Pay What You Want — a Sustainable Business Model?

revealingheart writes "As 2010 comes to a close, it could be remembered as the year pay-what-you-want pricing reached the mainstream. Along with the two Humble Indie Bundles, YAWMA offer a game and music bundle, and Rock, Paper and Shotgun reports on the curiously named Bundle of Wrong, made to help fund a developer who contracted pneumonia. More examples include when Reddit briefly let their users donate an amount of their choosing for upgraded accounts when they were having financial difficulties; the Indie Music Cancer Drive launched Songs for the Cure for cancer research; and Mavaru launched an online store where users can buy albums for any amount. Can pay-what-you-want become a sustainable mainstream business model? Or is it destined to be a continued experiment for smaller groups?"

Comments

Publicity worked for Humble Bundle

[devxo]

Humble Bundle is a success because of the publicity it gets. It gives them lots of sales, but the same model doesn't work without the publicity and if there would not be nothing special about it, well they would get all the reporting from gaming websites and sites like slashdot. Remember that if user pays $5, it's less than $1 per game. The normal prices were at least $20.

Re:Publicity worked for Humble Bundle

[Monkeedude1212]

I don't think it can function without the fixed price system working in sync.

Sooner or later more people will get used to paying less than $60 for a game by using a digital download like the Humble Bundle and sales through Steam. I don't think I can ever justify paying even $40 for a game ever again, just in my experience. I've now come to think that full feature titles are only worth about $20 - and if they aren't on sale throughout the year, they will be eventually. When I can get any number of indie titles for 5 or under, that's even more reason.

Eventually it'll reach a point where I think $20 is almost too much, and that $5 is average, and that a "Pay what you want - oh sweet, only $1" scheme might take over. Which won't be nearly as profitable.

I need those higher up publishers ripping people off in order to keep my perception of a games worth in perspective.

And then years down the road, pay what you want turns into basically freeware.

Re:Publicity worked for Humble Bundle

[click2005]

Big game publisher manipulation has set a perceived normal prices of at least $20.

FTFY

I do agree with what you said though. I paid $25 for HIB2. I played Osmos but the rest are of no interest to me. I paid that much mostly because I applaud what they're doing but I doubt I'd do it as often especially if there were hundreds of these packs.

I also think that if there were hundreds of these kinds of deals that people's perception of a 'normal price' would change. This is especially true for these games kinds of games as they're suited for the smartphone market that isn't yet controlled by the big game companies.

Re:Publicity worked for Humble Bundle

[Anonymous Coward]

Sorry but you "zero cost" people are talking utter bullshit. Support, patches, maintaining a community, marketing, hosting, payment processing, running a real-life bureaucratic nightmare (i.e. a business), all that annoying shit you need to actually survive while you make the next game and so on don't grow on trees for free. How about you publish a game and run a business yourself, then come back and tell us how everything is free and runs by itself?

Also, the "better 5 than nothing" argument is heavily flawed. They definitely lost full-price sales to people who only paid a fraction of that. It's only really viable if you get a huge volume to compensate the massive decrease in per-sale profit. For one of those games it's likely around several dozens of bundle sales to compensate one full-price sale (low average price divided by 5 games, minus donations and fees is hardly anything). Without the publicity to back it up, it wouldn't work.

Re:Publicity worked for Humble Bundle

[hedwards]

$10 for a CD is overpaying by quite a bit. They fought tooth and nail to keep the price artificially inflated at $18 per disc for so long, eventually Steve Jobs and piracy was able to convince them to lower the price, but even at $10 a disc, you're still over paying. A lot of the extra money goes to the process of creating popularity and over processing performers that ought not be allowed anywhere near a microphone.

Movies tend to be different as it's hard to know what they ought to cost.

Re:Publicity worked for Humble Bundle

[icannotthinkofaname]

Also, the "better 5 than nothing" argument is heavily flawed. They definitely lost full-price sales to people who only paid a fraction of that.

