Life cycle costing

Tasks:

The digital gaming revolution has given birth to a multitude of consoles and their various genres of game play from fitness to fighting, from brain training to brain draining. As we approach the peak selling season many new games are being launched at their relevant targets. For the management accountants of the many companies involved the pricing and costing of these products is a perpetual nightmare. You as a management accountant are to prepare a paper to present at a computer games conference.

This paper should critically evaluate in detail the following:

1. How would the following techniques be applied in the industry?

a) Life cycle costing

b) Target costing

2. The market based pricing strategies that should be considered for the launch of any new computer game/ console and recommend the strategy to be chosen for your organisation. (Playstation 3)

3. Each stage in the life cycle of a particular game/ console and the issues that your management team will need to consider at each stage. (production – limited stock, how much we need to make?, material availability, Sales – how much can we sell? Cost and Sale price need to balance, Managers – manageable, workers to complete the job)

4. Other information that you consider will set your paper apart from the competitors.

a) Life cycle costing

This managerial costing technique determines the cost of the product based on the overall life of the product starting from the procurement cost to the manufacturing costs (Adler, 2011). Since the gaming industry is largely dominated by fast selling innovative products hence the companies can effectively use the life cycle costing to determine the production costs and revenue of the video games at each stage of the product life cycle.

The industry life cycle of the gaming industry shows that the three major video game companies namely Microsoft, Sony and Nintendo are all in the mature phase of the Industry life cycle. The developed countries are experiencing maturity in terms of hardware and software developments in the gaming industry (Loughran, 2012).

Figure 1: Industry life cycle of Gaming industry

(Source:T anner, Davis and Davis, 2011, pp-56)

Since gaming industry is in the maturity stage of the product life cycle hence the management of the companies can effectively use the following stages of life cycle costing :

• Make an account for resources used in the past stages and identify the costs of the resources (Jin, 2010)
• Take decisions on improvement of product designs to retain the target market
• Identify costs for effective after sale services
• Assessment of renewal costs to prevent the products from moving on to declining phase of the PLC.

Hall(2010) opined that target costing is the approach that helps the companies to reduce the cost at the introduction stage of the new product development by integrating costs of product design, product price, expected profit and product cost (Hwang, 2010). As per reports of Mintel, Sony computer Entertainment and many other Japanese companies are adopting target costing in order to control gaming costs over the product life cycle. The gaming industry can tactfully adopt the target costing procedure in order to increase sales by reducing costs.

Step 1: Product design and price

Step 2: Determination of desired profit

Step 3: Target cost (Step 1- Step 2)

Step 4: Engineer the product to achieve the desired cost

Target costing

(Refer to appendix 1)

The Bloomberg report shows that by adopting Target costing in the year 2013 Microsoft has been able to increase its sale of Xbox One more than Sony’s Play station 4. As an additional feature, the company introduced additional features like multilayer interface, Blue ray players and subscription game networks. (Refer to appendix 2)

The gaming industry initially considers the Life cycle costing for the launch of any new video game in the market. When a new game console is introduced, in the introduction stage the marketer adopts premium-pricing strategy (Corbeil, 2012). The companies in this stage sets high price for the product so that the exclusiveness of the product can be expressed to the customers. For instance, Sony adopted a premium pricing strategy at the launch of Play station 4 in 2013 and priced the new generation video game at around £ 349. Similarly, Microsoft launched its Xbox One at around £429 premium price. This strategy attracts the customers because the customers want to be the first purchasers of the innovated products. This drives the sales of the video games in the introduction stage of the life cycle (Hilary and Hsu, 2011).

With the increase in the demand for the product the video games thus launched reaches the growth stage. Being a technological product, the demand decreases with the passage of time. Hence, in this stage the gaming companies use the price skimming strategy. Sony and Microsoft use this strategy to set premium price in the initial stage and gradually lower the price to make the game versions available to a wider target market. The use of the price skimming strategy by Sony in case of Play station 3 in the Asian markets has helped the company to acquire 65% of the market share of the Asian countries (Dormans, 2011).

In this stage to maintain the product demand, the companies also offer captive deals. These deals include purchasing of accessory items along with the game software of the same company in order to play the game.  For instance to play Halo the customer needs to purchase Microsoft’s Xbox 360.

In the maturity stage, the price skimming strategy is maintained but since the target, market becomes stagnant hence to initiate sales the gaming companies uses bundle pricing strategies. Here the companies offer a bundle of products like Sony offering additional controllers, remote controls and additional game discs along with Play station 3 (Maksoud, 2011). This deal is profitable for the customer because if these accessories are purchased separately then the customer will incur high expenses compared to the low bundled price offered by Sony. Hence, this initiates sales.

