Exclusive: A Primer On Monetization Of F2P Games

By Alex Konda

I was lucky enough to intern at Ayzenberg over the summer. The reason I chose to intern there is that it’s an ad agency focused on youth marketing, and with deep roots in the video game industry. Many of the senior executives there have worked at major game publishers and developers, and Ayzenberg has even launched its own digital game start-up in [a]list games. I want to be a marketer in the game industry, and so it was a perfect fit for me. As part of my internship, I was able to leverage Ayzenberg’s experience in the free-to-play (F2P) game category for my undergraduate thesis. The agency is one of the first to launch major campaigns around F2P, introducing Nexon’s games in the West, and launching titles for F2P game makers such as NC Soft, Perfect World and Turbine.

I chose F2P as the topic for my thesis through a recommendation from Craig Mitchell at WB Games, whom I met at E3 2011. I then came across Michael Pachter’s keynote at Ayzenberg’s [a]list Summit San Francisco (incidentally through a piece posted here in [a]list daily), and soon decided to focus on the monetization strategies of F2P.

This article contains the main points of a presentation I gave as my final project at Ayzenberg and based on research that I conducted there. It’s the basis of my thesis, and a primer for anyone — game maker, marketer or player —  curious about the economics of the F2P game category.

What is the Free-to-Play Business model?

Free-to-Play (F2P) is more of a service than a product, with some people categorizing them as “games as a service.” As a business model, free-to-play is a digital hybrid model usually consisting of freemium, microtransactions, and a virtual economy.

Freemium is simply giving a full product for free and offering a premium version, which usually needs to be subscribed to. Microtransactions involve transactions of small value, and this is usually the main source of revenue for Free-to-Play games. Virtual economies is broader implementation of microtransactions, for instance a platform where players in a persistent world game such as an MMO can continually buy, sell or exchange virtual goods. The beauty of a virtual economy is the fact that you can retrieve real time data and know pretty much what is actually going on in your economy rather than estimating what it’s earning. What a F2P game earns can be broken down into soft currency (earned by playing) and hard currency (earned through real money).

Psychology and Free-to-Play

Knowing the mind of the consumer is very important in a F2P game, whether knowing their motivations to keep coming back to your game, when to upsell, or how they view game balance (i.e. whether they perceive it as fair or pay-to-win).

For this, the following two psychological principles, one being a theory, are very important to know when approaching monetization strategies.

  • Flow Theory

Introduced by Mihaly Csikszentmihalyi, flow theory is something all gamers have been through. It’s that feeling of being fully immersed in a game not knowing how much time has passed. Flow theory can be defined as a state of positive immersion in an activity. Its components are full absorption in that activity, clear goals, a high degree of concentration, and a distorted sense of time.

I believe flow theory is a state that can lead to impulse purchases due to the player being fully immersed in the game. It forms one basis for why monetization must be considered part of the game design process throughout the development of a F2P game.

  • Impulse Purchases

Purchasing virtual goods largely relies on impulse buying, as there is little planning involved. Players usually purchase virtual goods after playing the game a certain amount of time and this differs for each game. There are two factors with impulse purchases. First is seeing the product and its value. An example of this is Team Fortress 2, where when players get killed they see what weapon their opponent had equipped at the time. The second is convenience, where items are clearly defined as ways that will make the game easier or enhance the experience by making the player more powerful.

Virtual Goods

Now that we know what motivates players to make in-game purchases, let’s look at virtual goods categories that have proven to be the most effective. These goods can be divided up in four categories.

  • Vanity Items

Vanity items provide purely aesthetic purposes, such as items that can change the look of an in-game avatar. They serve no functional value, yet they have a value to players for whom self-expression and displaying their style is an important part of their experience.

  • Power Enhancements

Power enhancing items elevate the player’s abilities in the game, and therefore affect game play overall. The most common examples are upgrades to weapons and attacks, enhancement to character health and stamina, or quicker progression of game elements that make the player more powerful. These types of items must take overall game balancing into account before being introduced into the game.

  • Boosts

Boosts accelerate progression or make the game easier to play by speeding up game play elements, such as making it faster to build or repair structures in a tower defense game. Balancing is also an important consideration for boost items.

  • Consumables

Consumables can technically fall into Power or Boost categories, as they can give the player the same kinds of upgrades. However they are one-time or limited use items.

Monetization Strategies

Now that we know what to sell, how do we sell it The most basic necessity is having multiple ways to pay to remove any friction and help increase conversion of non-paying to paying players. According to a PayPal sponsored survey, just adding one alternative payment method can increase conversion by 14 percent.

