Valve boss explains Steam pricing experiments

Steam has become pretty well-known for its regular sales, which offer sizable discounts on games and classic bundles. Valve boss Gabe Newell has explained the string of pricing experiments that led to its current strategy of regular sales, in hopes that it will help inform the digital marketplace on the whole.

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First, they measured price elasticity by quietly dropping the price of a game. "What we saw was that pricing was perfectly elastic," Newell said at at TechNW panel reported by Geekwire. "In other words, our gross revenue would remain constant. We thought, hooray, we understand this really well. There's no way to use price to increase or decrease the size of your business."

But that assumption was proven wrong rather quickly, when Valve tried out a heavily promoted sale. While they expected gross revenue to remain the same during a sale, given the reduced cost and increased purchases necessary to offset the discount, revenue actually increased significantly. "Instead what we saw was our gross revenue increased by a factor of 40," Newell said. "Not 40 percent, but a factor of 40. Which is completely not predicted by our previous experience with silent price variation."

He calls this practice "time-shifting revenue," saying the company is moving sales from the future. But even by that reasoning, it had greater long-term benefits, since the games on sale continued to increase their numbers after the sale was over. "Essentially, your audience, the people who bought the game, were more effective than traditional promotional tools." He says the company then tried the same experiment with a third-party game and saw the same results.

Newell also claims that making Team Fortress 2 free-to-play increased sales by a factor of five. "That doesn't make sense if you're trying to think of it purely as a pricing phenomenon." But he says it pays off in the long-run, since most F2P publishers Valve has talked to have reported a 2-3% conversion rate of people purchasing in-game. A meatier game like TF2 enjoys 20-30% of people who purchase extras.