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Summary:

Making the first hit free still works as a strategy for hooking consumers. If you’re thinking about such a strategy for your app, here’s how to go about making it happen.

in-app purchases

It should come as no surprise that free-to-play gaming has become a huge financial success in mobile gaming. Free-to-play (FTP) in the iTunes App Store refers to any iOS game that allows gamers to download a game without paying up front. In fact, 82 of the top 100 grossing games on the iPhone are currently FTP. And of the 18 games that you do have to pay for, only 5 titles do not offer any sort of in-app purchases. These 13 games are what are sometimes referred to as pay-to-play (PTP) games.

That leaves only 5 games in the current list of top 100 grossing games relying on their initial sale price alone for revenue. How are these FTP games making it to the top of this list? It is the sale ofvirtual goods through in-app purchases that is driving revenue for the top iOS games.

Growing opportunity for virtual goods

Virtual goods in iOS games are mostly fictional items that characters within the game interact with like weapons, vehicles or buildings. These items are often purchased within games by using real world currencies. The worldwide market for virtual goods reached $15 billion in 2012, and this number keeps rising. This global virtual goods market is expected to grow at a compound annual growth rate of 12.5 percent over the period from 2012 to 2016.

TechNavio found a correlation between the growing number of households with broadband internet access and the growth of the virtual goods market in their “Global Virtual Goods Market 2012-2016” report earlier this year. This report may show that more and more individuals now have the means to purchase virtual goods, but it does not help us understand their motivation to purchase virtual goods.

Monetization techniques used by developers

Motivating gamers to buy virtual goods in games is not a well-guarded secret. Simply search the internet for “monetization” and “free to play” and you will see several articles written to teach game developers how best to make money selling virtual goods.

Flow Theory – It is all about maximizing the amount of time a gamer spends in the game. This is accomplished by getting the gamer into a state of mind that Professor Mihaly Csikszentmihalyi calls “flow”. During flow, people typically experience deep enjoyment, creativity, and a total involvement with life. This is perhaps more obvious when one performs certain physical tasks like gardening, building or cleaning. You may refer to someone experiencing flow as being in the zone or on a roll. This could be why so many games that are successful at monetization have us hunting, gathering, building and collecting things.

Intermediate Currency – The second key ingredient to getting players to purchase virtual goods in games is by introducing an intermediary currency that is not directly associated to real world currencies. Ramin Shokrizade, and economist for Wargaming America, wrote on Gamasutra that “that putting even one intermediate currency between the consumer and real money, such as a “game gem” (premium currency), makes the consumer much less adept at assessing the value of the transaction.”

Dynamic Pricing – The final ingredient to monetization success is accomplished by implementing what is called dynamic pricing. Typically triggered by carefully timed events, dynamic pricing offers gamers multiple conversion rates between real world currency and in-game currency to create the illusion of getting a better deal by spending money at times controlled by the game, not the gamer.

Once all three conditions are met successfully, gamers are more likely to spend real money to increase the amount of premium currency they have in a game in order to possess the virtual goods they want. Regardless of how expensive these virtual goods really are.

The real expense of virtual goods

Pocket Gamer recently comprised a list of ten of the most expensive items for sale via an in-app purchase. Now keep in mind that many of these items are not directly for sale for real world currency as an in-app purchase. Most are sold within the game for in-game currency like gems, coins, or doughnuts. On the cheaper end of the list, you can participate in Barney’s Bowlarama in The Simpsons for 300 doughnuts (or $20 USD) or Blackbeard’s Ship in Playmobil Pirates for 5,200 gems (or $40 USD).

At the more expensive end you can be the proud owner of General’s Spear in Eternal Warriors for 5,200 gems (or $100 USD) or the Apathy Bear Gun in Gun Bros for 3,999 War Bucks (or $600 USD). While there are ways of earning such sums within the game, it takes a very long time to do so. For the impatient the problem is that you can rack up a real world bill for these virtual world currencies rather quickly.

Overspending by child gamers

We have heard the stories of the five-year-old boy in the U.K. that spent $2,500 in Zombies vs Ninja and the eight-year-old girl who spent $1,400 on Smurf Berries. Overspending events like this have surfaced often enough that the Office of Fair Trading in the U.K. is looking to find out if such games are putting undue pressure on children to pay for additional content. While this has created a lot of unhappy parents that are left paying the bill, this does not appear to apply to how the gamers themselves feel about their purchases.

Gamers couldn’t be happier with their purchases

When a game developer gets the formula just right, not only do they benefit monetarily, but they also have a satisfied customer base that feels that the money they spent within the game was worth it. Market research firm EEDAR shows that 75 percent of the players that spent $50 or more on a game were satisfied with their experience. The key to this research is that such gamers are selective in which FTP games they play.