Retention is also very important. The longer a user plays, the more likely they will pay. And the best way to retain consumers is to get them to pay, which is why it’s important to know the right time to upsell (which is different for each game).

Other strategies include having a store that’s simple to navigate and constantly checking metrics. The latter is a must. With cost per acquisition (CPA) to bring players into F2P games on the rise, it’s critical to continually evaluate whether players’ lifetime value (LTV) is higher than the game’s CPA.

The Old Standby — Subscription Fees

Offering subscriptions can be part of almost any monetization strategy, and it offers great flexibility. Subscribers are power users. They are not whales, but they could be. It is important to pay attention to these users, since they will usually be the ones who keep playing and keep coming back, given that they have a financial stake in the game. Offering discounts, giving hard currency each month, having subscriber-only events, these are all ways to create more value and give players incentive to become subscribers.

Virtual Currency

Let’s look at virtual currency. As stated, virtual currency can be divided into soft currency earned through game play and hard currency that involves spending real money. The point of soft currency is to drive retention. It rewards players for just playing the game, and the ways to earn it is up to game design. One example is picking up coins in Offensive Combat after getting a kill. Hard Currency offers the ultimate convenience for players. Instead of having to grind through game play to acquire items, they can just buy them with real money. One way a game can encourage players to spend real money is to introduce items that can only be bought through hard currency.

Worth noting, when it comes to exchanging currency for hard currency usable in the game, it is beneficial to give users a greater perceived value for the money they spend. Take the currency conversion table in Tetris Battle:

There is bonus currency for nearly every purchase, and the more you spend the bigger it gets. Valuating virtual currency differently than real world dollars can influence purchase decisions because players see items priced with the game’s arbitrary values rather than real currency. A good example of this is Microsoft’s pricing scheme for Xbox Live.

Perfect Price Discrimination

Also known as dynamic pricing, perfect price discrimination revolves around having consumers pay the maximum value that they see in the product. The best example of this pricing model is in the airline industry, where booking later will give you a higher price due to the fact that the purchaser has more of a need for the ticket. Though this pricing model is sound, it’s difficult to implement because it relies on continuous data. Yet a F2P game’s virtual economy, where you can attain a steady stream of granular data, this pricing strategy can be effectively applied.

Economists argue that dynamic pricing can only work in a pure monopoly. I would argue that a F2P game is a pure monopoly, in the sense that inside the game the store itself is a monopoly on its own. It’s worth noting that factors for dynamic pricing to work will have to be created by game designers, for example having in-game events.

Here is a comparison between regular pricing (left) and dynamic pricing (right), where you can see the benefits of being able to implement dynamic pricing.

Scarcity & Luxury

Scarcity is very straight forward. It comes down to only selling a certain amount of items to increase demand. With scarcity, there is also a dynamic pricing opportunity as well, where an item can have a low starting price and limited quantity with price increases as it gets close to selling out.

While not for every game — and more importantly, not for every game community – overly expensive luxury items have been known to generate money for F2P games. The strategy behind these items is to price them prohibitively, for instance thousands of real world dollars. These are intended for players whose passion for the game and access to expendable income is boundless.

Rentals

Since F2P games should be constantly updating and delivering new content (operating the game as a service), rentals are very useful. With new items constantly released, players can quickly feel what they’ve purchased is out of date. If they can rent items, they won’t get this feeling, and they will be more inclined to rent the next batch of new items.

Also, rentals can help lessen buyer’s remorse. Even though most in-game transactions are usually for small amounts of money, many of them are impulse purchases and buyer’s remorse is a common and un-favored byproduct.

Seasons

Using “seasons” to introduce new tiers of items is a concept introduced to me by Steve Fowler, who heads up [a]list games at Ayzenberg. [a]list games is a division at the agency focused on digital, mobile/tablet and F2P games.

The basis of the “seasons” concept is releasing batches of items according to a calendar and making them available to different tiers of players. Say a game is in its fifth season and has elite or high-end items that can only be purchased through soft currency. These are priced so that they’re only accessible by top players (because hey, they earned it). When season 6 items are released, and assuming those top players have continued to rack up soft currency, they’ll be able to quickly upgrade. Meantime season 5 items will then go on sale for hard currency, incenting lower level players to spend real money get their hands on them even as they try to earn the newest items through game play and soft currency.

With seasons, rentals are very useful. It goes back to players wanting to feel up-to-date. Seasons are meant to increase purchase frequency and make sure the game doesn’t start to feel old, and thereby help player retention.