I know I'm probably falling for a troll here, but can you prove that those who paid less for a game through a pay-what-you-wish thing are guaranteed to have paid full price if the cheaper option wasn't available?

If you can prove this, I recommend you apply for a job on the RIAA's legal team. From what I read here on /., they could probably really use proof of this idea.

And just to disprove your statement with one (admittedly, anecdotal) counterexample already: I know I've come across games before on Steam that were $20, for which I would have been willing to pay $10, or that were $10 and for which I would have paid $5. Therefore, I am not guaranteed to pay full price if the cheaper option isn't available. Therefore, your statement is false, and you cannot know how many full-price sales you lose to events like Humble Bundles.

Re:Publicity worked for Humble Bundle

[hairyfeet]

I'm sorry but I think you're wrong, and here is why: We PC gamers enjoy one of the largest catalogs on the planet and thanks to Windows backwards compatibility I can play games from 20 years ago to games released yesterday. There is also a great wealth of places where one can get quality titles, even AAA titles, for quite cheap, such as the Good Old Games Xmas Sale where nearly 300 games are marked down, many half off. This not only makes for a truly staggering amount of choices, but it means that even guys without tons of disposable income such as myself can literally have dozens of games installed we haven't even gotten around to trying yet.

That means the indie developer really needs to find a way to get noticed, the "pay what you will" model does that. Hell I just paid $5 each for Evil Genius (damned fun BTW) and Unreal 2 SE, so some indie guy I never heard of trying to sell me a game for $20 doesn't stand much of a chance. Sell me a fun game for $5? Not only will I remember the guy, I will happily spread the word to friends and on places like /. just like I like to plug GoG simply because they have great prices with NO DRM and great service.

Everything has a price, and the price of the ultra low barrier to entry for PC games means an endless sea of games put out every year. Some good, some bad, but most frankly never even get heard of and die alone, not because of the game itself, but simply because trying to be heard with the endless shouting of a bazillion other developers is damned near impossible. The "pay what you will" model helps a developer starting out or who has a game they think is good but just not getting exposure to get that much needed foot in the door. any marketing type will tell you the hardest thing to do today is build a brand with so much media vying for our attention. This new model gives a chance for the little guy to do EXACTLY that, and without having to accrue a ton of upfront costs like advertising, as the gamers will do that for you. Seems like just good business to me.

Re:Publicity worked for Humble Bundle

[tnk1]

Actually his point is valid, it all depends on the numbers. If you have a game that 100 people would have bought for say 20 dollars then you have 2000 dollars in sales. However, if you assume that "pay what you want" customers will average only 5 dollars, then those 100 people who would have paid 20 dollars then will only pay 5. That cuts your "guaranteed" sales to 500 dollars. So now, the people who weren't going to spend the money at all at 20 dollars need to make up the 1500+ dollars. That is another 300+ buyers. (I use the + in this case to point out that there is no point in this pricing method if you are just going to make as much money as you would have with a regular pricing model.)

If you look at that, you are making a big presumption on just how many people out there would buy a game if it is simply cheaper, even if you might do so. In this case, 3/4 of your customers need to have been people who wouldn't have bought the game to begin with solely on the cost factor.

That probably will work for some games, but honestly, given the fact that millions of people do shell out for expensive games, its more likely that your indie game didn't sell for other reasons such as: no publicity, significantly less polish, no franchise tie-ins, etc.

Bear in mind that people, even hardcore gamers, have only a certain amount of time in a day to play your game. They will want to play the games that they have bought as much as possible to get their money's worth and if the game is really, really fun, they'll play it constantly because they like playing it. Eventually they will tire of your game and move to the next one, but if you consider that a 60 dollar game could net you hours and hours of play, as well as even some social advantages to playing a popular game, that 60 dollars is actually not that much of a price to pay for the amount of recreation provided.

So yes, you may well be willing to buy a game if it is half price, but I think your experience is at best anecdotal, and at worst, you aren't considering the realities of your own spending and time availability accurately.

