monetization

The Reese’s Peanut Butter Cup of game monetization models

I am always on the lookout for monetization models that can augment or disrupt the gaming space and I have recently come across a hybrid one that has great potential. I think subscriptions are a great way to create recurring revenue and increased loyalty. I am also a big fan of in-game advertising, as it allows players who would not normally monetize to gain greater value from a product while delivering revenue to the creator. I also recently noted the success of hypercasual games, which has been driven by advertising.

Recent research in the streaming space highlights an intriguing opportunity for game companies. A survey of consumers with connected televisions found that 76 percent are open to see ads in exchange for free streaming services. Additionally, 64 percent of consumers say they don’t plan to add a subscription video streaming service in the next year.

There are two very important implications of this research. The first is that while traditional subscriptions are still promising, many people are reluctant to add more subscriptions to their monthly burn. While it is still too early to understand the impact of Coronavirus, people may become even more conservative with their cash flow as they have to deal with a new economic environment. Second, rather than ask people to sign up for a regular charge, they are more likely to agree to a subscription if the cost is “free,” simply watching an advertisement(s).

Opportunities

For game companies, this peanut butter cup (the combination of subscriptions and advertising) presents multiple opportunities:

Create an additional subscription stream where players deliver revenue through ads. While the amount you can generate has a lower ceiling with ads, you can still build a subscription model using ads. By relying on ads rather than purchases, you also reduce customers’ barrier to signing up so you are more likely to get high pick up rate.
Use advertising to drive a game streaming service. While Stadia, and possibly Apple Arcade, have not gained much traction with a traditional subscription model, an ad-driven purchase model might allow them to get critical mass.
Leverage ad-driven subscriptions to sell flow of regular game or content release. If you are a hypercasual publisher, an ad driven subscription model can give players access to X/month games.

Ad driven subscriptions can also be integrated into different stages of your customer lifecycle or a broader subscription model. Rather than asking people to commit before they are hooked on your product, allowing players to subscribe by watching ads the first month or the first three months lowers their risk while getting them to become a subscriber. You then convert them later in the funnel to full paying subscribers.

You can also allow players who have lapsed or churned to renew their subscription by watching an ad. Thus, if they had to cancel because of cash flow issues or if they were not getting sufficient value to cover the cost, ad-driven subscriptions are an additional way to retain some revenue from these players and keep them in your ecosystem.

Challenges

While offering an ad-driven mechanic for customers to subscribe creates many options, it also presents challenges. First, one of the great benefits of subscriptions is that it gets your customers invested in the product. This makes them more committed and engaged. If they acquire the subscription by watching an ad(s), they may not be as committed to the long-term relationship. Second, to generate sufficient subscription revenue, a customer will need to watch or be exposed to multiple ads. If they are just watching ad after ad in one sitting, the value you can deliver to advertisers will be minimal. You will need to come up with creative solutions to generate enough ad revenue to justify providing a subscription. Finally, a subscription requires regular purchases, which is how subscriptions delivers reliable revenue. It is simple to bill a player regularly for their subscription and it becomes passive activity for your customer. With advertising, they will have to proactively watch ads every time the subscription renews. One potential alternative would be showing interstitial ads or ads in another frame, rather than relying on a watch-to-earn mechanic.

Figure it out

Just because nobody before Reese’s thought of a good way to combine chocolate with peanut butter did not mean it was a bad idea. It is the same with ads and subscriptions. The companies that crack the code first for merging these two monetization models are likely to see great returns.

Key takeaways

Two of the most promising business models to grow the game industry are subscriptions and advertising, so combining the two can create a unique opportunity.
There are three ways game companies can leverage this opportunity: create an in-game subscription option that incorporates ads, use subscriptions to grow a streaming service or publish a flow of games that customers subscribe to via subs.
Challenges include generating enough subscription revenue through ads, getting customers to feel committed and figuring out a mechanic for players to renew.

Subscriptions: The new weapon in the game monetization arsenal

People in the game industry are continually asking about “a new business model” but they usually want new monetization techniques (ie. gatcha mechanic, piggy bank, etc.). Now, however, there is a real opportunity to disrupt the industry with a new model, subscriptions. I have been in the games industry since 1993 and in that time there have only been two new models, try-before-you-buy and free-to-play. Subscriptions may usher in the next era of gaming.