Looking Ahead

There is still a lot to understand and discover about the F2P category, and a few trends are just starting to emerge.

The percentage of players who become paying customers in F2P games varies but is generally below 10 percent. Finding alternative ways to monetize the other 90 percent without the use of advertising, which is costly, is key. Market saturation is making discoverability challenging for new games, with some game makers struggling to find alternative ways to get their products known. Both of these are challenges that game makers working hand-in-hand with marketers need to creatively overcome.

Other trends point to a bright future for F2P. More and more AAA quality games are now attracting more hardcore, mid-core and traditional console gamers to the category. F2P titles on consoles will also help broaden the audience for these games. The business model is also being used to penetrate global markets like Brazil and is being looked at to be used in countries like India and Africa.

On the technology side, better optimized cloud gaming will give more players access. And NoSQL Databases capable of collecting more data, including scattered/de-normalized data, will allow for micro-segmentation within F2P games.

The F2P space is quickly growing. It will be very useful for marketers — even hopeful future ones like me – to understanding its monetization strategies and the category in general. As part of my studies, I will be defending my thesis on this topic for the Barrett Honors College at Arizona State University in fall 2013. In it, I will be exploring different strategies for different types of F2P games, such as social, mobile, or MMO, and how to best monetize players in these types of games.

In closing, I would just like to give a big thank you to everyone at Ayzenberg; I enjoyed my time there and learned so much.

About the author:

Alex Konda is currently a senior at Arizona State University majoring in Marketing and Computer Information Systems. You can find him on LinkedIn or reach him at kanishkonda@gmail.com.

Exclusive: Pachter Examines Zynga’s Flailing, Sees Wii U Failing

Moments before our interview at [a]list Summit Seattle, Wedbush analyst Michael Pachter looked down at his phone and started walking.

“Something’s happened with Zynga,” he called back and disappeared around the corner.

Michael Pachter

Zynga had just revealed that it expected a net loss of about $100 million for the third quarter despite beating revenue forecasts. It blamed costs of up to $95 million related to its acquisition of Draw Something maker OMGPOP.

Zynga purchased OMGPOP for $180 million in late March of this year. Notoriously, the company’s biggest hit Draw Something began bleeding users from its peak almost immediately afterward. In the month following the acquisition, the game’s daily active users (DAU) fell by more than a third. The write down on the deal represented yet another open wound in Zynga, a company that seems to be punctured head to toe as it deals with plummeting share price, shrinking market cap and its now legendary senior management exodus.

Just last February, Pachter had delivered the keynote at [a]list Summit San Francisco where he countered the notion that Zynga’s earlier success could represent a social game bubble.

We warned him we would be asking for currency on his take on the company. We never imagined something else in Zynga would pop before our interview. Being the unflinching and always accessible pundit who he is, Pachter agreed to the interview anyway. Besides Zynga, we also got him talking on the upcoming launch of the Wii-U.

[a]list: Do you stand by your earlier take on Zynga or do you now think there’s something fundamentally wrong with their business?

Michael Pachter: I think the problem with Zynga is they’ve given us way too much choice, way too much quality and satisfaction, and less of a reason to spend money. So where I was wrong was, I thought they would continue to monetize and hook people. Their strategy backfired. They’ve given us so much choice we don’t have to spend money.

[a]list: Can they turn it around?

Michael Pachter: I think that Zynga’s biggest problem is they started out as a free to play company, and so as they grow users they don’t necessarily grow revenues. They have to figure out how to monetize every user. The simple way to do that is advertise. Make this commercial supported gaming. If you don’t spend money you have to sit through ads and if you spend money you don’t. So the Words with Friends model, where you can pay three bucks and opt out of ads, I think that’s fine.

I have to say, I actually think the right model for them would be if you pay a dollar, and the dollar goes as a credit in the game so you can spend it on in-game items if you want to, but if you deposit a dollar each quarter, no ads for three months. If you got four dollars a year out of each of their 311 million actives, that’s more revenue than they’re making now. That alone I think would solve their problems, and then the whales would still spend — you know, two percent of them would still spend $100 each. I don’t know why they don’t do that. I think that’s the fix. I think the reason it hasn’t been fixed is, nobody wants to be first to do that.

If the alternative to spend a dollar is watch a dollar’s worth of ads over 90 days, I mean again, if you deliver the ads with the frequency — call it a penny per ad impression — which really is something they could do, that’s one ad per day. If it’s a tenth of a cent per ad impression, it’s ten ads a day. If you’re going to play the games as often as most people do, that’s just not that hard to sit through.

