Researching the price elasticity of software and the effectiveness of Loss Leader Pricing in Software Inc
This guide is also avaliable on Steam: https://steamcommunity.com/sharedfiles/filedetails/?id=3256150569
This guide is not for absolute beginners as I will not be detailing where every button is, there are plenty of absolute beginner guides that already exist. However, if you've already played a bit, you will understand this guide as the concept is very simple to execute.
Here, I detail what I've discovered about Software Inc's game mechanics, presented them, and added my thoughts onto it. Whether loss leader pricing is worth it or not, is up to you to decide.
Hey there! I’m Wang, and recently I’ve been experimenting with a sales tactic: Loss Leader Pricing. This isn’t much of a guide, but more of a summary of my research as I tried this tactic in game. It’s not super powerful or game breaking, but can give you an edge against your competitors and accelerate your growth.
What is Loss Leader Pricing?
The concept and execution is very simple. Its when a company sells a product at a lower price than usual (usually below market price) to sell more product, and often at a loss; whether it’s to increase market share, draw customers away from competitors, or stimulate more sales of complementary products*, the effect is still the same.
*a complementary product is when a product is sold alongside another product, eg. Phones and phone chargers, movie tickets and popcorn.
There are plenty of real life examples one can find by simply googling. One of such is Costco’s Rotisserie Chicken, which is sold at a net loss. Shoppers coming to buy the chicken would expose themselves to other products in the store and hence buy more. I haven’t personally seen this in action as Costco doesn’t exist where I live, but the concept still applies: attract more customers.
Before the game
I've just realized this guide is going to look a LOT like a lab report.
What I plan to do is to release a product at various prices, and compare the differences in market recognition and sales.
Before trying this out, there are a couple variables I needed to decide on.
Type of product: I chose a computer OS as the number of potential customers is constant (Not OS dependent). Computer OS in particular as it's the one with the most potential customers out of all OS types.
Quality and creativity of product: Visionary and outstanding. This will make competition less of a variable, thus exaggerating the effects of price, which is what we are trying to isolate and investigate here.
Price of product: This will be my independent variable. I will test out $0, $1, 50% of recommended price, and 100% recommended price for now.
Setting things up
Now, a little annoying quirk I encountered is that the game for some reason treats free products differently from priced products. In the design document, if I change the price to $0, then develop and release the software, i cannot raise the price; the game will give me a prompt saying "Product is already free". Similarly, if the price is non-zero and I try to change it to $0 afterwards, the game will say "please enter a valid value". So I have to develop the OS twice, in two seperate saves in order to test out the effect of free product too. Annoying.
I got myself 37 million dollars in January 1990. I hired a team of designers, programmers and artists for my OS, designed my Computer OS while following the recommended market targeting as best I can, and here I saved.
Notice that the recommended price is $150. I've gotten a marketing publisher as I don't want to set up a marketing team myself.
Data
Here is my gathered data from the various playthroughs.
points to note:
- I updated the software whenever I could, fixing bugs and updating tech levels.
- I spent $10,000,000 ordering 5 million copies for every release, which is counted as expenses and affects the value of total profit.
- Market recognition is not 100% accurate as the number of hearts is eyeballed.
- Approximately $4,000,000 was spent in development (salaries, food, bills, rent etc).
- I cannot sign a deal with a marketing publisher with a free product. For non-free products, a marketing publisher was used. (14.4% royalty) The total development cost is a lot higher with a marketing team for the free product.
- Every product, including the free one, was released on the morning of August 1993; I spent the rest of the day updating tech levels.
direct screenshot from Steam because Reddit table formatting UI is shit
* note that on the second month, I sold 294,628 copies as my marketing efforts caught up (Sparse > Prominent)
** I didn't make $37034 in sales because some people got refunds
Data analysis
Changes in sales when price changes
Seems like when you lower the prices a little bit from the optimal value, sales do go up a little, but not nearly as much to make up for the decreased price, resulting in less profit (Price inelastic demand).