Another issue with the model is where the expensive games come back to bite the indie games on the ass. Right now, many games out there which retail for 60 bucks, I could just pirate from the internet if I was too poor/cheap to pay for it. Now, while this actually *does not* cut into the sales of the big gaming companies, since the cheap gamer would have never shelled out the money to begin with, it *does* cut into the indie gaming developer's pockets. Why? Very simply because that gamer, who would usually be more likely to spend money on your less polished, but proportionately cheaper product, now gets high quality games for free. Its a lose-lose for indie game developers on that front. That means that there is a whole segment of the unpaying masses that have a limited amount of time and a ton of free, high quality content to fill it with. Is that segment small or large? Its hard to say, but it does need to be considered.

In the end, I feel that the pay as you want model is very simply a gimmick to play to a certain segment of gamers. If a small number of companies tout their liberal pricing policies as evidence that they are "different" than everyone else, that's old school PR value, not a new and interesting way of doing business and that is not a put-down. Such a strategy can definitely work on that small scale. If the whole indie industry turns into that? Well, then it just it won't work. You will find that, as you might expect otherwise, the better indie games will win out, and that would have happened if the price was 20 dollars or 5 dollars.

Re:Publicity worked for Humble Bundle

[AusIV]

There is an important distinction between "cost", which you're talking about, and "marginal cost", which the GP is talking about. Marginal cost is the increased cost of producing one additional unit, and for digital goods marginal cost is very nearly zero. The only marginal costs you mention are support and payment processing, the rest are more or less fixed costs. The marginal costs for selling a digital good with minimal support are very, very low. Once the fixed costs are covered, selling an additional unit for $5 will be very close to $5 profit.

There's definitely a matter of balancing opportunity costs. It would be silly for a company with a highly anticipated title to offer that game at a name-your-own-price rate. But once sales have started to taper off, it makes sense to lower the price and get something, rather than keeping prices up and get nothing. This can serve to get people talking about the game again, and may lead to sales at regular price once the sale ends.

I don't believe that pay-what-you-want is a sustainable business model, but I think it's a great way to milk some extra cash out of a title that isn't selling much and it can help bring hype to a game.

Re:Publicity worked for Humble Bundle

[hairyfeet]

Isn't GOG great? You can gift games to your friends, the prices are crazy cheap and even cheaper now that they are having their Xmas sale which IIRC lasts until the 27th, all the games work on BOTH x86 AND x64, and NO DRM AT ALL, no phoning home crap, no stupid ring 0 drivers that can break your OS, oh and for the Linux guys out there they even have a list of games that work on Linux so you can even give games to the FLOSSie in your life. You can redownload ANYTIME you wish, they have tons of extras like wallpapers, avatars, all kinds of cool stuff you get when your purchase, and their forums are top notch, with everything from walkthroughs and mods to tutorials on just about everything in a game.

So please, if you care about PC gaming, spread the word about GOG far and wide. Tell your friends, family, post on places like /., anyplace you can spread the word. Because the ONLY way we are ever gonna do anything about the nasty DRM infections, and yes they ARE an infection, as a repairman I can't even name how many virus like symptoms I've traced back to bad DRM schemes, is to vote with our $$$ and GOG lets us do that. With GOG I keep all my games on a TB USB drive, I can carry them with me when I visit family, and even without a connection it all "just works". I was always a "CD and a box" kind of guy but GOG really changed my tune. I have NEVER had a more easy or satisfying purchasing experience online.

Oh and be sure to sign up for the newsletter. They will not send you anything but notices about sales and new releases, and their sales are killer. I mean where else can you buy everything from Far Cry to Rise of the Triad, and with nearly all the games under $10, and many under $5? With that Xmas sale now is the time to load up on games! Well I wish everyone a Merry Xmas, I'm gonna kick back and enjoy me some fragging courtesy of GOG!