The crazy thing, I play Words with Friends and the ads come after I play my word. Well after I play my word, I’m done. The only reason I need to sit around is I might want to move to the next game, because I might have multiple games going. I don’t get why there’s not an ad when I load the game. To me, that’s just lame. Make me sit through the ad before I play my word because I’m there, you know? I’m going to play my word. If I want to play one game, I can close it out. And if I load it up again I can play the next game. I’m not sure they’re particularly thoughtful about ad delivery, but I think that’s the big opportunity.

[a]list: Nexon has done well for itself in free to play social and mobile games, and they’re experiencing continuous growth in the category while Zynga’s headed in the other direction. What would you define as the core difference between these two companies and why one’s thrived while the other is struggling to find its business model?

Michael Pachter: I think Nexon probably derives 85 percent of its revenues in Asia, and Zynga probably derives five percent of its revenues in Asia. That’s the primary difference. Nexon is significantly less successful in North America and Europe than Zynga is. I think Nexon has a great Asian model that I think they’re doing a very effective job of exporting to the West. But they started with the Asian model, and they designed their games for Asian markets, so they’re far more effective and they’re set up differently. There’s room for both. Zynga doesn’t have any games that are like Nexon games. Nothing. They’re different models.

[a]list: The Wii U is priced and ready to ship. We know you have strong opinions on the console and Nintendo’s hardware strategy. We’d be remiss not to ask you for final thoughts with their next launch on the horizon.

Michael Pachter: I’m not a fan of the console. Essentially I look at the GamePad and the television, the two screens, and I see a DS that’s disaggregated. It’s very similar to playing a DS game. The difference is, with the DS your line of sight is on both screens. It’s easy to toggle back and forth. With the GamePad on the Wii U you have to look back and forth, and that’s not natural.

I understand the console is going to be way more powerful than the DS. It’s entirely possible you’ll get great experiences that are console-like but take advantage of the touch screen. But I think most developers look at the GamePad as either a gimmick or very DS like, and they don’t want to incorporate the touchscreen features because the games aren’t any better for them.

Nintendo will pioneer, they’ll do a far better job than anybody of exploiting the console and the control scheme, and I think others will learn from them. I’m afraid we’re going to have a repeat of the Wii cycle from the publishers’ perspective and the developers’ perspective, where very few people will support it. Then if it’s successful they’ll come in, and they’ll fail. When they fail, they’ll go away again. The reason I think they’ll fail is, I can’t think of a third-party publisher that did well on the DS. I mean, Scribblenauts, so there are a handful games and you can count them. Nobody did very well on the DS, and I don’t think anybody’s going to do very well on the Wii U.

So my advice is, it will sell out until the hardcore Nintendo fan base has all their consoles, and I don’t know what that number is. They sold 90 million Wii’s, it’s certainly less than 90 million hardcore fans. I would guess it’s between seven and ten million, and it could be 20 million but they don’t all have $350. When the hardcore fans are satisfied, I think sales are going to drop precipitously because I don’t think the thing is priced competitively with what most people think is a comparable console, Xbox 360 or PS3. I think that this thing, rather than launching and being the cheapest of the three consoles, which the Wii was, and very novel because no one had ever seen motion control before, this console is launching and it’s the most expensive of the three consoles and it’s not novel because it’s very much like the DS.

The final complicating factor is, if you’re a gift giver, you have a choice of giving somebody a Kindle Fire in HD for $199 and standard def for $169, or perhaps an iPad mini which I’m guessing would be $299 but probably not more than the $349 price of the Wii-U, or a smartphone which is a couple hundred bucks if that. I think there’s a lot of competition at that price point for gift givers so I’m not sure this is the best solution for most people. I don’t think it’s going to succeed after its first six months or so, I think once it’s done selling out it’ll really surprise people and its price will have to come down.

[a]list: Thanks, Michael.

Exclusive: Getting Acquainted In San Francisco

Ayzenberg’s 2012 [a]list summits visited San Francisco, Los Angeles and Seattle with a series of events looking at how entertainment marketers are wooing consumers today. Aptly named “The Consumer Courtship,” the summits gathered industry legends, entrepreneurs, pundits, senior marketers, even a few super YouTubers. The topics varied from summit-to-summit but hovered around the rise of branded entertainment and how it feeds off of social media marketing.

[a]list daily is featuring a retrospective on the summits in three videos.

In Part 1, Azyenberg’s summit agenda creators Steve Fowler, Julian Hollingshead and Chris Younger reflect on highlights from Michael Pachter’s keynote and a panel on social marketing with Hootsuite’s Dan Webster.