But at very low prices, sales go down. This is very interesting, I did not expect this at all. You would expect the sales to go up when prices go down, right? Imagine a 1 dollar computer OS software that has outstanding quality, that would fly off the shelves! But not here. Upon release, the reviews do indeed say "It is suspiciously cheap".
And then sales skyrocketed when it's free. One would expect $0 and $1 to make no difference, but not in this game. Seems like Software Inc treats "free" and "not-free" products VERY, VERY differently.
So if we plot a graph of price of product against sales, I expect it to look something like this:
And in order to test this theory, I released the product at different prices with increments of $10 ($10, 20, 30 and so on, until 150% of the recommended price, which is $225) and recorded their sales on release.
According to my earlier data, seems like the sales on release and sales after a year are directly tied together: Hence, I won't waste time waiting an entire year 23 different times and only record the sales on release.
Now this was not what I was expecting. I gathered data until $100, before i noticed something was wrong. At $80, sales started to plummet. I was on track to getting no sales at all by the time I reached $150, the suggested price, in direct contradiction with my earlier data.
Taking a closer look, when changing the price, the prompt tells me, Suggested Price: $75. This was the price I set in the design document for this save (which I reloaded over and over to change the price). The anomaly in my data started occuring at $80.
Do you see it?
Seems like the game no longer takes their suggested price, $150, as the "best price" anymore. Before development, I "promised" to consumers that the price would be $75 in the design document. So when I raised the price to something above $75, consumers understandably got angry and didn't buy. You would feel cheated too if a game you were looking forward to jacked up it's price at the last minute for no reason, wouldn't you?
But the more important part is that the data for $10 to $70 fits into my theory. Raising prices, weirdly, raises sales. I'm sure there's a term for this in Economics, where increasing the price of something increases the perceived quality of the product. Some terms I could find with some simple googling and asking ChatGPT were "Veblen Good", "Prestige Pricing", "Snob Effect". You can look into those if ya want.
I re-released Scam OS with $150 set in the design document, and collected the rest of the data.
Note that data at $150 doesn't match the data I presented earlier as this is a completely different save - slight deviations due to random factors occurred during the development process (eg. competition).
Pretty much just what I expected. Massive sales at $0, and a second peak sales at the suggested price. Another noteworthy thing here is the total profit graph - the maximum total profit is the suggested price. Literally anything else will give you less total profit.
I didn't go all the way to $225 as the trend tells you pretty much everything. An exponentially decreasing quantity in sales as you go further and further higher than the suggested price, gradually approaching 0.
Market Recognition
Market recognition seems to be directly tied to how many sales you have. That makes sense. But it doesn't seem to be proportional - the free OS sold 5.4 times as many copies as the $150 OS, but only has a market recognition of 2.2 times more.
Competition
Competition is arguably one of the most important elements that decide the success of your product. Here are the competition charts for my 4 test products:
My Computer OS, which I have very creatively named "Scam OS" in an attempt to lure more customers into my social experiment, is represented by the white bars. There are some differences in the competition due to random factors I cannot control, but the general trend is the same: A very well-off OS dominates the market, I release my OS, and another OS quickly releases in succession. These graphs are not very interesting by themselves - Scam OS is able to compete, but not completely dominate the competition. Now, let's look at the $0 graph, shall we?
look at all that beautiful, beautiful white. Scam OS completely destroys the competition. Monthly OS sales at historical records.
Conclusion and Takeaways
So, what does this tell us about the effectiveness of Loss Leader Pricing in Software Inc?
Set the price of the product either to free, OR the suggested price. No in between. Definitely not even $1.
The whole point of Loss Leader Pricing is to generate more sales. By lowering the price, you generate a teeny tiny bit more sales, but lose out on a huge chunk of profit. When lowering it even more, the effect is reversed - you lower the price AND lower the sales.
