is true in the case of console gaming). Both consoles offer a wide array of entertainment options such as online play, high definition gaming, high definition videos, Streaming Netflix, wireless capabilities and many other “must have” features. As of late, Playstation 3 (PS3) has begun offering many of the same features Xbox 360 (360) offers; however, PS3′s features are either free or built in to the system, and the 360′s always seem to cost.

Take for example HD video playback. It was announced before the release of the PS3 that it would offer Blu-ray disc capabilities. This would enable better quality game play, and the ability to watch true HD 1080p movies. Xbox 360 soon added an external HD movie player that was sold separate of the system for a hefty $199.99. Also when the 360 was released, if you wanted to play games wirelessly, you had to purchase an adapter for $99.99. PS3 offered  built in wireless. (Recently, a new 360 was released that has built in wireless. However, HD videos cannot be played since “HD Movies” are no longer in production, and Microsoft decided not to add the Blu-ray feature). In addition, if you want to play online on Xbox 360, also known as Xbox live, you have to pay. PS3 offers Playstation Network (PS3) for free. Now all this post has been up to this point is background information. The real purpose of this blog post is to ask a question. Microsoft recently announced that it would increase its 1 month Xbox live membership cost by 25% and its 12 month membership by 20%. Why? Why when the economy is in an all time low, and consumer confidence is at an all time low, and the rest of your products cost a considerable amount more than the competition, even when the competition offers a superior product (in terms of included free features and, in my opinion, better game video quality) would you choose to raise your prices???

The answer: Does it really matter if prices are raised? Zach, a co-author of this blog, has always preached that a great strategy is to create a product that does well when the market is up, and just as importantly, if not more, when the economy is down. One would expect that in a recession, consumers spend much less of their income on things such as gaming. This however is not true. People tend to stay inside more and spend more on home entertainment. One example is going to a movie vs. staying home. On a Friday night for a family of four, a trip to the movies will cost about $40 (just for the tickets). Add in a large soda, large popcorn and candy, and you’re somewhere around $60!!! That should be illegal. So why not just visit your local gaming store and for the same price, buy the latest game or 2 Blu-ray movies?

This is exactly Microsoft’s approach. Gamers seem to not be too sensitive to price changes, as long as they are not too big of a change. (Xbox live went from $7.99 to $9.99 per month and $49.99 to $59.99 per year). So maybe Microsoft is going for the stereotype of “expensive = good” as described by Robert Cialdini in his book Influence, The Psychology of Persuasion.

Question: Would you as a consumer continue to play Xbox live if its prices were increased by 20 to 25%? Or would you find a less expensive substitute, such as PS3?

-Austin