High technological changes, changes in customers’ demands and preferences and  introduction of new range of games forces all versions of video games to move to the declining stage of the product life cycle (Miller and Washington, 2012). In this stage, the company’s major focus is on reducing the price to the lowest possible amount. Here the companies adopt economy-pricing strategies. This strategy enables the companies to attract the specific target customers who are budget sensitive and were waiting for the price reduction in order to make purchase. In this stage, the company should not invest in improving the existing game version rather should invest on introduction of a new version.

Market-based pricing strategies

For instance, Sony adopted an economy- pricing strategy in case of Play station 3 and launched Play station 4 by adopting premium-pricing strategy. This helped Sony to gain profit from the sale of both the Play stations simultaneously (Wesley and Barczak, 2010).

Figure 2: Pricing strategies adopted by Video gaming companies at various stages of product life cycle of video games

(Source: Tulloch, 2010, pp-96)

Sony’s Play station 3 that was introduced in 2006 was launched at a premium price of £599. However, the introduction of the Play Station 4 in 2013 indicates that Play station 3 is in its declining stage of PLC (Merchant and Zambon, 2010). From the launch to the declining stage the company adopted the different pricing strategies and with the adoption of price skimming continued to lower the price if the Play station by 20% every year (Ensslin, 2011). For Sony to increase the sale of Play Station 3 in Asian market the company needs to adopt the economy pricing strategy.

Suppose if the launch price of the Play station was = £400 and a 20% reduction is experienced each year with the movement of the PLC then the product will be priced as follows:

Year 1 (2007): £ 400

Year 2 (2008): £ 320

Year 3 (2009): £ 256

Year 4 (2010): £ 205

Year 5 (2011): £ 123

Year 6 (2012): £ 98.40

Year 7 (2013): £ 78.72

Figure 3: Prices of video games in different stages of PLC

(Source: created by author)

As per Forbes, analysis majority of the video games generates 85% of the total sales in the first year of launch. After the first year, the games are replaced by the updates versions (Refer to appendix 3). However, the companies face various issues in the various stages of the life cycle. Although the sales decrease in the growth and maturity stage however the companies do not discard the product hence they are involved in different issues. The issues are as follows:

Production issues: At the introduction stage, the companies face difficulty in forecasting of the customer demand and hence are not able to make production capacity details.  At the growth and the maturity stage the initial demand has been confirmed and hence the just in time approach is followed by the companies to maintain production capacity (Roehl-Anderson, Bragg and Willson, 2005).

Resources issue: The digital technologies, CDs, DVDs, and blue ray discs, the use of extensive technologies makes the production of video games costly. The basic manufacturing processes like creation of game records and game formats also are costly hence the companies face cost reduction issues in terms of video games production in each stage of PLC (Hilton, 2005).

Sale forecast: It is difficult for the companies to forecast the actual sales statistics in the maturity and declining stage of the video game (Merchant, 2011). Hence, this in turn makes it difficult for the company to plan the production forecast in these two stages.

Pricing strategy: The companies have to keep on reducing the prices and adopt different pricing strategies in the different product life cycle stages. For this constant monitoring of the external market is necessary to track the technological changes in the product.

Recommendation for Play Station 3 launch

Labor issues: The success and invention of a game depends on the thought and innovation of the human effort. Hence, the labor and the human force are the primary backbone of the companies. In the maturity and growth, stages the companies have to incur high labor charges since they try to innovate and make technological changes in the product features to suit the needs to the market (Zagal and Mateas, 2010).

As per the reports of Forbes the video gaming industry target market comprises of three types of customers among which 40% are female and 60% are male.

UK records for around 1902 active game companies alone and the 3 major companies regulating this industry are Sony, Microsoft and Nintendo. However, the introduction of Smartphone apps has contributed to the development of gaming industry. Thousands of games making hubs are found in different parts of UK. (Refer to appendix 4).

The video games industry has flourished in the present social status and the customers generally prefer purchasing the games in the initial introductory stages (McCoy, 2010). However, the growth of the industry is still stagnant in the developing countries and hence the companies can market the products in the developing and Asian countries with economy pricing strategy to generate sales from the declining stage of the products. With the growth of the mobile devices like smart phones and tablets, entertainment value of the video games will further increase in the future years (Shan and An, 2010).

Reference list

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