Understanding Riot: Retiring Legendary Skins Without Discounts
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!
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.