Understanding Riot: Retiring Legendary Skins Without Discounts

 

Understanding Riot: Retiring Legendary Skins Without Discounts
by Flikery

Today's post from #VVinning/A DIFFerent View is the second in a series of three guest posts that will be going up this month.  The subject of today's article was decided by a voting contest on my Twitter and Facebook; next week, we will see an update to the "My First Runepage" infographic with the cooperation of LoLmanac.

The author of today's post, Flikery, is a graduate/Ph.D student in economics who has graciously written a post for us about the business side of retiring older legendary skins -- from the perspective of Riot Games.  I've edited some portions of the article to make it more accessible to the average League player, so hopefully you guys will understand the rationale. Being a business student myself, this post has a special place in my heart as it combines two of my greatest loves: Money and League of Legends.  I hope you enjoy reading today's article as much as I did!
-- VVinrar


My name is Flikery and today I am bringing you post regarding non-gameplay related issues we League of Legends players face together. As you know, Riot is running a business, and we are their customers. In most cases you can figure out, at least for the most part, why Riot does what they do. However, sometimes the motives for Riot’s actions are not quite so clear. Today, I am going to look at one of those situations which, to many unhappy players (just check the number of downvotes!) may not have been so obvious, and try to offer a plausible explanation.

The Issue at Hand 

Last month, Riot retired five of the older legendary skins without much fanfare about the announcement. The largest problem people had with this news was that they were retired without an accompanied discount for last chance purchasers. Since it is almost certainly true that a discount to these skins would generate a short term increase in revenue, why would Riot not discount them?

The short version (TL;DR) is that by showing a strong commitment to the special pricing structure of legendary skins, they make people understand that if they want these skins, they will have to pay the higher price, no matter what. Consumers will have no incentive to wait to purchase a legendary skin if they decide that they want it.
Note: Red Baron Corki (April 2010) and Firefighter Tristana (June 2010) did go on sale over two years ago; this seems like enough time to show a policy commitment on offering price reductions for legendary skins.

Why Does Commitment Matter?

The importance of this pricing commitment can be seen when considering the idea of the Coase Conjecture. The Coase Conjecture (named after economist Ronald Coase, who is still alive at 101 years of age) is the idea that if a good lasts a long time (is “durable”) and consumers are patient enough, even a monopoly cannot set a higher than usual price (i.e. they do not have market power), as high demand consumers can simply wait for a company to lower prices to sell to the lower demand consumers. Since these assumptions do not hold perfectly, the implications for the real world are not perfect either; however, we can see evidence that this is a concern for firms even in a non-perfect case through the following real-life example (which will hopefully clarify the idea of the Coase Conjecture as well).

I love Batman. He is awesome. The Dark Knight Returns by Frank Miller is probably my favorite graphic novel, and is worth reading if you have even the slightest interest in comics, Batman, or awesome things.  Anyway, when Batman Arkham Asylum came out, I bought it on release day and loved it. About a year later, they released a Game of the Year Edition of Batman Arkham Asylum at a reduced price with more content. I was still more than happy with my purchase, but I filed this information away.

Fast forward to the release of Batman Arkham City, the sequel to Arkham Asylum. I still love Batman. And I still intended on playing the new game. But I considered the situation and realized that:
(a) I have plenty of other ways to entertain myself right now (so I can afford to be patient), and
(b) if I wait about a year, I can almost certainly get a Game of the Year Edition for cheaper with more content.

 
Those are some pretty good ratings!

Lo and behold, a couple of weeks ago, I was rewarded when I purchased Batman Arkham City: Game of the Year Edition (on sale). And yes, it is still pretty awesome. Thus, through waiting, I was able to get the game I wanted, plus extra content, at a lower price. Consider an alternative world where I did not know the GotY Edition would be made. I would have happily paid the $60 for Arkham City, and maybe have purchased some of the add-on content; in this case, the game publisher would have gotten much more money from me than the $40 it did. This is the idea behind the Coase Conjecture: people like me, knowing that prices will decrease in the future, will wait to make the purchase even though they would buy it at the higher price if that was the only option.

How is this connected to Riot? 

In Riot’s case, suppose they put Red Baron Corki on sale. Customers who bought the skin when it came out may still be happy if they bought the skin at the higher price. When Riot releases the next legendary skin, these customers think it is awesome. They also know that if they are willing to wait long enough, they can get the skin for much cheaper, so instead of buying now some of these high demand consumers will wait for the skin to be discounted. If enough of them decide to wait, Riot will make less on the skin than they would have otherwise.

