Sony is hosting a storefront tomorrow, September 15th, which will likely announce the price and release date of the PlayStation 5. But how does such a company pick a price for something like a PS5? How does manufacturing and insight affect the price we see on store shelves?
Well, that’s what I’m going to talk about today. This is how a price is made.
Parts list vs. total cost
The bill of materials is how much it costs a company to purchase all of the components to build its product. For Sony and Microsoft, this includes agreements with major vendors like AMD to acquire the SOC (system on a chip) and with NAND flash manufacturers (which powers SSDs) to include storage.
This cost is probably the first thing that comes to mind when trying to determine how much to pay for something. And the bill of materials is a crucial part of the arithmetic companies perform in selecting a price. But it̵
Bloomberg reported that the PS5 will cost Sony around $ 450 to produce. That number is likely close, but we don’t know if this is the full cost of production, the cost of manufacturing, or just the parts list. The difference is that manufacturing costs would include things like assembly and quality assurance processes, while production costs would include everything associated with creating a product to be shipped.
Making consoles is expensive
However, even the cost of production doesn’t reflect everything console companies spend money on. Creating a game box is the result of years of research and development that is expensive. Once you have a finished console, you’ll need to pack, ship, and sometimes store it as well. The packaging alone can be up to $ 15 per console.
Companies are struggling to fill the void in their supply chains, but this is a complicated logistical job that also requires a lot of upfront spending. And there is a risk that demand will not be met, which can result in you having to pay for faster shipping options. Sony is doing just that by offering Delta flights with PlayStation 5s. However, this is considerably more expensive than cargo ships at sea.
New console hardware also brings increasing pain. That means failures for finished products, but also low returns for these SOCs. TSMC, based in Taiwan, etches the SOCs for AMD, Sony, and Microsoft onto giant wafers. Then they have to cut the SOCs out of that wafer, like slicing a tray of brownies. Companies are paying TSMC for the entire wafer, however, and a Japanese Bloomberg report yesterday claims that only 50% of the SOCs on certain wafers can be used in PlayStation 5s. Sony has to eat up the cost of the unused SOCs.
For his part, a Sony spokesperson commented on GamesBeat on the Bloomberg story:
While we do not disclose manufacturing details, the information Bloomberg has provided is incorrect. We haven’t changed the production number for PlayStation 5 since mass production began.
Note that Sony doesn’t mention anything about its SOC earnings.
Supply and demand vs. Building a community
At some point, a console manufacturer understands all of its costs. It then has to decide what its customers should be billed for. And while these seem closely related, cost actually only acts as one variable in an equation that primarily involves supply and demand.
You know this one. Demand is how much consumers want a thing and supply is how much access they have to that thing.
At launch, the consoles will be very limited, but that won’t always be the case. So Sony won’t be pricing the PS5 at $ 1,000 just because it could likely sell a lot for that price in the first month.
However, the demand is more complicated than the availability of the hardware. It’s also about access to selected, exclusive games and the quality of multiplatform games. The demand for these experiences is high, but the supply is limited because you can’t just take God of War anywhere. You have to pay Sony for this experience. And people are willing to pay a lot for it.
However, when it comes to consoles, manufacturers want you to have access. You’re trying to build a community.
Sony and Microsoft receive a license fee when developers sell games. They also have online stores where they cut 30% of all transactions. It works much better when people can afford the hardware they need.
And while gaming is a huge business, it’s also surprisingly cramped and insular. People identify themselves as gamers in ways that people do not identify as readers, for example. The brands PlayStation and Xbox can take advantage of this by attracting loyal followers. But it’s also something that can backfire.
In 2011 and 2012, Microsoft reviewed its data and found that users were using Xbox 360 to watch videos and play games online. The Xbox One was designed with a focus on TV and online capabilities. But just because these things are in line with people’s behavior doesn’t mean that’s what gaming fans wanted. Outraged, gamers happily picked up the PS4 for $ 100 less, even after Microsoft rolled back many of its always-online requests.
Players see themselves as a community and when they decide something is unfair it takes a tremendous effort to appease them.
For Sony, this means a $ 600 PS5 is dangerous. The system would likely still be sold at that price, but it could lead to a price for disgruntled gamers expecting $ 500 or less.
PlayStation 5 vs. PlayStation 5 Digital Edition
Another important factor in the price decision is the positioning of the two PS5 versions. The full version and the discless digital model all have the same specifications. And a Blu-ray drive is relatively cheap ($ 50 or less, and probably a lot less). Does Sony charge $ 50 less? Maybe. Many factors will play a role in this choice.
Small number in front
Microsoft announced the price for the Xbox Series X at $ 499.99. And that’s $ 500 because a penny is meaningless, except that people perceive $ 499.99 to be significantly less than $ 500. This is partly because we are associating a series of zeros with large numbers. But it’s mostly about that number up front.
It is huge to put a “4” in front of the number. It’s even more important for the Xbox Series S, which leads with a “2” for $ 299.99.
Marketers love this effect, and Sony is likely to want to use it on the PS5. But that puts it in an interesting position.
With Sony selling the PS5 for $ 499.99, there is little point in selling the Digital Edition for $ 50 less for $ 449.99. Both numbers have a “4” at the front. This makes the Digital Edition feel like a bum (regardless of its actual value). And $ 299.99 for the Xbox Series S versus $ 449.99 for the PS5: Digital Edition is even worse.
If Sony is concerned about Microsoft’s pricing, it makes the most sense to get a “3” for $ 399.99 at the start of the PS5: Digital Edition price.
The lure effect compared to driving consumers towards digital
However, the pricing of the PS5 against itself depends on what is most important to Sony right now. Does Sony want to bring PlayStation fans into digital ownership or are they more concerned about losing hardware sales?
Sony may want users to buy PS5: Digital Edition because downloads have a higher profit margin compared to physical media. That could serve the company well in the long term.
In that case, expect a $ 100 difference between the two PS5 flavors.
However, Sony may just want to protect itself from hardware loss. If the PS5 loses money at $ 500, which is possible, the PS5: Digital Edition would lose even more at $ 400. The company would potentially make up for this difference over time, but there could be reasons for making profits now rather than later.
In this case, Sony could use the lure effect. The best-known example here is popcorn from the cinema. The seller sells a small popcorn for $ 4, a medium one for $ 8, and a large one for $ 8.50. In this situation, you don’t even look at the small ones, but think about how you can’t go without paying just 50 cents more to get a big one instead of a medium one.
If Sony would prefer customers to spend more cash upfront on the standard PS5, it could create a lure with a $ 449.99 price tag for the PlayStation 5: Digital Edition. When the full PS5 is $ 499.99 – and especially when the PS5: Digital Edition is hard to find – people will focus on paying just $ 50 more to get a no-compromise PS5, rather than comparisons with the Xbox Series S.
The price of PlayStation 5 says a lot about Sony’s strategy
Whatever Sony decides it should tell us a lot about its overall strategy.
If we get systems for $ 400 and $ 500, we’d probably want more gamers to use digital gaming in the future. When it comes to $ 450 and $ 500, it wants to compete with Microsoft while maintaining a higher price. And when it comes to a little over $ 500, it’s because it’s less concerned about Microsoft than it is about its own earnings for the next few quarters.
Oh, and if it undercuts Microsoft, who cares what it means? Let’s just have some fun saving some money and let Sony worry about it.