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    Video games have supposedly lost their nerdy stigma, (thanks to Rockstar and Angry Birds and the Wii yes, but you can’t anticipate $70 billion in revenue by 2024 and not look a little grown up) but I still find myself referencing Tom Bissel’s journalism and Jason Rohrer’s art games when the conversation turns to what many people continue thinking of as nazi/zombie wasting adolescent pachinko. But gaming’s grown up and in possession of analytic insight that could interest even that most mature institution—publishing. I’m not referencing a new app based on the Wasteland or an update of Ubik (Jonathan Lethem why was the Library of America PKD not enhanced with Cryo’s classic?) but Valve co-founder Gabe Newell’s excellent digression on price testing in video games. As Newell says, “There’s probably going to be lessons in it for other people trying to create value on the Internet.”

    Gabe Newell is a co-founder of Valve, creator of game franchises such as Half-Life and Portal. Geekwire today published an excellent recap of Newell’s insight on how his company, who distribute games digitally through their online Steam storefront, tested price elasticity, consumer demand, ideal price points and freemium models.

    Sounds like Amazon price testing writ in gibs, to me.

    Newell goes into some detail about how Valve, watching daily sales in a controlled test, thought they’d determined that pricing for their titles was perfectly elastic, that gross revenue remained constant no matter how they changed price. But then they varied their formula and sharply dropped prices and saw revenue increase by a factor of 40. They thought they were just time shifting sales, ie, encouraging people who would buy in the future to buy immediately, but further tests proved the reality was more elusive and more complicated.

    You should read the post to get the gritty details – but the big take away is that a promoted sale and price drop increase sales at the time of promotion and create a longer term effect of increased sales after the promotion. This, Valve thinks, has something to do with users being more reliable drivers of revenue and additional sales than promotion or marketing. Furthermore, Valve has been experiementing with “free to play” branding. It’s a subtle distinction from “free”. They’re finding that companies that offer games designed to be “free” with an upsell to paid services often have a 2 to 3 percent conversion rate. But games marketed as “free-to-play” that offer a richer experience are seeing a 20-30 percent conversion rate of users who buy additional services.

    The core observation is more of a question Newell poses: “Why is free and free to play so different? Well then you have to start thinking about how value creation actually occurs, and what it is that people are valuing, and what the statement that something is free to play implies about the future value of the experience that they’re going to have.”

    Newell should write a book — and why not, he should use Vook to do it — but maybe a better course would be for the distribution and pricing minded to register for Steam accounts.

    tl;dr: How to succeed in business: Delete Facebook, hit the gym, stop playing video games but listen to the founders/programmers/thought leaders when they talk about pricing, or just about anything.

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