So how is Riot fighting this through not discounting? Hopefully it is more clear now, but by showing that they will never lower the price, they eliminate the incentive for people who value the good highly to wait for a lower price (since they cannot expect a lower price to come). In other words, more people will pay the higher price right away.

For all of this to make sense from a business standpoint, Riot must have data that suggests there is a chance that this kind of waiting might occur. It also suggests they expect to make a lot of money on legendary skins in the future and do not want to cut into those sales. Additionally, they may not like taking the risk of angering the people who buy legendary skins by making them less exclusive, as the purchasers of legendary skins are probably the people who individually spend the most on the game. Angering your highest paying customers is usually not good business practice.

A related question: Why retire legendary skins at all?

As discussed above, retiring these with no discount gives Riot an opportunity to signal that legendary skin prices will never be reduced, solving the waiting issue that leads to the outcome of the Coase Conjecture. If the skins were still around, there still exists the chance that prices will be lowered in the future. This way, they get to show commitment to their pricing strategy for legendary skins. Also, these skins probably do not sell very often anymore, as there are far better skins for much cheaper, so the sales they are giving up to show this commitment is probably minimal.

A worthy question...  

Another Question: Why did Riot not announce the retirements on the front page?

The most obvious answer is that Riot knew the majority of people would not like that they were retiring skins without a discount, and did not want to deal with the full backlash from the community. The reason I question this decision is that they missed an opportunity to use this as an experiment in how their consumers react to the "buy it now or never" ultimatum. Business decisions should be data driven, and a corollary to that idea is that if you want to make smarter business decisions, you need to have better data. Riot just used an ultimatum pricing strategy with Pulsefire Ezreal by saying, "buy now at this lower price or pay this really high price that no one will probably pay."

The data from the Pulsefire Ezreal strategy is probably informative to their future plans, and with the legendary skin retirements they had a chance to test the non-price reduction version of the same ultimatum strategy. Even if unsuccessful, it helps to know the limits of a strategy and the limits that your consumers are willing to accept. Because Riot is basically stealth retiring these legendary skins, there are now no apples to apples comparisons with Pulsefire Ezreal; any data you get from the legendary skin retirement goes straight into the inapplicable data trash pile, as enough people were not aware of it to make a meaningful comparison.

Quite a waste, in the opinion of someone who knows the value of data.

 

I hope you enjoyed reading today's guest post by Flikery.  Do you agree that Riot's decision to not make a major announcement was a mistake?  Was it a bad business decision? Please comment with your thoughts below!     -- VVinrar

And finally, congratulations to the winners of last week's $30 RP contest.  The winners of the contest were Rhythmik and PROGRAM_IX on Twitter and Joe Z. on Facebook.  Stay tuned for more contests in the future.


For more of my work:

-- Find old posts @ the RoG forums and new posts every Thursday.
-- Find my Item Efficiency Spreadsheet at bit.ly/mathcraft.

-- Feel free to find me in the "A DIFFerent View" chatroom on the NA server.
-- Contact me at [email protected]
-- Follow me on Facebook or on Twitter.


24

Comments

  • #22 kyoshiro1221
    Great article!
    So I've never commented on this forum but reading this made me chime in. I personally love when skins become more exclusive. I find pride in my account for owning skins like Bowser rammus, ufo corki, urf Warwick, champion ryze, and many retired skins that I own. It feels awesome when both teams complement my skins!
    I feel fine with riot retiring skins, it just makes collectors like me happier!
  • #24 Flikery

    It definitely seems cool when you have a skin that people can't buy anymore. I think the skin I would want most is the rusty looking Blitzcrank skin. Even though it is a palette swap, it is just so rare and so awesome!

  • #20 gimped420

    A point (reason) that you didnt touch on, is the fact that these legendary skins cost a lot of RP, and discounting them even temporarily would devalue the investment others have made a years ago.

  • #23 Flikery

    Great point! I super briefly mention that idea where I say "Additionally, they may not like taking the risk of angering the people who buy legendary skins by making them less exclusive, as the purchasers of legendary skins are probably the people who individually spend the most on the game. Angering your highest paying customers is usually not good business practice." I definitely agree that this could be a big reason, and I did not give it much due (in an attempt to streamline the post).

    I don't have access to the data, but I imagine a good chunk of people never pay anything for the game, and that most of the revenue comes from a small portion of the player base. Making those people unsatisfied could be extremely detrimental to profits if this is the case. Again, just a guess I have.