Re:Publicity worked for Humble Bundle

[pinkushun]

Breaking it down even more, from www.humblebundle.com

Average purchase: $7.77
Average Windows: $6.64
Average Mac: $9.06
Average Linux: $13.78

Re:Publicity worked for Humble Bundle

[ThePromenader]

Addendum: when it comes to 'fun' category, I could care less if an author/actor/musician becomes a billionaire because of his 'entertainment value' - all that matters is his/her worth to ~me~. Yet when you throw market-manipulating corporations into the question (film industry, publishing houses, RIAA), I begin to hesitate: do all those taking a share of my contribution ~deserve~ what they are getting?

Re:Publicity worked for Humble Bundle

[yariv]

Even if the average price is 5 dollars, why would you assume this is the average price for those willing to buy for 20? I would guess their average would be significantly higher, in fact quite close to 20 dollars.

Re:Publicity worked for Humble Bundle

[Bigjeff5]

You're failing basic supply and demand principles here.

For computer games, supply is effectively infinite, so we can ignore that side of the equation, and we need only look at demand.

The question is, is $20 the optimal price point?

Taking your example, only 100 people will pay $20 for the game. At $30, say the number drops to 50. Sales just went from $2000 to $1500 by raising the price. However, if the $30 price point only has 10 fewer purchases, well now your sales went up to $2700. In this case, the $20 price point is clearly too low.

On the other hand, if $20 is too high then things will go something like this: the price is dropped from $20 to $5, and 900 more people are willing to buy the game at the drastically reduced price. That's $5000 for selling 1000 copies at $5 vs $2000 for selling 100 copies. The $5 price point is the clear winner here. To continue, dropping the game to $1 may only increase sales by another 3000 copies, sounds like a lot, but that only gets you $4000 total - a loss from the $5 price point. On the other hand, dropping down to $1 may actually boost sales to 10,000 copies, a clear win.

Each product has an ideal price point, where the demand for the unit and the price needed to match that demand produce the greatest possible profit.

This is why stores have sales. Think for a moment about Black Friday - the most profitable shopping day of the year. It is called Black Friday because it is the day when most retail stores go from being "in the red" - i.e. no profit for the year - to being "in the black" - profitable. How can this be, when it is the day when retail items are at the lowest price they will be all year?

The answer is demand. You will always increase demand for a product by reducing the price. For almost all products this also means an increase in profit. The question is not whether reducing the price will bring in more money, the question is at what point will reducing the price stop bringing in money. With retail sales there are hard limits - things cost a certain amount to make, so the price cannot be reduced below that and still make money (on that item - you can sell for a loss to boost sales of other items, for an overall profit gain - see Xbox 360 vs Wii for a good comparison of the two strategies). With digital sales the limit is simply a number that needs to be met (the cost to make the first copy), the hard limit (bandwidth & server costs) is so minimal as to be insignificant.

This also illustrates the genius of retail sales. At retail, an item initially sells for its highest price. Once most of the people who are willing to pay the high price have purchased the item it goes on sale, bringing in a whole new set of customers who were not willing to buy at the higher price but are perfectly willing to buy at the new, lower price. Depending on the nature of the item, the new price could become the permanent price, or it could go back to the old price. Either way, once sales level off, there is another sale, and a whole new slew of customers come in to buy the product.

This allows the retail stores to extract the full profit at each stage. For my example, it would combine the $30 profits, $20 profits, and $5 profits. You would end up with $1500 for the 50 who would buy at $30 or less, another $1000 for the remaining 50 who would buy at $20 or less ($2500 for the first 100 sales), and $4500 from the remaining 900 who would buy at $5 or less. Once the money train has dried up, you can then even drop to $1 to catch the remaining 3000 people, for another $3000. This brings the total profit to $10000, and eliminates the risk of dropping the price too low.

As you can see, in my example the last two bumps were the most significant, but for other products that could easily happen at other price points. For example, a polarizing game with a core of fanatical fans but not many others who would be willing to purchase the game no matter the price. You might only get 100 people to buy,

I tried...

[pspahn]

I recently put a bunch of stuff that I don't want/need in the hallway with a sign asking for people to take what they want, but to leave any amount of cash under my door if they wanted to. One guy stopped by to give me $5 for my camping stove. No one else left anything. Oh well.

