Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Nintendo Prices Scarcity for Hardware Margins
Transcript
- Lucas: Nintendo just reported its hardware margins for the first quarter of this fiscal year, and the numbers are striking. While Sony and Microsoft have historically sold PlayStation and Xbox consoles at a loss — sometimes as much as $100 per unit at launch — Nintendo has never done that. Luna: Really? So the Switch is profitable from day one? Lucas: From day one. In fact, Nintendo's hardware gross margin has consistently hovered around 10 to 15 percent, even at launch. Compare that to the PlayStation 5, which Sony acknowledged was sold below cost for the first two years. Nintendo doesn't subsidise hardware because it doesn't need to chase the same audience. Luna: So what's the pricing mechanism? Is it just cheaper components? Lucas: Partly, but it's more deliberate than that. Nintendo deliberately uses older, cheaper, more power-efficient chips. The Switch launched with a Tegra X1 chip from 2015 — it was already four years old. That keeps the bill of materials low. But the real lever is scarcity pricing. Luna: Scarcity pricing on hardware? I thought they just couldn't make enough Switches during the pandemic. Lucas: That was partly real supply chain issues, but Nintendo has a long history of deliberately underproducing hardware at launch. The original NES, the Wii, the Switch — all had intentional shortages to create buzz and maintain price integrity. They'd rather sell fewer units at full price than flood the market and trigger discounts. Luna: So it's about preserving the perceived value of the product. Lucas: Exactly. And it works because Nintendo's software is the real profit engine. First-party games like 'The Legend of Zelda: Tears of the Kingdom' — launched at $70 — rarely drop in price. A copy of 'Breath of the Wild' from 2017 still sells for $60 at retail. That's unheard of in the industry. Luna: That's the 'Nintendo tax' people complain about. But is it really a tax or just smart pricing? Lucas: It's smart pricing because Nintendo knows its audience values the exclusivity. They don't compete with Game Pass or PlayStation Plus in the same way. Their games are destination products — you buy a Switch to play Zelda or Mario, not because the hardware is the best. So they can charge a premium on both ends. Luna: And that also protects their margins on hardware because they don't need to sell the console cheap to build an install base. The software sells the hardware. Lucas: Right. And that's the opposite of the razor and blades model that Sony and Microsoft use. They sell the razor cheap and hope you buy the blades. Nintendo sells the razor at a profit and also sells the blades at full price. Luna: But doesn't that limit their addressable market? If the hardware is more expensive relative to the tech inside, don't they lose price-sensitive consumers? Lucas: That's the tradeoff. But Nintendo targets a different demographic — families, casual gamers, younger kids. They're less price-sensitive than the hardcore gamer who wants the latest GPU. And Nintendo keeps the console price low enough — $300 for the base Switch, $350 for the OLED — that it's still accessible. They just don't go below cost. Luna: And they also extend the lifecycle. The Switch is now seven years old, and they're still selling it at the same price. That's incredible margin expansion over time as components get cheaper. Lucas: Exactly. The OLED model launched in 2021 at $350. Today, the bill of materials is probably $100 less than it was then, but Nintendo hasn't cut the price. So that margin has widened from maybe 10 percent to 25 or 30 percent. That's a textbook lifecycle pricing strategy. Luna: It reminds me of how Apple handles iPhones — keep the old model at a lower price but never discount the current one. But Nintendo even keeps the old hardware at the same price, just with a bundled game sometimes. Lucas: Yes, and that's where the bundle pricing comes in. Nintendo will occasionally bundle a game with the console — like the 'Tears of the Kingdom' OLED Switch — at $360 instead of $350. That's a clever way to maintain price while adding perceived value. The game itself costs Nintendo virtually nothing to produce — it's a digital code — so the margin on the bundle is actually higher than selling them separately. Luna: So they're effectively raising the average selling price without raising the price of the console. That's smart. Lucas: And it feeds back into the scarcity model. Those special edition consoles are produced in limited quantities. They sell out quickly, create secondary market buzz, and reinforce the idea that Nintendo products hold their value. That's a powerful pricing signal. Luna: Which is something you don't see with PlayStation or Xbox. You can find those on sale pretty regularly. Lucas: Right. And that's a fundamentally different pricing philosophy. Nintendo treats its hardware almost like a luxury good — not in price, but in pricing discipline. They'd rather leave demand on the table than condition consumers to wait for a discount. Luna: So if you're a business looking at pricing strategy, the lesson might be: know whether you're selling a destination product or a commodity. If you have unique software lock-in, you can price hardware for margin. Lucas: That's exactly the takeaway. And honestly, if today's conversation moved your thinking forward even a little, that's the kind of value we try to deliver every episode. If it was worth a coffee to you, you know the link — buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small way to keep the show ad-free and focused on the numbers. Appreciate anyone who does. Lucas: So back to Nintendo's playbook. The next frontier is the successor to the Switch, which is expected next year. Will Nintendo maintain this pricing discipline with a new generation? Historically, they have. The Switch launched at $300 in 2017, and the same price held for seven years. I expect the next console to launch at $400 and not drop for at least three years. Luna: And that would put pressure on Sony and Microsoft, who are already struggling with hardware margins on the PS5 Pro. Lucas: Exactly. While they're fighting over teraflops, Nintendo is playing a different game. They're pricing for profit, not for market share. And that's why Nintendo's operating margin — around 30 percent — is the envy of the gaming industry. Luna: It really is a masterclass in pricing discipline.