How best to control your own spending

If you are looking for a way to help keep your virtual goods budget in check, one option is to prevent your device from making any in-app purchases in the first place. While this may be an option for some, it certainly is not an option for gamers, especially gaming children. Instead what seems to work out best is to move the buying decision to outside the gaming environment entirely. Using hard currency from one’s own piggy bank to purchase iTunes Gift Cards will help modify the frequency of impulse purchases made in the ‘flow’. This will also help associate real-world value to the virtual goods one desires.

When things go really wrong

The iTunes support staff at Apple has been very receptive to helping out when your purchases do not turn out the way you intended. The two or three times that I have called iTunes Support directly over the years in regard to a refund, I got it. If you feel that the situation may affect other customers, you can always let Apple know by clicking on the “Report a Problem” link provided in your receipt. Additionally you can also provide the iTunes support staff feedback directly.

Keeping iTunes customers happy is certainly key to standings in customer service. With a growing world appetite for virtual goods reaching $15 Billion dollars, the FTP gaming experience is clearly here to stay.  As more and more gamers get familiar with the experience, satisfaction among well-paid developers of such game and happy paying customers is becoming commonplace.

  1. Reblogged this on #LoveTroll: ideas & inspiration for social sharing and commented:
    Many lessons can be found at the intersection of Games and Social. Makes sense, right – the two are so related!

    Enjoy this exploration of economics, technology, and our simple yet honest desire to be happy :)

  2. Jonathan Libov Saturday, August 24, 2013

    Great post. While the next few months or years will probably continue to benefit games more than any other genre in generating in-app purchases, there’s also a bright future for non-gaming apps with the onset of contextually-aware devices. It seems a safe bet that contextually-aware devices and the software that resides on them will one day be able to interject themselves in our real-world “flow” and then, of course, seek to monetize.

    FWIW, I had some fun with this idea in “What if in-app purchase came to real life?”: http://whoo.ps/2013/08/22/what-if-in-app-purchase-came-to-real-life

    1. I believe that many are looking forward to the day when in-app purchases come to real life. And it just may be near field communications (nfc) that enables such an experience. Any way that technology can reduce the friction between merchants and consumers should serve to increase the flow of goods and services.

      http://gigaom.com/tag/nfc/

      Now if only someone could figure out how I could earn one million gold coins, diamonds and of course doughnuts in the real world as fast as I spend them in the virtual world.

  3. Copy_Right©Forever Sunday, August 25, 2013

    Hey, they created inApp-purchase to stop piracy and the cracking community. The crackers were hacking and stealing apps with the excuse that they wanted to “try” them first. It was a bogus excuse… but the app industry answered the call, and made that all possible.

    Guess what? it works rather well for all parties.

    If people would stop viewing web based products as what they see as a “free culture”, then it wouldn’t be skewing off in this direction.

    So, all you freeloaders are turning the web into a culture of pay-per-view, insane-pavlovian-lab-rat monetization schemes. Otherwise, who is going to keep making this stuff?

  4. Is it possible to turn off in-app purchasing, device-wide, then password protect that setting? This would be the best way to keep kids from losing thousands of dollars.

    1. Yes, turning off all in-app purchasing use to be a valid option before free to play started becoming the norm. I have outlined all of the options available to parents interested in controlling spending through automated means previously:

      iOS 101: Manage Your Family’s iTunes Store Spending
      http://gigaom.com/2010/10/15/ios-101-manage-your-familys-itunes-store-spending/

      However, with so many games heading in this direction, learning about the pitfalls of spending too much on virtual goods is a skill that everyone should learn.

      The only other option may soon be to simply not play games anymore, which is what turning off in-app purchases will effectively do with many of the today’s top grossing games.

  5. iPhone App developer Sunday, August 25, 2013

    All the app developers allow users to play first few steps for free and then they charge for the crictical area of game. This is great technique.Once people love the game they defenitly starts to buy this later versions.

    1. There are certainly plenty of games that introduce themselves with free content, then offer additional un-lockable content if you like the first few levels. This sort of in-app purchase is referred to as a non-replenishable in-app purchases. These are not the types of games that typically use the mentioned monetization techniques outlined in the article and generally are not the sort of games that have outraged parents.

      Many of the free-to-play games that are in the top 100 grossing games use replenishable in-app purchases. Such purchases are used to continually increase your in-app currency. If you are not careful as a gamer, you can get caught up in the euphoria of the game and run up massive bills converting real world currency into virtual world currency, even if you have fun doing so.

      The different types of in-app purchases are outlined in the following article:

      Don’t make a costly mistake: Know Apple’s in-app purchase rules
      http://gigaom.com/2013/06/08/dont-make-a-costly-mistake-know-apples-in-app-purchase-rules/

  6. I fully agree that the free toplay model can be very beneficial for game developers, but in the same time if used not properly very dissappointing for gamers and can even distract gamers from the app. Plus there really should be protection from kids spending money inside of the game – probably making purchases outside the gaming environment would be the best decision, but many game developers would be against it since it can lower their income

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