Inflation and Social Gaming

With inflation imminent or already in most major markets, the next question is “What must social game companies do to survive?” The answer: A lot more than they are currently doing.

When social games are deployed in international markets, one of the initial issues that must be tackled is is how to adjust the price levels. If you want to optimize revenue, you cannot have the same real prices in Brazil or Poland as you do in the US. The prices of virtual items must be relative to locals’ other entertainment options. The default many companies use to set price levels is the “McDonald’s index,” which effectively is the price McDonald’s charges locally for a Big Mac. Thus, if they charge $1 in Poland and it costs $2 in the US, it would suggest you set the cost of micro-transactions in your games at 50 percent what you charge in the US.

What makes the situation interesting is inflation. Once the price level is set in a game, the company rarely adjusts the prices other than to reflect adjustments made in the US version. The problem with this strategy is that relative price levels change. If the local game is in a country with 25 percent inflation while US inflation is around 5 percent, the real cost of virtual goods (the opportunity cost of buying items in the game versus buying that Big Mac) would decrease significantly. This change would both throw the balance of the game economy out of kilter (goods would be so cheap that it would give an unfair advantage to people making minor purchases) and decrease the developer’s revenue (higher inflation devalues the local currency).

With inflation on the horizon everywhere, but to different degrees, this is an issue that any game company with a significant international presence should address.

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