Try-before-you-buy was introduced in the early 2000s and perfected by Big Fish Games, who released via download a game every day that was free for the first hour and then the player would have the option of purchasing the full game. While the model did not have a huge impact on the traditional game companies (who were selling their product for a fixed cost in retail), it was blue ocean as it brought an entirely new demographic into gaming. For the first time, gaming was not dominated by teen age boys playing in their parents’ basements (or 30 year old boys playing in their parents’ basements) but saw an influx of female players, particularly older women.

Early in the 2010s the gaming industry experienced its greatest disruption. Free-to-play gaming gained traction in the US (and Europe) after dominating Asian markets. In this model, games were truly free and over 90 percent of the players would never spend a penny. The games, however, were built to get the most engaged players to spend to improve or speed up their gaming experience, and many of these players would spend tens or even hundreds of thousands of dollars in their favorite games. Social gaming companies, led by Zynga, gained millions of daily players, pulling them from other gaming or entertainment companies.

Free-to-play was truly disruptive. Household names like Atari, Acclaim and THQ (which had earlier reached over $1 billion in sales) went bankrupt. Zynga saw its valuation reach over $10 billion. Disney and Electronic Arts both spent hundreds of thousands of dollars to acquire companies in the space. The concepts behind free-to-play have grown to shape the video game space, even those old-school companies that still monetize with an upfront purchase use in-game monetization to drive their revenue growth.

Given the impact of free-to-play and the millionaires it, everyone has been looking for the next disruptive business model. Based on how other industries are evolving, subscriptions are likely to be the next disruptive model in the game industry,

How subscriptions are changing the world

While Asia provided a clue that free-to-play would disrupt Western video game markets, developments in other industries show the likelihood that subscriptions will emerge as a disruptive force. The largest retailer in the world (by market cap), Amazon, uses its Prime subscription service to lock in customers. Salesforce.com, the most important company in the enterprise software space, eschewed the high fixed fee model for a subscription model that left its established competitors in the dust. Adobe, the largest provider of graphics software, abandoned its old business model to move to a subscription model and is now valued at $135 billion. Netflix, the second most important entertainment company in the world (nobody is beating Disney for a while), gained its position with a subscription model. Even Disney is betting its future on subscriptions with Disney Plus.

Enabling this shift is a change in people’s attitude. Ten years ago, people would not pay for digital content and overall wanted to own things. People did not pay for music (remember Napster). People would buy a DVD or CD, even if they would only experience it once. The examples above (and the hundreds I left out) show that attitudes have shifted. Millions of people are willing to pay Spotify money every month without owning a song. According to the Reuters Institute, in the United States, the proportion of people ages eighteen to twenty-four paying for online news leaped from 4 percent in 2016 to 18 percent in 2017. Attitudes have clearly shifted.

Why subscriptions work

Subscriptions have succeeded because they better align customers with providers than other business models. Rather than the linear model of selling a product to a customer, the subscription model creates a dynamic where the company to please constantly its customers. As Tien Tzuo says in Subscribed, “companies that know what their customers want, and how they want it, will succeed over companies that spend a lot of time and effort creating a product they think is a good idea, then spend equal amounts of time and effort trying to persuade people to buy it.”

Further driving the success of the subscription model are the benefits it has for the provider. Subscriptions allow companies to start the month (or year) with a guaranteed base of business. Rather than having to estimate how many units you will sell, you look at your subscriber base and can accurately forecast your revenue. This stability allows companies to market aggressively, invest in new content, etc., as they can predict cash flow.

The subscription model also aligns companies with their customers. As Tzuo writes, “instead of thinking about reseller margins and unit sales, [companies are] thinking about subscriber bases and engagement rates.” Companies driven by a subscription model have direct ongoing relationships with their customers. They no longer have to segment customers, they now have individual subscribers. With the industry leaders (Amazon, Netflix, etc), every subscriber has their own home page, their own activity history, their own red flags, their own algorithmically derived suggestions, their own unique experiences. And thanks to subscriber IDs, all the boring transactional point-of-sale processes disappeared. As companies can never be too close to their customers, subscriptions create the loop that makes customer intimacy a reality.

Will subscriptions work in the game industry

Now that we agree that subscriptions are a great opportunity overall, will they work in the game industry. First, many game companies already are using this model. According to a great blog post by Google, they have seen global growth in game subscriptions of 70 percent year over year. Second, it is working. According to the post, game companies that have integrated subscriptions experience 20 percent higher retention. They also have seen higher overall monetization. Finally, subscriptions offset risk in developing and launching new content. According to Tzuo, “regardless of whether a show is successful or not, investing in sharp new content helps Netflix to both (a) attract new subscribers and (b) extend the lifetime of its current subscribers. Those shows don’t go away! Together, they’re increasing the overall value of the portfolio. They are instrumental in driving down customer acquisition costs (as more subscribers sign up) and increasing subscriber lifetime value (as more subscribers stick around for longer).”