     

  • #19 SteppenKat

    Well, this made me buy MTF (always loved the skin but didn't have the urge to buy it) and Im happy with the purchase. Also, it's funny that most people who say those skins aren't worth their price are the same who complain about Riot's plot to make "big money" out of this "scam".

    Haters gonna hate. Always.

  • #13 Shinkada

    I'd much rather a post talking about the pricing structure of champions than skins. That way I could complain about it loudly in the hopes that Riot finally realizes forcing people to pay for champions (because using IP when the total cost of the roster is in the hundreds of thousands of hours of playtime is totally unrealistic, not to mention runes and rune pages) is severely tarnishing the public's respect for them, and thus the public's actual desire to give them money.

    Free to play games are weird like that. People already boycott games from hated developers like EA and Capcom, but when the game is free to play you really need to keep the community on your side since most of your profits (should) come from luxuries and conveniences like skins and rune pages.

    Unfortunately this is more about skins so a post like that would be pretty off topic. ;x 

  • #14 Flikery

    I think that is a very interesting topic, but probably a lot more complicated than this. Maybe someday I will get the chance to explore it :-D

  • #21 FleurDeLiz

    The official forum community is not even a statistically significant portion of the overall playerbase. The phrase 'tempest in a teacup' comes to mind.

    Riot does its own data analysis, and bases its business decisions off of this internal analysis.  No one, not you or anyone else, is going to be able to browbeat Riot into changing its business model with a mere forum post or forum-based petition.

    (Speaking of boycotts, the fact that EA and Capcom not only remain in business, but are THRIVING, speaks to the general ineffectiveness of the gamer community in terms of holding a boycott of anything)

  • #10 RRD313

    Personally I think that this decision by Riot and how they handled this was very strong. My main reasons being:

    • Exclusivity- That is why it is a Legendary skin. Early on I didn't understand why some Legendary skins were still available. I thought what made them legendary was the fact that they were retired. Low supply and high demand keeps prices high, the only way Riot can do this is by limiting how long of a period of time you have to buy a skin.
    • Not announcing the retirement- I personally see this as being a very strong play by Riot. Look at it this way:
      • Yes, they do hide the fact that they are retiring these skins without putting them on sale from potential angry customers. But! If you think about it, this lets us (the customers) know that there needs to be some urgency in buying these skins. We now start to realize the skins will not go on sale so this turns Riots sale strategy from: "Maybe we can get a few extra skins sold with a sale at the end" to "Here's our special skin if you want it get it now, were not going to tell you when it might be gone."
      • This change in strategy I think will make them more money. Personally, I believe that you have two kinds of people. People who buy skins and people who don't. So with the new strategy, the people that buy skins no longer get to wait for a sale and they will probably buy it full price. Why? Because they are the people that always buy skins and now their time is limited. Yes, its not black and white and there are people in between who occasionally buy a skin for their 3 favorite champions, but those people are not going to care about pricing as much because it's only a couple skins. They probably aren't even up on the sales and probably only differentiate skins by price.

    In the end, I think the only people that are mad are the regular skin buyers who are now upset they can't have those skins because they weren't notified.  Which will only teach them to buy their skins early at full price ;)

  • #15 Flikery

    But how will they know that they skins will disappear if they don't see the announcement? :-P I've been wrong before and I'll be wrong again in the future, but it is still hard for me to see any use to hiding this announcement except for fear of backlash. Thanks for your thoughts!

  • #9 buckx

    There is a wrinkle in their strategy that I would throw in. They have noted that the quality of their skins is going up over time, and that is used as the justification for some of the retirements they're doing. One thing that Coase's theory does not cover in this case is the utility provided by the product during the waiting period. Certainly two years of making use of a skin provides some benefit. It's not something that one consumes. As long as the value of those two years of use are greater in the eyes of the early adopters than the difference in price of buying it on sale vs. buying at full price, they will regard their choice to purchase early as the "correct" one for future purchases.

    For the people coming in two years after release, they're presented with the option of buying a new, higher quality skin or the older, lower quality legendary for the same price. There is no reason to buy the lower quality one unless you're overly enamored with that particular concept, or if you were buying them both anyway. If a two year old legendary no longer measures up to new legendaries, I say don't retire it. Instead, drop the legendary distinction on it, and have it be one of the best 975 skins around.

    Edit: A further thought: I totally agree regarding their quiet announcement. There's no mechanical reason to retire skins. The only reason to retire them is to send a signal to the current owners and/or to those who haven't already bought it (those of course adding up to everybody). Since the only purpose to it is to send a signal, doing so quietly makes no sense.

