Price Adjustments to New Information: Sony PS3

Tim J. Smith, PhD
Founder and CEO, Wiglaf Pricing

Published August 1, 2007

With experience, professional pricers instinctively learn to laud price increases and denigrate price decreases. Sometimes though, it is a good idea to lower your price.

On July 9th, Sony Corp. announced it was decreasing its 60 GB PlayStation 3 by $100 while launching an 80 GB PlayStation 3 at the prior price. This alters the 60 GB PS3 price from $599 to $499, near that of the 120 GB Microsoft’s Xbox 360 Elite at $480. Why might the price drop be proper? We have to understand the effect of new information.

The Prior Assumption

The PlayStation 3 does provide a significant technological advantage over the Xbox 360 Elite that could justify the significantly higher price in that the PS3 offers users the option of playing high-definition Blu-ray Discs alongside the traditional DVDs.

Because the PS3 offers users the option of playing high-definition Blu-ray Discs alongside the traditional DVDs, it could have been anticipated that it would provide a significant technological advantage over the Xbox 360 Elite that would justify the significantly higher price.

The New Information

Unfortunately, the Blu-ray format hasn’t caught fire with consumers. Since inception, only 1.8 million Blu-ray discs have been sold. Also, as a platform for video entertainment, the Blu-ray format is competing with an industry consortium supporting the HD DVD format. Considering that there are over 400 million homes in the key markets in Europe, North America and Asia where the Blu-ray players would potentially be purchased, and considering that the Blu-ray format has been marketed for over a year, the current sales levels do not indicate that the Blu-ray format is currently perceived as highly valuable by consumers. (Further marketing efforts by Sony may prove effective in changing customer perceptions, but it is difficult to make predictions.)

Hence, the PS3 was marketed with an expensive feature that the main-stream gamer didn’t sufficiently value. Sony learned this through their sales of PS3. Through May 2007, U.S. retailers had sold 5.6 million Microsoft Xbox 360s and 2.8 million Nintendo WIIs against a mere 1.4 million Sony PS3s.

The Strategic Pricing Decision

Armed with new information, Sony took a corrective pricing action in the summer months, well ahead of the Christmas shopping season, by lowering its price. In doing so, Sony brought the PS3 closer to the market’s perception of its position on the Price to Value equivalence line. (See figure 1 for a conceptual representation of this argument.)

We should expect that Sony did not make this decision lightly. At stake here is not only Sony’s profitability on the PS3 gaming console. The current price and sales volumes of Sony’s PS3 has strategic implications on all future sales of games and developer licenses for the PS3 gaming platform, on and all future sales of Blu-ray DVD players and discs, and on Sony’s relationships with movie production houses in their battle against the HD DVD format.

When new facts correct assumptions, it is usually best to adjust one’s decisions to reflect reality.

Figure 1. Sony PS3’s Price Move Reflects Market Reality.

Notes

Sony (July 9, 2007) Sony Computer Entertainment America Introduces New 80GB PLAYSTATION®3 (PS3^TM); Announces New Price on Current 60GB Model, Press Release.
The price of $499 may be near marginal production costs, yet this should not cause excess grief. In the gaming market, the game console is often used as a platform for gaining profits from future sales of games. This and other network externalities strategically drive the gaming competitors to seek large install bases quickly.
Nick Wingfield, “Sony Cuts PlayStation 3 Price to Lift Sales”, The Wall Street Journal, July 9, 2007. p B4.
Merissa Marr and Sarah McBride, “Europe Steps Up Probe of New DVD Formats”, The Wall Street Journal, July 3, 2007. p A7.
Michael V. Marn, Eric V. Roegner, Craig C. Zawada, The Price Advantage (Hoboken, NJ: John Wiley & Sons, Inc. 2004) pp. 43-73.
Tim Smith, “iPod v. Walkman, Winning Price to Quality Competition Using Customer Perceptions and Market Segmentation”, Wiglaf Journal, November 2006. https://wiglafjournal.com/pricing/2006/11/ipod-v-walkmanwinning-price-to-quality-competition-using-customer-perceptions-and-market-segmentation/
A more thorough analysis may investigate Sony’s pricing move as part of an overall versioning and time-based market segmentation and price discrimination strategy. We have relegated that discussion to pending forthcoming article and herein have chosen to focus on information and decision making.

Posted in: Pricing
Tagged: Microsoft, retail

About The Author

Tim J. Smith, PhD, is the founder and CEO of Wiglaf Pricing, an Adjunct Professor of Marketing and Economics at DePaul University, and the author of Pricing Done Right (Wiley 2016) and Pricing Strategy (Cengage 2012). At Wiglaf Pricing, Tim leads client engagements. Smith’s popular business book, Pricing Done Right: The Pricing Framework Proven Successful by the World’s Most Profitable Companies, was noted by Dennis Stone, CEO of Overhead Door Corp, as "Essential reading… While many books cover the concepts of pricing, Pricing Done Right goes the additional step of applying the concepts in the real world." Tim’s textbook, Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures, has been described by independent reviewers as “the most comprehensive pricing strategy book” on the market. As well as serving as the Academic Advisor to the Professional Pricing Society’s Certified Pricing Professional program, Tim is a member of the American Marketing Association and American Physical Society. He holds a BS in Physics and Chemistry from Southern Methodist University, a BA in Mathematics from Southern Methodist University, a PhD in Physical Chemistry from the University of Chicago, and an MBA with high honors in Strategy and Marketing from the University of Chicago GSB.