How you should implement subscriptions in games

While subscriptions are an exciting opportunity, success with the model will come down to execution. Just as hundreds (or thousands) of game companies failed to implement successfully free-to-play, succeeding with subscriptions is more difficult than adding another package to your purchase page. There are several core concepts in building a product that leverages subscriptions.

Subscriptions need to be about access

The biggest challenge, and most common mistake, game companies face is what to provide for the subscription fee. The easy answer is virtual currency, after all it is what customers are willing to pay for with in-app purchases. The easy answer is wrong. As stated in the Google post, “it’s important to move away from the mindset that subscriptions are just an auto-renewal mechanism for discounted IAP. Instead, subscriptions need to be thought of as offering highly-retentive long-term access to content, rather than the one-time situational purchase of content offered by IAP.”

Successful subscriptions are about giving players access to content and special benefits, access that can be gained or lost. In a social casino, it could be access to new slots or unique table games. In a game like Archero, it could be access to special levels or powers. The benefits could also be exclusive tournaments, special avatars or unique in-game events. The key, though, is not limiting (or even relying) on giving players virtual or premium currency but access to a premium experience.

Keep it simple

One of the core principles in creating successful products is to focus on simplicity, which is often very complex to do, and subscriptions are one area where it is easy to fall into the complexity trap. Companies with very successful subscription offerings have very few options.

If you offer customers too many options, it is likely to overwhelm them and preclude them from choosing any of the options. This concept of cognitive load is critical to the success of many products, from games like slots to apps like Uber. Given that the human brain consumers 20 percent of the body’s energy but only is 2 percent of the body’s mass, it is important to understand that people will subconsciously work to reduce the amount of energy the brain is using.

Cognitive load is how much info people are processing at any one time. Cognitive load is tied to working memory, the more information in that short-term memory the higher the cognitive load. As cognitive load increases, consumers are less likely to make a purchasing decision.

With subscriptions, this is directly tied to the offerings. If a player has different options ranging from the term of the subscription, monthly costs, benefits levels, they are likely to choose none. For example, you might offer people a month-to-month, 3-month-, 6-month or 1-year plan, with pricing at $4.99, $9.99, $19.99 and $49.99, each with different benefits. Rather than the player finding the one that optimizes their utility (to use an economist term, or makes them happiest, to use a human term), they are more likely to shut off and just pass on the offerings.

Instead, offer them one or two (at most) options. It can be a regular subscription or a premium one (additional benefits) or a short-term plan and an annual plan. You do not see Netflix offering ten different types of subscriptions. The key is make it very easy for the player to understand the value and choose between the two plans and whether or not to subscribe.

Keep it honest

One of the reasons subscriptions took so long to be commonly accepted is that until recently they were part of a sleazy industry. Companies would trick customers into signing up for a subscription, then make it very difficult to cancel the subscription. They might let you sign up easily, then require you to call them to cancel at a call center open one hour a week every second week. Even then, the agent you spoke to would do everything humanly possible to keep you from cancelling, creating an awful experience. These practices soured people overall on signing up for subscriptions. With social media and sites like TrustPilot, word quickly gets out of deceptive subscription tactics.

Preventing customers from leaving or tricking them into subscribing is not only unethical, it is bad business. One of the fundamental values that subscriptions create for a business is the connection with the customer. It forces the company to ensure every month it is creating value for the customer and that is why the customer renews or maintains the subscription. Everyone on the product team looks at new content and features and judges whether it will help retain customers and bring in new subscribers. While scamming customers may bring short term gain, it is the customer connection that subscriptions create that leads to great companies like Amazon, Netflix, Spotify, etc.

The best companies use subscriptions to improve their underlying business. Tien Tzuo writes in Subscribed that “the smart [companies] realize that if they really want to retain their subscribers, they need to focus on building a great service, without relying on lame tricks like hiding the cancel button.…Make it easy for customers to leave if they want to. You can certainly ask them why they’re leaving, or try to win them back, but don’t get in their way—the digital equivalent of blocking the exit with a hulking security guard. When you build subscriptions into your game, let customer value drive the offering rather than tricks on keeping customers from cancelling.

