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The Cost Drivers of Video Games and Consoles

The gaming industry has become a huge business over the last thirty years, and companies have been collecting a seemingly endless supply of revenue. As the years passed, games advanced through graphic design and innovation. Prices for these games and consoles increase with each new generation. The average new video game today costs consumers about $50, while the average console costs between $250 and $300. Why do they cost so much? What costs go into creating these devices that make it so expensive for customers? This article will explain what cost drivers, or factors that cause changes in costs for activities of creating products, affect the production of games and consoles. This should give the younger demographic a better understanding of what it takes to create a game.

The best way to explain the cost drivers of gaming is to go through the five main steps of a product’s cost life cycle: research & development, design, manufacturing, marketing & distribution, and customer service. First we will begin with research and development. This step in developing a product revolves around a single question: what can we do to add value to our products? Companies must answer this question in a way that not only will customers purchase their products again, but new customers will buy from them too. In this case, production managers and employees work on ways to add value to games to satisfy customers.

When creating ideas for the console, gaming corporations must determine how to innovate their products. For example, the Nintendo Wii™, Nintendo’s most recent console, offers innovation through the controllers used to play their games. These wireless controllers (with the exception of the wire connecting the Nunchuck controller to the Wiimote) use motion sensors that give the player a greater feel for what is going on in the game. If you are playing a golfing game, you swing the controller like a golf club in order to hit the ball in the game. This breakthrough in gaming is new to gamers and offers a better use of motion sensor activity than its competitors, Sony’s PlayStation 3™ and Microsoft’s Xbox 360™, which simply offer wireless controllers with their respective consoles. Innovations tend to add costs to production, but the companies know that if these innovations are sufficiently intriguing to the customer, these companies can accumulate enough revenue to make up for these added costs.

After completing the research and development stage, gaming companies then design their consoles and games. They must pay attention to detail; what graphics card to install, along with the CPU (central processing unit, which serves as the “brain” of the system), RAM (random access memory), hard drive, and so on. Each new console requires more memory and faster processors to keep up with consumer demand. The new technology needed for games requires specific designs that will appear to consumers; designs that look attractive and at the same time be cost-effective. The Nintendo GameCube™ was, as it implies, shaped as a cube, allowing for a maximum internal volume (given fixed dimensions) while using minimal surface area and taking up as little external space as possible. With these dimensions, Nintendo was able to put its technology into the console’s casing and keep costs at a minimum. Once these costs are determined, the company must create a selling price in order to make a profit (this is called target costing).

The third step in the process is manufacturing the product. It takes a lot of money to build and manufacture complex technology like video games in order to sell them in mass distribution. Costs have to be allocated to the employees who build the games and consoles, as well as paying for the materials needed for production. A company must take into account how much material and labor expenses will cost the company so that it can maintain a budget. Once they products are complete, they are distributed to wholesalers and retailers.

Marketing and distribution are an important part of determining costs for video games. Companies have to know where to sell their merchandise, as well as who they should target their product to. Video game companies must advertise games and consoles in a way that is so appealing that customers will care less about the cost than what the product will offer them. Video game companies must pay retailers and wholesalers to sell their products to consumers, who in turn give money to the retailers and wholesalers and eventually back to the corporations that produce the merchandise. After the products are sold, they must keep track of the customer’s satisfaction with the games.

The final step in this process is customer service. Video game companies create their games so that they contain as little mistakes or defects as possible. These companies create a customer service program for consumers to call in case the products are defective or broken. If customers are happy with their games, they will continue to buy more games from these companies; however, should there be any problems, customers will contact these companies and explain the problems with the games. Once the companies gather this information, they can use it as research and develop newer models, thus creating a new cycle of creating games.

As you can see from the life cycle of a product, video game companies must spend a lot of money on different costs to create products that customers will be content with. When you take into account all the research and development costs, design costs, materials and labor, as well as so many other cost drivers, it is obvious that creating games and consoles are not as cheap as one may believe. The next time you play a video game, you should feel thankful that there are people that work hard and spend a lot of money on an enterprise made to make people like yourself entertained.



Source by Daniel Feigelstein

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