You can jump to Part 2: Los Angeles and Part 3: Seattle.

 

Exclusive: YouTube Stars On Growth Of eSports

We talked eSports with hosts Husky StarCraft, Zac Hill, and popular YouTube stars at “Duels of the YouTubers.” The tournament organized by Wizard of the Coast and Ayzenberg Group was live streamed last week on TwitchTV. It pitted YouTube stars Tobuscus, Katers17, OMFGCATA, Panser and Black Nerd Comedy in a last man standing competition playing Magic The Gathering: Duels of the Planeswalkers 2013.{link no longer active}

“Duels of the YouTubers” was yet another indication of the growing popularity of eSports, garnering more than 110,000 channel views during its airing.  Hear what some of the people behind the eSports phenomenon have to say on why gamers are starting to show en masse that they love watching games as much as playing them.

 

Exclusive: The Winners Of Game Connection Marketing Awards

[a]list’s Steve Fowler interviews the winners of this year’s Game Connection Marketing Awards. The winners were announced at a ceremony at Porte de Versailles Expo in Paris on November 28.

Marketing reps from NC Soft’s Guild Wars 2 print and digital campaigns, Neoco’s Borderlands 2 social media campaign, Sid Lee Paris’ Assassin’s Creed III “Rise” trailer, and Crispin Porter + Bogusky’s Just Dance 4 mobile campaign talk about what helped them walk away with first place trophies.

 

Interview With Wreck It Ralph’s Rich Moore

Disney’s Toy Story for gamers, Wreck-It Ralph, is set to break the $100 million mark at the box office this weekend. It opened at number one with $50 million last week.

The film’s director Rich Moore is no stranger to games. The former Futurama and Simpsons director was personally involved in creating the reimagined old-school arcade game that’s the basis for the film.

“It’s always been a dream of mine to have a game created based on the idea that I had,” says Moore.

In this interview with Gamerhub.tv, Moore talks about how Disney pulled together classic game IP and why it chose to turn Wreck-It Ralph into an actual game.

 

Exclusive: Wargaming.net’s Free-To-Play Battle Theater

Authenticity plays a part in World of Tanks, even though the free-to-play hit is a relatively fast-paced combat game.  The founders of the company behind it, Belarus-based Wargaming.net, call themselves military strategy enthusiasts.  Their penchants for historical accuracy shows up in the visual realism and attention to detail in the hundreds of pieces of military hardware found in the game.

Matt West at Wargaming America says the company leverages that accuracy to target military buffs.  With its next game, World of Warplanes, that means promoting the game at air shows and military museums.

“While we focus on appealing and reaching that hardcore gamer, we also reach out very deeply into the military community,” says West.

World of Warplanes is now in closed beta testing and due to be widely available later this year.  Wargaming’s other announced game recently changed its name from World of Battleships to World of Warships.  It’s slated for 2013.

In our exclusive interview, West talks about branding and community initiatives planned for World of Warplanes, and how Wargaming.net hopes to eventually create a single funnel that gets players into all of its games.

 

Exclusive: Ford’s Resident Gamer

In this exclusive interview from E3 2012, [a]list daily talks with Ford social and emerging media analyst Brian McClary.

Ford has had a presence at E3 for two years running, part of its strategy to relate to gamers.  McClary’s deep gaming roots and understanding of gamer culture give the company a great reference point.

“Gaming isn’t something you do,” says McClary.  “It’s something that you are.”

 

Exclusive: The Challenges Behind Branding Skylanders

The Skylanders franchise took off like a rocket when it was introduced last year. The product line was not only a first for Activision but for games in general, with big budget console games aimed at young players that required physical toys – an entire line of action figures – to play. Not surprisingly, the novel concept faced skepticism, with industry pundits split over whether it could succeed.

By the time the original games and toys launched, most major retailers had bought in big, dedicating good chunks of real estate to feature the line prominently for the holidays. By late December, Skylanders sections in most stores looked like water and canned food aisles before a big storm. The products ultimately generated an estimated $100 million at launch and, according to Activision, sold well enough into 2012 to become the best-selling game products {link no longer active} for the first four months of this year.

Activision is now preparing to keep up with demand for the sequel, Skylanders Giants, and a whole new line of toys to go with it. We interviewed Skylanders’ executive producer Scott Krager earlier this year, where he gave us insight into challenges the products initially faced, and the strategies in place including social and mobile efforts to grow the brand now that it has taken young gamers by storm.