Build a loop

A successful subscription plan should be tied to engagement in the underlying game. The more a customer plays the game, the higher the value of the subscription. According to the Google post, “in mobile games’ subscriptions design, some offer a booster or bonus points, to reinforce the action of ‘play.’ Some create a durable good, such as a permanent building or character, that levels up as a player remains a subscriber for a longer period of time. In these cases, the desired action is “continue to subscribe.” In other cases, subscribers get bonus premium items, currency or points to reinforce the action of in-app purchases.

Looking outside the game industry, airlines have done a good job of creating a loop around their frequent flier programs. With frequent flier programs, members improve their status by flying more or buying expensive tickets, such as business class. According to the Google post, “the ‘earn’ criteria here — flying or spending — is precisely the desired customer actions that the airlines want to reinforce.”

Evolve benefits

Another important element of a successful subscription program is that benefits evolve. According to Google, “as the players invest more in the game, whether it’s with their time, skills, or other IAP, the subscription benefit also compounds.” Thus, the player can unlock more sophisticated content or new challenges that would not have been relevant for them earlier in their experience.

Celebrate VIPs

VIPs are the core of virtually any social game’s success. Most free-to-play games generate 60-90 percent of their revenue from the top 1 or 2 percent of players. Many product managers have avoided subscription programs because of concern on how it would impact VIPs. If a player can subscribe to a VIP program for a fixed sum, the concern is that would put a cap on how much the VIP would spend in the game.

This concern leads back to the first point on subscription design, that is should be about access, not a replacement for existing purchases. Thus, the subscription plan might give the VIP access to slots they would love to play but not chips to play those slots.

When thinking about your VIPs, do not forget they are already VIPs. If someone is spending significantly in your game, do not try to take another $5 or $10 from them every month. Instead, turn the subscription into a celebration of their VIP status. Give them a free subscription, the goodwill will be worth much more than the short term revenue you would generate from forcing your VIP to purchase a subscription.

Use subscriptions to drive acquisition and convert players

In addition to driving monetization and engagement, subscriptions are a great way of increasing retention they are also a strong acquisition tool and powerful CRM element early in the product life cycle. First, an offer of a one or three month complimentary subscription can entice a potential customer not only to try your game but invest time to learn about your product.

Second, subscriptions can help convert players into customers of in-app purchases. They provide a way to let players see and test the spectrum of in-app offerings. According to Google, “Scopely’s game Wheel of Fortune frames its subscriptions offer as an all-access pass. These subscriptions feature exclusive rewards that a potential buyer would want in addition to a sales discount. Surfaced right after the first-time user experience (FTUE), with benefits such as ‘more energy, this subscription aims to increase these new buyers’ in-game engagement, and cultivate a habit of playing regularly and investing in their future gameplay.”

Third, subscriptions can increase virality, helping your existing users bring in new customers. Campaigns that let your subscribers give free months to their friends, and get free months themselves, are very effective at driving new user acquisition. For example, a promotion where a player can gift a new player three free months, and get a free month for every new player who signs up, helps you acquire players with the only cost being the lost subscription revenue of your advocate.

Making subscriptions a reality

Rather than being a follower, future successful game companies will push forward with subscriptions and help disrupt the industry, not react to the disruption. By focusing on execution and building a strong subscription offering, it is likely we will see the next Netflix or Spotify.

Key takeaways

Many industries are evolving from a discrete purchase model to a subscription model. From retail (Amazon) to music (Spotify) to entertainment (Netflix) to enterprise software (Salesforce.com), the subscription model is redefining winners and losers. The game industry will eventually succumb to the same forces.
To create a successful subscription program, the offering needs to center around providing customers with unique access and benefits, not replicating what they get when making in-app purchases.
Successful subscriptions also need to build an honest relationship with players, provide simple options, create a loop where subscribers enjoy more benefits by playing more, appeals to new potential customers and rewards your VIPs.

How to add features that your customers actually want

One of the challenges successful game developers face is what features to add to the product. With a successful game, you are not in panic mode but you also must deal with the reality that in a free-to-play product you need to keep players engaged or you will become the next Trivia Crack. The fundamental issue is adding features that are useful and fun for your existing players, that enhances their enjoyment of your game.