Re:I tried...

[Binestar]

this is like the guy who put a couch out near the road with a sign "Free" and it was there a week. Took the "Free" sign off and put a sign that said "$25" and it was stolen that night.

Re:I tried...

[adonoman]

This model works much better when you're dealing with people face to face. Had you set up a table and asked people to pay what they wanted, you would have either gotten a lot more money, or no one would have grabbed anything. People are a lot more "honest" when someone's watching, even if they know that there won't be consequences of not being so. This is why busking works, but you'll have a hard time selling music on line in a pay-what-you-want model.

Re:I tried...

[sakdoctor]

That's not how it's done these days.

You could have removed some key parts of the stuff, and sold them as "unlockable content".
Otherwise you could have done an advert supported model, with banner ads epoxied to everything.

Re:I tried...

[Anonymous Coward]

You laugh, but this works. My parents have used it successfully to separately get rid of a refrigerator and a stove. The fridge had been sitting out for weeks, but it was picked up within hours of the $ sign going up.

In fact the guy started loading it on his truck, looked over and saw us, continued loading for a second, then thought twice and yelled over: "is it okay if I take this?" We yelled back "yeah."

My theory is that the "free" sign tells people it's worthless junk, and they don't want to haul it home just to find out it doesn't work. Attaching a dollar amount tells people that it's worth the effort of picking it up.

Re:I tried...

[Bigjeff5]

...but you'll have a hard time selling music on line in a pay-what-you-want model.

Seemed to work very well for Nine Inch Nails and Radiohead, they each made several million on their experimental attempts online sales. NIN used a tiered model (starting at free), while Radiohead was pay-as-you-want, but the concept is the same and the results are undeniable.

Musicians typically don't make much, if anything, on album sales. By cutting out the labels entirely both of these bands received 100% of the profit. Even if overall sales were a fraction of what the label could have done, the musicians still came out far ahead.

Seems to work for Restaurants

[mots]

In Vienna we have a pakistani Restaurant called the "Deewam", which is basically "eat as much as you want - pay as much as you want". Seems to work, it's well-frequented (mostly by students for obvious reasons) and it's been there for quite a few years. Maybe it's because you have to pay an actual person and look him/her in the eye. As most people don't want to look like assholes, they pay adequate prices.

Pledge Music

[lkcl]

pledgemusic.com - this is an alternative business model. kickstarter.com - this is an alternative business starter model.

however for software, the model is radically different. once you're into "self-funding", the next version, once completed, is almost pure profit thanks to the internet. there's no "physical goods" to produce. if it's data, it can be hosted, and it can be distributed for virtually nothing.

so under these circumstances, "pay what you like" actually makes sense.

and, remember also, you can always put advertising onto the "pay" page, which can, in certain circumstances, earn you more than you could for the data-based products being sold! there are plenty of sites which give you 10-step guides on how to do this... but as always, you always need to begin with that niche "good idea" in the first place...

I Do This

[chromatic]

I've just done this with the book Modern Perl. Rather than punishing paying customers with DRM or trying to track down and stop copyright infringement, my publisher gives away electronic versions for free and asks readers to spread them to other people, to write reviews, and to consider donating a reasonable value for the information.

So far I've earned more money more quickly than I would have with the traditional publishing model.

Re:Subscriptions work better

[Kjella]

If you're paying for a server you're only likely to get a server, not development. If people can play it for free without the subscription or use alternate servers, the incentive to develop is really low. You can funnel lots of your profit into development only to have the business being taken over by someone providing cheaper hosting. Unless you start with exclusive content, in which care you're quickly back where it's only one server/network worth playing on.

It isn't a matter of opinion

[serutan]

Either pay-as-you-go will work as a sustainable business model and become the norm, or it won't. Debates among armchair economists won't affect the outcome. If IP stakeholders start attacking pay-as-you-go with PR campaigns, lawyers, and Congressional whores, then you'll know it's definitely working.