This has been thoroughly proven in the excel spreadsheet and graphs. The peak value for profit occur at the suggested price; Sales peak at 80% of the suggested price ($120), but not by that much. So quite objectively speaking, any price in between is not worth anything. Set the price either to free OR the suggested price in the design document.
The price set in the design document should be the finalized price. (which should be the suggested price anyway, see paragraph above)
As seen in the earlier section, if you lower the price and raise it again on release, even if you raised it back to the suggested price, consumers don't buy the product as much. It's like as if they feel "cheated" when you raise the price after promising them something lower.
Free, high quality products destroy the competition.
A high quality free product is pretty much just a highly effective DDOS attack (Distribution Denial of Service - this option is available in the Accounting tab). If you have a grudge or simply hate the logo of a particular company, releasing a free version of what they do best can really hurt their feelings. This may have a ripple effect in the future, when you've beaten down a competitor product and they don't do so well in the future and you in turn do better.
Software Inc treats free and non-free products VERY differently.
The difference between $0 and $1 is monumental. Such differences include, but is not limited to:
- Amount of sales (and thus the resulting market recognition)
- Ability to sign publishing deals
- ability to change price after release
Boost your gain in market recognition.
Usually, one would need to release 5 to 6 sequels of an IP before they can get a full 6 hearts of market recognition. The nice thing about Software Inc customers is that they all seem to have long term memory loss - they still buy a fully priced sequel even if the prequel was free (i.e. there is no "consumer expectation" that the sequel will be free too). Releasing a free product can shorten the time you need to gain market recognition, perhaps to 3-4 sequels before getting a full 6 hearts. You can even release multiple free products to REALLY get there quick. This can be especially useful in highly saturated markets such as Antiviruses, 2D, 3D editors, audio tools etc. to gain an edge over competitors (Sometimes, releasing 7, 8 sequels of an antivirus can only get me to 4 hearts)
Boosted market recognition, but at what cost?
Now, of course, this action is highly, highly unprofitable. my 2.9 hearts of computer OS market recognition costed me 13 million, and losses will only continue to increase as salaries stack.
Loss Leader pricing could be used when you've established yourself as a company, have millions in the bank already, and want to tap into a new market.
The printing costs of software can easily be brushed off ($2 for ordering copies, $0.15 for printing it yourself) so this strategy is more applicable for software. But, I strongly, STRONGLY, do NOT recommend doing this with hardware, such as phones and consoles. The printing costs of each copy can easily reach $100+. with 4 million sales, you are looking at a net loss of 400 MILLION, That's the net worth of some of the largest companies in Software Inc! not to mention the printing machines and distribution infrastructure needed to print some 400 thousand copies per month!
Is this a viable starting strategy?
But you might wonder, what if you're just starting out? where can I get 13 million dollars of startup cash? Well well well, dear reader, I have written a guide on manipulating the stock market, and with the right decisions, a keen and attentive eye, and a hefty dose of luck, you can potentially earn yourself upwards of 300 million dollars in 10 years with 100k starting cash. You can see it here:
I sound so much like an advertisement. Shameless self promotion, woohoo! (Though I don't earn anything from writing these, it's simply fun for me!)
Anyway, moving on:
Does all this apply to other types of software? 2D, 3D editors? Games?
Honest answer: I don't know. Without actually testing it out, there will always be a degree of uncertainty. However, I also have yet to see anything that suggests otherwise. I would assume the sales of all software is calculated by the game based on the same system, combining the effects of price, competition, market recognition, product appeal and so on.
Andddd that should be everything. This guide took me 15+ hours of research and writing, holy moly. This is my analysis and interpretation of the data I've collected. If there are different interpretations and conclusions, please let me know. And at the end of the day, it is up to you to decide whether loss leader pricing or messing with prices is worth it. Manipulating the stock market and then crashing your way into markets with loss leader pricing is just one of the many ways to enjoy a game of Software Inc.
And that marks the end of this guide, a beautiful 2600 words. This is Wang, wishing you high market recognition and customers suffering from long term memory loss in your loss leader pricing journey.
Thank you for reading!