Keys to adding successful features

There is an excellent post by Casey Winters that highlights three keys to building features that enhance a successful product:

The new feature must retain players. The feature itself retains the player and you do not have to drive players artificially to it from other parts of the game. For example, if you add Blackjack to your social slots application, it works if players engage with Blackjack and then come back to play it regularly. You can use the same retention metrics (D1, D7, D30 and CURR) to assess if a feature is working as you do to look at an app.
The feature can drive its own use at scale, you do not need to create a plan to build adaption. To use the Blackjack example, if you integrate it in your lobby players will try it without forcing you to run specific campaigns.
The feature must improve KPIs of your core product. To use the blackjack example, it needs to improve either your overall retention or monetization.

The last point is critical to success. I used to be at a game company where product managers regularly presented analysis of their features and bragged about the great performance of the feature. Overall, though, the company’s games continued to lose players (DAU) and monetization per player (ARPDAU) was also decreasing. While the features appeared to perform great in a Powerpoint, they actually were costing the company money because they drove lower overall performance.

How to add features that improve LTV

While you may infer from the previous sections that you should only integrate features that appeal to everyone, the opportunity is to segment your players and build features to appeal to target segments. If you limit yourself to only adding features that are accretive to everyone, you have a small pool to pull from.

Given you already have a successful game, by definition your players are already enjoying your product. While there may be opportunities to add features everyone enjoys, you have a bigger set to choose from if you also identify features that may appeal to a subset of your players. This is particularly powerful because this feature can appeal to a segment that is likely to churn and keep them engaged or a segment that does not monetize and prompts them to spend. Conversely, it could only appeal to the ½ of 1 percent that are VIPs but given how much they spend could have a great impact on revenue

If you are building a feature that appeals to a specific segment, then you must be careful not to violate the third key to creating a successful feature, you do not want it to impact negatively overall KPIs. The way to achieve this balance is by positioning or displaying the feature only to the target audience. This can be done as an AB test, where you only surface the feature to specific players. It can be achieved through targeted CRM (in-game banners, push notifications, email, etc.) that is only sent to players in the target group. Surfacing a different UIUX to players who you want to engage with the feature can also accomplish the same goal. The key is maximizing how much the target audience uses the feature and minimizes how much other players see it.

Using the blackjack example yet again, we can illustrate how it could help a social casino game. Overall, slots monetizes much better than blackjack. It is a faster game and many blackjack players will play in a way so they lose very few chips. If you added blackjack to a successful slots game and promoted it across your player base, you probably would get great engagement as a lot of people love blackjack. It would, however, drive some players from your slots to blackjack where they are likely to monetize at a lower rate. If you were looking at how it would impact overall performance, then, you would say blackjack is a failure.

If, however, the blackjack game was not in the main lobby but embedded deeper in the game and you then drove players who were likely to churn (maybe you have a nice machine learning algorithm that can identify these players) to blackjack, it would engage some of these players. They would then come back regularly to play and rather than churn some would monetize. Thus, you would have a successful feature that helps the overall product.

Add features that help your game

Although it sounds obvious, when building your product roadmap you need to dive deeply into each potential feature and identify how it will improve KPIs of a target segment. Effectively, how will it solve a problem for you or your player (user churning, user not spending, etc.). The bigger the problem, the higher the priority.

Key takeaways

The key to adding new features to a successful product is ensure the feature itself retains players, can generate its own use and helps the overall KPIs of your game.
You must avoid features that seem to perform well when reviewed in a vacuum but actually hurt the KPIs of the game.
You can achieve launching a successful feature by targeting your players and then only showing or promoting the feature to players who will benefit from it.

Finally, a new approach to monetization in free-to-play games

I am excited that the latest gaming phenomenon, Fortnite, is not only a hit game because of its content but also because it has brought a unique monetization mechanic to the mass market. For over ten years, people have been optimizing the free-to-play model, improving monetization primarily through in-app purchases. We have all talked about finding new or additional revenue mechanics but there have been no dramatic changes. Many companies have gotten better at getting players to pay more (or more players to pay) but nobody had changed the paradigm. Yet, as I have written many times, the real opportunity for growth is to find a blue ocean, do something your competitors are not.

Why Epic

Epic Games has overcome this challenge with Fortnite, creating a monetization mechanic previously seen only in niche titles. Initially, I have to admit I was particularly surprised this innovation came from Epic, as I frequently wrote that traditional game companies ( most recently Nintendo) could not succeed in the mobile space because they were too wedded to the old monetization model of discrete purchases. Epic is definitely a company that has benefitted mightily from the old model, from Unreal to Gears of War to their other hits, they have made billions of dollars from selling great games in pretty boxes. Now, though, they have disrupted the free-to-play space.

