virtual goods are a completely different model from physical goods which have inputs aside from your labour. Even if Inno "trained" us to expect deep discounts, all they have to do is add more diamond sinks to rebalance. A shoe seller can't produce more shoes without buying more material and can't give all their customers a third foot to get them to buy more shoes.
Part of the issue Inno faces is that they inevitably price things higher than players do. Practically nobody aside from the extraordinarily impatient believes a KP is worth 45 diamonds.
I do believe our separation of physical goods and virtual goods to be a inadvertent red herring. Cost is cost. The only difference it, and it may be significant in the long run, is the materials. You are right that virtual goods, once created, are extremely cheap to produce. However, once they are viewed from the purchasers reference point their value is relative to whatever the purchaser values them at. In this the cost to the producer is irrelevant when pricing the items unless the cost (in physical goods) is greater than the price. It's may be hard to see how a virtual good price could be too low to ever make it unprofitable, but even virtual goods have equipment upon which they must be maintained -- and thus ongoing cost of "storage," if you will.
So the reference point of my original post was from the producers point of view -- and you are right that if the items are physical -- and thus each item has the cost of materials and labor -- deep discounts will bring the average selling price closer to the point of unprofitability. Yet, at the same time, the storage and maintenance cost of virtual items is there, and thus, the lower the average purchase the less revenues and the less revenues the less raw profit (not as a percentage, of course, but as a basic number), which means, at some point, if that number is too low the investors take their money elsewhere.
In the end the point is deep discounts lower the average selling price thus profit margin, and revenues because many, many players wait for the deep discount rather than buy at the standard rate. This is true of virtual goods and non-virtual as well.
As to your point about rebalancing, you may be right. However, it would seem to me that if you "raise the price" on something the market generally reacts by not purchasing the thing as much. Which means, at some point, you cannot make up for lost revenues by simply raising the price somewhere else indefinately. There are limits and the same people who refrain from purchasing at the standard price are probably the same people who will refuse to purchase once you have attempted the rebalancing by raising the prices elsewhere.
@Deborah M
Your are right that there is always a mix of customer attitudes. Some will pay full price, some will not. Some will want incentives -- lower prices being just one of the possibilities -- and some won't care. But imagine for a moment that there were not incentives other than the standard package at the standard price. No discounts or goodies. If there are no variances in the selling price you will divide your group into two categories: those who spend because they think the price is okay or even good; and those who do not because they've come to the opposite conclusion. One day you decide you wish to bring in more revenues by offering incentives -- doesn't matter what but something. Now in the group of purchasers -- i.e. those who have already purchased -- the value of the standard package is now lowered since they now know they can purchase MORE for the same price they previously purchased LESS. Is it not reasonable to believe that those purchasers who were closest to the "this is too expensive" line (and thus were in danger of becoming "non-purchasers") would realize that the actual value of the original, non-incentivized package was less (because they could get MORE for the same price if they just wainte? Psychologically, once you get a package with an incentive for the same price as a package without an insentive, you lower the value of the package without the incentive. Thus, the value of the standard, non-incentivized, package becomes lower.
Of course, on the flip side, the value becomes higher to some degree as well among those non-purchasers who, without the incentives, think the price "too high." With the incentives those closest to the line of "cheap enough" may cross over and now purchase. Yet, now they, too, have re-valued the basic non-incentivized package at a lower price because they have now said that package is worth X only if it has some incentive attached to it.
My point is that the larger the discount the larger the change in the perceived value of the standard package because you are adding something of value to it in order to get the same payment out of your purchasers. Over the long run this will lower the average perceived value of the non-discounted package and force you to continue offering incentives just to get more people to purchase it. Some, of course, will not care what price it is, but that group is probably very, very, small indeed. The rest of us will become more "jaded" and expect more and more incentives.
AJ