I recently read an article on pricing in the Harvard Business Review, “Pricing to Create Shared Value,” that has direct implications on monetization strategy in the social gaming space. It is so counter to the current strategy of so many social game companies, I am sure many of you will either disregard it or just think I am wrong. Before you do, keep in mind the underlying article was written by star professors from Harvard Business School (John T. Gourville) and the London School of Business (Marco Bertini), based on years of research, so maybe the 20-something monetization whiz in the Bay Area does not know it all.
Current price setting is not just broken; it is destructive
The article starts by explaining that the way most companies make money is more than broken; it is destructive (again, they are not talking specifically about the social game industry but the parallels are so clear). They point out that in many industries, including financial services, insurance, air travel and telecommunications use pricing strategy to extract as much as possible from every transaction. They mention, as a couple of examples, all the added charges by airlines and how your phone bill does not come close to your monthly plan. The authors point out that this antagonistic approach used to work in many cases but today’s consumers are not passive price takers. They find and disseminate information about a company’s or game’s prices, using social media such as Facebook and Twitter to publicize policies they feel are unfair. Looking at the bulletin boards and Facebook pages from most of the major game companies, you will see it is impossible to argue this point. This situation creates a unique challenge for social game companies, as customers are not just rejecting questionable prices but actually rejecting the companies’ way to make money.
The problem is that companies in many industries have traditionally treated value in the marketplace as a fixed pie and have reasoned that they must compete with customers to get as much of the “pie” as the customers will give up. Whatever value the customers give up is value consumers miss out on and vice versa. Theoretically, companies assume that they own all the value and are thus entitled to charge whatever will maximize their share. Thus, they treat pricing as an optimization problem, pricing mechanically in the pursuit of profit and exploiting any consumer disadvantage, such as a lack of information or understanding, limited attention or limited choice (sound familiar yet?).
The article makes the point that this underlying philosophy is wrong, as value does not belong solely to the company; there is no value without a willing customer. More importantly, value is not a fixed sum but can be increased through collaboration with customers. For example, a well-designed promotion or sale not only boosts sales but can also encourage virality and retention. To increase shared value, companies need to perfect the language they use to communicate directly with consumers: the language of price. Price is the strongest signal to motivate customers, both positively and negatively. These days most consumers greatly discount branding and other high-level marketing, but pricing puts customers in control and forces a decision (either to monetize or not). Prices send clear messages about what the company believes in, what it thinks of its customers, and how it wants to interact with them. These messages can either drive players away, thus destroying value, or expand the pool of value creating new revenue, increased customer satisfaction and retention, positive virality and cost savings.
Do not focus on transactions
To build on the above analysis, game companies need to focus their pricing strategy on their customer relationships, not the individual transactions. Pricing decisions can undermine the bond between the player and the game by signaling to players that you only value their wallet. As you will see on countless forums and message boards, players feel an emotional commitment to social games, and by sending the signal that they are only an ATM breaks this relationship and prompts to consumer to react accordingly. In the HBR article, they used the World Triathlon Corp (WTC) as a company that took the wrong approach, creating additional events that generated revenue but were inconsistent with the Ironman tradition (they also did extensive licensing with products not really related to the Ironman). Rather than generating additional revenue, consumers created an online campaign critical of the changes that forced WTC to cancel the program and issue an apology.
While the WTC example shows the folly in pursuing a purely transactional approach, the article’s authors use Hilti as an example of how a consumer centric approach can enhance revenue. Hilti (the power tool manufacturer) created a Fleet Management program after realizing that construction companies (their customers) did not care about owning tools but about increasing productivity. The program charges a monthly fee that covers the use, service and repair of all tools. By removing the need for ownership, Hilti simplified its customers’ financial planning, reduced their admin work and lessened downtime. By focusing on the relationship rather than the transaction, Hilti both created additional value for customers and captured more market share.
The article points out that most companies price reactively, and this is certainly the case in the social game industry. Game companies price based on historical analytic data, making changes to get a larger share of the customers wallets based on past behavior. This is such a powerful practice that most social game companies are actually built around monetizing based on reactive models. To create share value, however, social game companies must price proactively, anticipating what players want and how they will react to different pricing schemes. The article points out that customers often seek to avoid paying if there is a simple and legitimate work-around. They are also sensitive to sunk costs and react differently to small recurring fees than to large onetime fees. Knowing those things, a game company can price proactively either to discourage detrimental behavior or to encourage behavior that is beneficial to both the company and its players.
The article has a great example of reactive pricing gone bad: airlines. By introducing a checked baggage fee, they encouraged consumers to bring more luggage onto flights. Thus, the fees have negatively impacted all fliers (who has not been frustrated by the boarding process now that it takes ages to get people’s carry-ons stowed?), delayed flights and increased security lines. An example of proactive pricing is Amazon, which introduced Amazon Prime. Consumers get unlimited free 2-day shipping for $79 a year, an optional service that many consider quite useful that encourages strong loyalty to Amazon.
Flexibility, transparency and fairness
The article points out three other issues that should be considered when creating a pricing strategy: flexibility, transparency and fairness. These are all considerations that social game companies often do not pay enough attention to.
Pricing is usually rigid as companies try to find the “right” price level that will maximize revenue or profits. Individual consumers, however, may value the same product differently and what is valuable to a consumer at a particular point of time may have a different value at a different point of time (for example, energy may be worth more when they are traveling than on the weekend). A single inflexible price often limits a company’s ability to share value equitably with customers or to shift prices in response to changes in their needs. As each customer engagement is unique, each customer has its own prices (different at different times), which is a function of the shared value created.
Transparency is another pricing area that social game companies seem to avoid rather than embrace. A company that is transparent about the way it makes money fosters engagement and builds trust and goodwill among players. Engaged customers cost less to retain, often migrate from non-monetizing to monetizing or monetize in other ways. On the contrary, game companies that are less transparent signal they are hiding something, distancing themselves from their players and putting both parties on the defensive. The authors of the article point out that the industries with the lowest customer satisfaction have the most complicated monetization schemes: airlines, retail banks and telecoms (and none of those industries are particularly profitable).
Finally, it is important to understand and influence players’ perceptions of fairness. When pricing seems fair, consumers often buy more and are more willing to pay a premium. Critically, perceptions of fairness relate not only to final prices but also to the process by which they are set.
Should you adjust your pricing strategy
As I said before, I realize many of you will disregard this article and continue business as usual, either claiming it does not apply to the social game space or the writers are incorrect about the best way for a firm to optimize profits. I obviously do not agree but recommend that before you decide on a pricing strategy, look objectively at the points raised above and determine the best way to create long-term growth. As with other posts, a proactive strategy is a lot more intellectual work than the current monetization schemes. Creating a proactive pricing strategy requires you to learn about, understand and empathize with your customers, not simply analyze numbers (though that is still important). This is similar to my suggestions on user acquisition and analytics, in which you can create great value by going beyond current practices.