In retrospect, it is not that surprising that innovation did not come from a mobile game company. Just as traditional game companies could not embrace the free-to-play model fully, the “what are now” traditional free-to-play company cannot discard their in-app purchase (IAP) optimization strategy fully. Thus, Epic, which did not have the IAP optimization baggage, could look holistically at the opportunity and come up with a new approach.

What Epic did

Fortnite’s Battle Pass system is a unique approach to drive monetization that is showing great results. According to a recent article by Adam Telfer and Joseph Kim, Fortnite has generated $126 million in revenue, including $5.3 million mobile revenue in its first 10 days.

The Battle Pass is a mechanic that avoids pay to win (spending to get a competitive advantage over other players) but finds a way to get players to pay significantly for cosmetic benefits. Traditional thinking in free-to-play is that cosmetic accessories (avatars, skins, emotes, etc.) can only generate limited incremental revenue. With Fortnite, however, they have made the cosmetics the only way to show success and progression, so players are motivated to acquire (and show off) more and better items, and subsequently monetize to get the great cosmetics.

Battle Passes are largely a challenges mechanic, and even in traditional IAP games challenges are a proven monetization mechanic. They are a great way to drive player activity, guide them to specific activities and provide a sense of completion. It’s not surprising that the evolution from challenge systems to Battle Passes yields a new monetization mechanic.

The first key element is that there is not a leveling or stats system. Thus, you cannot show others how skilled you are by pointing out you are level 5,274. Instead, status is conveyed by how great your cosmetics are. The more, and better, cosmetics, implicitly the better Fortnite player you are.

The second key element is the Battle Pass, a series of challenges to earn cosmetics. The Battle Pass is a series of challenges with each one providing cosmetic rewards.

The third key to the Battle Pass is offering multiple paths. In addition to the free path is a premium path that provides significantly more rewards. Epic is also very loose in providing rewards for the premium path, players feel they are getting an incredible value.

Fourth, each Battle Pass only lasts a season. Each of these seasons has its own cosmetics, so if you miss a season you never get them. This creates an incentive for the player to play each Battle Pass so they do not miss any content forever.

Fifth, and a key difference with traditional IAP models, players can pay to skip ahead in tiers. Since tiers are not levels, players are not actually paying to win anything, just to get to higher value cosmetics.

Sixth, if you fail at a challenge, you need to start the entire path again unless you monetize. Critically, if you die during a challenge (which happens to most players of Fortnite), you have to start at the beginning of the challenge. Thus, there is a strong incentive not to lose your progress (and plays to people’s loss aversion). People do not want to start from zero repeatedly.

How you can use Battle Passes

Battle passes effectively change monetization from the core game loop to the challenge mechanic. By eliminating levels and points, you can move monetization from interrupting gameplay to super-charging it. Challenges work in many genres but the Battle Pass takes it to the next level. Zynga credits much of its current success with Zynga Poker to challenges. Virtually any PvP game, and even some single player games, can integrate a challenge system. The key to success though will be recentering monetization on this system rather than the traditional IAP model, making it the source of showing progression and providing a VIP path.

Key takeaways

Fortnite is one of the biggest gaming successes ever, and it is being driven by a monetization system previously not seen in mass market free-to-play games, Battle Passes.
Battle Passes allow players to earn cosmetic rewards, which have a high value because they are the only way players can show progress in Fortnite.
By centering your monetization on a challenge system, you can develop a similar mechanic as Battle Passes.

Lifetime Value Part 25: Why retention is THE KPI

Whenever I write about lifetime value (LTV), I always try to stress that the key to growing a high LTV is retention. I recently came across an article, The One Growth Metric that Moves Acquisition, Monetization, and Virality by Brian Balfour, one of the top experts on growth, that does a wonderful job of showing just how powerful retention is to your LTV. Balfour identifies four areas that retention impacts.

Acquisition

As you improve retention of existing users, you also acquire more new customers. A number of organic acquisition channels, such as virality and user-generated content (UGC), work when existing users take an action that introduces new users to your game or product (via inviting friends, sharing, word-of mouth, creating new content, etc.). A larger base of active users leads to better acquisition metrics. Players remaining in your game or product can invite new people to the product, so the more you retain, the more players who can send invites.