    Last edited by buckx: 8/2/2012 1:41:28 PM
  • #11 Flikery

    Hey buckx,

    I think you are correct, and I certainly expect plenty of people to buy it early; that can be fully rational to many people who value it highly. In the Arkham City example, many more people will buy the first iteration of a game than the Game of the Year Edition I waited for (if my memory of the data on the topic is correct, at least). In my explanation I chose to de-emphasize those people in an attempt to give my argument more clarity, but again, your point is well taken as there is some utility loss from not getting to use the skin during that time. The assumption of patience does mitigate some of that utility loss though.

  • #8 arthurmauk

    I tried to argue for Riot's decision behind Pulsefire Ezreal pricing being profit-maximising with the Coase Conjecture but my comment got deleted. Credibility in commitment is everything. Watch this somewhat relevant video for an illustration: http://www.businessinsider.com/golden-balls-game-theory-2012-4

  • #12 Flikery

    I have seen that video before; quite entertaining. And commitment is always an important topic when looking at future expectations.

  • #4 superledfrenzy

    Something else that came to mind when I first saw that "Annie in Wonderland" was no longer for sale is the exclusivity of that skin. No one else can own that skin except those who already purchased it.

    Now, what happens when you are playing against a summoner who is using "Annie in Wonderland?" You may think "that skin is amazing! I want to own it." You find that it is retired, and can no longer be purchased. This could raise the value of skins in the minds of players, because knowing that skins can be retired makes them much more exclusive and "cool." Do you want to be part of that group of summoners that owns a retired skin?

    I also agree at least partially with your assessment of their announcement strategy. What does Riot have to be afraid of? This is a free-to-play game, while skins are a premium feature that does not actually help you in-game. It would have been a great idea to use this as a marketing strategy, instead of attaching the negative connotation that it received. "Last change to get these legendary skins!"

    Then again, I would also understand the additional backlash they would surely receive from customers, and their Customer Service may have advised them against it. Many Customer Service departments try to hide their faults, even though I have found that it's much easier to be up front with your customers to gain their trust (I've spent some time working in CS).

    Anyways, definitely a thoughtful post, and I hope people recognize the difference between "RIOT as a business" vs. "RIOT as a non-profit Game Company."

  • #5 Flikery

    Ya, there is definitely a lot going on in the situation, and I had to think about it for a while to find the story I found most plausible. There is almost certainly considerations that I did not mention, some of which you bring up. In the end, without knowing what data or plan Riot based their actions on, all it amounts to is an educated guess.

  • #6 superledfrenzy

    Oh, I'm totally with you about the "Legendary Skins never go on sale, so customers will not perceive that they can wait for a better value" hypothesis. I also believe that this was their number 1 reason for retiring, along with increasing the urgency in customers.  I was just mentioning some other possible benefits of retirement.

    A successful example of what you bring up is Disney DVDs. They go in the "Disney Vault," and only come out at certain times. If you want to own "Beauty and the Beast," Disney has made it clear that you need to pay full price. With a DVD from any other company, you know that all movies will eventually be $5 on Black Friday.

    In the end, this all kind of makes me want to purchase Brolaf.

    Last edited by superledfrenzy: 8/2/2012 1:02:15 PM
  • #7 Flikery

    "In the end, this all kind of makes me want to purchase Brolaf."

    This is an acceptable response.

  • #1 DonYagamoth

    Good thinking, your posts makes sense.

     I'm not into marketing and strategies, but I can definitely see what you are saying in this post. Thanks for the explanation, let's see how RIOT goes on with future Legendary Skins. Even if I'm not generally interested in such stuff, it can be really useful to know :)

    On a sidenote, I don't care about Skins at all. In fact, I often actually prefer the standard-skins over the rest (<3 Karma Standard Skin). Only exception is the Shyvana Skin which looks genuinely much better (opinion) than the standard. Other than that I would only get the Explosive Heimerdinger Skin because of the awesome artwork ^^... But I don't play those enough to justify getting the skins.

    Last edited by DonYagamoth: 8/2/2012 11:47:50 AM
  • #2 Flikery

    Glad to hear that it was clear!

    Which Shyvana skin is it you like? I was quite pleased to get the Boneclaw Shyvana skin when it went on sale a week or two ago, and I like it pretty well. The new dark one looks awesome but really puts me on tilt; I am always looking for red and orange with Shyvana, so trying to follow the dark colors is strange.

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