Published on July 30th, 2013 | by Chris Scott2
Question of the Week: Steam Sales
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As someone who held off purchase PC games because I knew a Steam sale would cheapen them eventually, I’d like to know: are the massive discounts of the Steam sales good or bad for developers in the long run?
Everyone loves a good sale. They are great opportunities to get things one wants (but probably don’t need) for cheap. Because most of us are rather self-absorbed, we often don’t think of the impact things like sales have on the people that make the things we want to purchase. For most people it’s really not a concern. But, if one wants to analyze the videogame industry, understanding how something like the Steam Summer Sale impacts developers is actually quite essential.
A vital first step in gaining a deeper comprehension of the sale’s effect is a basic comprehension of sales related businesses. Companies budget X amount of dollars for the creation of a project. After development is complete and when a product is released, retail outlets buy the product from for sale to the general public. These retail outlets can price the product as they see fit, but most will sell it for the manufacturer’s suggested retail price (MSRP) so as to maximize their profits on individual sales.
Sales at the retail level are not the same as sales at the manufacturer level and manufacturers need to be cognizant of both as it will determine what they can apply to their ledger. Sales to retailers go towards making the budget back and until a product makes back that money it is in the negative, commonly referred to as the red. Once they make enough money to cover the budget, sales convert to profit, commonly referred to as the black.
However, depending upon a manufacturer’s contract with a retailer for a particular product that money from sales to retailers might be a temporary entry if the retailer requires a certain amount of sell through of a product. If that number isn’t met, the manufacturer might need to purchase their product back from the retailer. Navigating the retail minefield can be quite tricky to say the least.
The above is the traditional chain for retail. The digital marketplace has changed things up quite a bit in terms of how things are handled. With no physical product to sell, manufacturers sell their product to digital retailers under different rules. Digital retailers, like Steam, host the product on their servers. This setup actually is quite beneficial to both manufacturer and retailer, though, as both get to take home a greater cut of the sales than through traditional retail.
The second thing that needs to be understood is the financial timeline. In terms of games, the most money towards the budget is gained in the first few weeks of sales. After those first few weeks, sales tend to drop off precipitously. What most people don’t understand is that companies set timelines for when and where they determine a product profitable. These timelines are based on forecasted predictions from previous sales of similar products. And that is the most important part of understanding how Steam Sales affect developers.
Another thing the common person might not take into account is that Valve doesn’t set the pricing; pricing is set at a point agreed upon with the manufacturer. As such, Valve approaches manufacturers about setting sale prices. So when you see a game like Bioshock Infinite priced at $29.99 during the recent Steam Summer Sale, it’s a manufacturer decision and 2K has determined that it can afford to cut the price to that based on their financial standpoint for the product. On the other hand, something like Tomb Raider from Square Enix can afford a deeper discount because Square has decided to cut their losses on the product already.
In the end the Steam sales mean little to developers in regards to helping or hurting their overall numbers. All that stuff has been figured out by bean counters well in advance. it may seem backwards but its just the way business works and its not really a concern of ours as customers. That said, there is a flip side to these Steam Sales: it puts product in the hands of future customers. You might not have bought Tomb Raider when it counted to Square Enix ‘s bottom line for the project but you can be sure that your purchase of it during the Steam Summer Sale is being logged by Square as interest in the series and could determine if another one is made or not. And more games we as fans like being made, is certainly a good thing for developers and fans.