Monetization is the second area impacted by retention. I get very frustrated when people, usually Product Managers, act as if there is a trade-off between retention and monetization. The reality is that retention drives monetization rather than damaging it. First, retention allows players to spend more frequently. If you retain a customer for three months rather than one month, they have 3X the opportunity to spend. Moreover, if your model is more robust than simply discreet purchases (either in-app purchases for a game or sales for a retailer), you also generate a longer stream of advertising or subscription revenue the longer the user is engaged with your product.

User acquisition becomes a competitive advantage

Paid user acquisition is one of the critical elements to growing a game or app, you need to have a positive return on ad spend to justify scaling your product. More importantly, since a bidding model drives user acquisition in the app space, with acquisition muscle you can push competitors out of acquisition channels, dominating a market and growing faster. As described earlier, your users are generating more revenue (they are in the product longer so spending more often and driving ad and subscription revenue), you can afford to outspend your competitors.

Payback period

Retention accelerates your payback period, allowing you to avoid raising additional funds or providing more free cash flow to funnel into acquisition. Payback period is the amount of time to pay for your full loaded user acquisition costs. As Balfour writes, “if you have a longer payback period, you either need to raise more money to fuel acquisition or wait longer to reinvest in acquisition. If you have a shorter payback period you will be able to reinvest the cash earned sooner in acquisition. Since improving retention drives monetization – meaning you make more money over a designated period of time – it also shortens your payback period.”

Build with retention top of mind

With retention driving so much value, you need both to create products that will retain customers or players and then the live services need to focus on improving retention. While it is sexy to try to boost ARPDAU, you will create the most value by strengthening your retention.

Key takeaways

Retention is the most important area to focus on, as it drives four areas critical to growth: virality, monetization, paid acquisition and payback period.
Retention generates more users because there is more virality, word of mouth, user generated content and an ability to spend more to acquire.
Retention drives revenue because players have more opportunities to make purchases and generate additional advertising and subscription revenue.

Subscriptions 3.0

Although most of my success is with the traditional free-to-play (F2P) in-app purchase business model, the big opportunity will be on layering additional monetization on this model. One old model that I think represents a great opportunity for casual games is the subscription model, a model that pre-dates online gaming. A recent article on Alist, Subscriptions Reborn for Gaming, does a good job summarizing the history and pointing to the future of the subscription model.

Subscriptions in gaming in days past

First, it’s important to note that the subscription model is not new to gaming. The rise of MMORPGs, think World of Warcraft or Everquest, was driven by subscription revenue. At it’s peak (2010), World of Warcraft had over 10 million subscribers (most at over $20 per month).

The importance of subscriptions, however, subsided with the growth of in-app purchases. Most MMORPGs moved to a mixed or purely F2P model. Now. World of Warcraft is the only major product that is largely subscription based, and it offers free play up to level 20.

Other online entertainment have gone the opposite way

While gaming has moved away from subscriptions, it is increasingly important for other online businesses. Amazon Prime, Amazon’s streaming media and free delivery service, with over 50 million US subscribers and about 80 million worldwide. Music has evolved from selling albums or singles to subscription services like Spotify and Pandora. DVDs sales have plummeted while Netflix now has over 80 million subscribers. Thus, in other entertainment spaces, the subscription model is driving revenue now.

Subscriptions in gaming now

While not many games are offering subscriptions, yet, many gamers are already subscribing. Microsoft and Sony both have tens of millions of subscribers to Xbox Live and Playstation Network, respectively, for access to multi-player gaming and new, free games. Electronic Arts is seeing success with its Origin Access subscription service, which for about $4/month gives players access to classic EA games as well as new games before other customers.

The opportunity for subscriptions in gaming

While there is clearly a demand for game subscriptions, one hurdle that remains is Apple’s restriction on iOS subscriptions. With Apple, to offer an “auto-renewable subscription,” that is a subscription that automatically renews rather than asking the customer to purchase it again after a set period of time, you must provide a product that cannot be used up over time, what they call a non-consumable. A consumable could be an hour-long experience point boost in a game app. On the other hand, a non-consumable could take the form of an unlocking a theme, since it could be restored again later.

