Five hundred and ninety-nine U.S. dollars is indeed a lot to ask for a gaming peripheral. My column this week talks about the price, why I think it went up so sharply, and why it has me a little worried.
It’s the classic manufacturing problem:
The more you make, the cheaper it is to produce each unit. Let’s say it takes a million bucks to establish a factory to produce Widgets. Custom machines need to be built, people need to be trained, and space for the raw materials needs to be acquired. On top of this, it takes about fifty dollars worth of parts and labor to produce a single Widget.
If we only sell one, then we need to sell it for $1,000,050 to break even. If we sell a million, then those setup costs get spread out over all the units, so we only need to charge $51 apiece to break even.
Shamus, everyone knows this. Why are you wasting my time with this “Intro to Business 101” crap?
Well, when you’re talking about a new product with an unknown demand, then you need to play a dangerous game of brinkmanship. If you produce too few, then the shelf price will be way too high, fewer people will want it, and you’ll end with with a failed product. But if you go the other way and overestimate demand, then you get stuck with a bunch of Widgets that nobody wants to buy. Sure, that $51 price is nice and low, but there is an upper limit of the number of people in the world who will want a Widget. Some people just aren’t interested, no matter how low you can make the price.
Getting stuck with unwanted units is the worst. If you make too many, then you’ve got this big pile of very expensive Widgets that nobody wants to buy right now. You have to store them, which means they’re costing you additional money on top of what you initially paid to produce them. This is particularly true when retailers realize your product isn’t selling, so they pull it from the shelves to make room for crap people actually want. If a lot of retailers all return your unwanted product at once, you may have more units than you can physically store. What are you going to do, throw even more money into this hole by buying long-term storage? Sure, you can cut the price and wait for them to eventually sell, but if your product is bad enough or unwanted enough, it might end up costing you more to wait for them to sell than it would to simply throw them away. Which is how you end up with thousands of unsold computer games dumped into a landfill.
Yes Shamus. We’ve all heard the story about Atari.
The point is that you’re looking for the sweet spot on a demand curve when you have no idea what that curve is shaped like. Maybe $69 is the magic number that will make the Widget 1.0 irresistible to consumers. Maybe there are 1.5 million people in the world who actually want a Widget. But you have no way of knowing these things for sure. And market research can only take you so far.
This is still pretty obvious, Shamus.
Okay, so you’re trying to solve an equation for which most of the variables are unknown. Now here’s the tricky part:
When dealing with products that benefit from the network effect, popularity can form a positive feedback loop that will drive up demand. More people will want it, and the people that already want it might be willing to pay more. But you need to sell a lot of units before that happens.
In the case of the Rift, not only do they need to solve for the right spot on the demand curve, but you need the initial install base to be large enough to be a viable target for developers. Sure, you can sell 10,000 units for $500, or you can (humor me here) sell 1,000 units for $5,000. You make five million bucks either way. But no developer in their right mind will want to make games for a device that’s only owned by 1,000 people. So you’re not just trying to balance you own costs, but also trying to make predictions on behalf of an unknown number of potential VR developers.
More users mean more games, and fewer users mean fewer games. On top of this, games themselves have positive feedback loops. The more popular a game is, the more people want to talk about it. If people want to talk about it, they will click on articles about it. Which gives the press an incentive to talk about it even more, thus further growing the user base. People who passed on the game at first might end up getting it just to see what all the fuss is about, because people want to be part of the conversation.
Which is to say: Pricing the Oculus Rift is a hard problem and I’m glad it’s not my job.
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