If you assume that Apple will not change its policy soon, you should not create separate strategies for Android and Apple given the importance of the iOS platform, instead build a subscription model that works for both. While there is no set of best practices yet in the mobile space for leveraging the subscription model, I suggest following the plan below to test this model

Look at micro-subscription, small monthly amounts. $0.99 or $1.99 is not a large burden on players but not only will it generate revenue but will get them further invested in your product.
Consider multiple subscription tiers. $0.99 for the silver subscription, $4.99 for the gold. This provides opportunities for your most engaged players to get the most benefit but is also accessible for all players.
If you have an in-game VIP or loyalty program, offer subscriptions for players to move up or stay at a certain level. I would pay $10/month to retain my Platinum Status on American Airlines, let other people buy into status (plus it puts a monetary reward on it for players who earned it).
Decide whether it is a company wide subscription (like EA’s Origin Access) or if it is game specific. The former obviously makes sense only if you have, or plan to have, a broad range of titles.
Decide what to include in the subscriptions but always test. Different options include early access to new content or games, discount on purchases (which also may include IAP monetization), special avatars or themes or a regular XP boost. The benefits are game/company specific but should be broad enough to ensure a majority of players would see value.

As the model evolves, it will be interesting to see what does and does not resonate with players. By watching the space, you can learn best practices and build from there.

Try it

While the subscription model is unproven in casual games and there is no defined model on how to do it right, you should still try it. It is increasingly difficult to monetize mobile apps, or at least monetize at a level that covers your acquisition costs. By adding subscriptions, you may find a secret to increasing lifetime value and thus enabling growth.

Key takeaways

Gamers have responded to the subscriptions model since MMORPGs, though it lost favor to in-app purchases recently.
Other areas on online entertainment – music, film, video – are driven by the subscription model.
Subscriptions represent an opportunity, though currently unproven, to increase revenue and customer lifetime value.

Dawn of a new era of in-game advertising

Last week I wrote about the rising cost of paid user acquisition. this week I want to dive deeper into how advertising can help mitigate this issue. Ironically, my former employer, Zynga, made a creative move recently in this direction. Zynga announced SponsoredPLAY, an in-game advertising product where sponsors offer special content or levels that enhance rather than detract from gameplay. I do not know enough about the offering to comment on it directly but it shows how game companies need to think to thrive in the coming age of higher cost per installs.

Why advertising is the natural hedge

Last week I discussed the fundamentals of the paid user acquisition space and why it pointed to dramatically higher CPIs (cost per installs) in the near future. There are several options to cope with this situation but one of the strongest is to increase advertising revenue in your game. Once advertising becomes a significant component of your revenue mix, any increase your CPIs due to higher advertising rates should also generate additional ad revenue on the other side of the equation. The more CPIs increase, the more your ad revenue increases.

Advertising 2.0

Unfortunately, increasing advertising is not as easy as putting banner ads in your games. Last January I wrote how consumers are much savvier now and expect their communications with companies to be as smart and sophisticated as they are. The same holds true for advertising.

For advertising to work in 2015 and beyond, it must achieve certain functions that most ads do not

Targeted: The advertising should be relevant to the customer. A 50-year-old man should not see an ad for a Miley Cyrus concert.
Contextual: The advertising should fit naturally with the overall game experience. You should not be playing Game of War and all of a sudden see an advertisement with pink fluffy unicorns dancing on rainbows.
Beneficial: Rather than having the advertising annoy the player, enhance their experience. Use it to deliver benefits that they would not normally receive.
Segment: You do not have to show ads to everyone. You may only want to show ads to non-spenders. If the ads are truly beneficial, you may actually want to show them more frequently to spenders. The important thing is to create as small clusters as possible and then create an advertising strategy that optimizes the value for that cluster (IAP [in-app purchases], subscription, advertisements).
Multiple formats: You should not limit your advertising strategy to one type of advertising, just as you would not limit your in-app purchases to only allowing players to buy chickens. Different types of ads will work in different parts of your game and some types will be more relevant to certain users. Use the full arsenal of advertising to optimize your player’s experience and the revenue they generate.
Flexibility: The digital marketing world is still in its infancy. Rather than have a laser focus on one ad unit or strategy, keep abreast of developments in the industry and continually evolve your strategy as best practices evolve.

Continue reading “Dawn of a new era of in-game advertising”

More discounts, less fees

Having traveled a lot recently, I noticed a phenomenon that presents opportunities to all companies. When companies or industries introduce new charges or fees, customers rebel. Examples include baggage and change fees by airlines and overdraft fees by banks. Customers react by switching if they have options (some industries have such fees across the industry), decreasing loyalty or just consuming less of the product. It is not a surprise that airlines are beset with bankruptcies and banks are much less profitable than in the past (hence the need for bailouts).

While most of those industries argue the fees are essential for profitability, there is another option. Rather than frame the charge as a fee, increase the overall price and provide incentives for the user to get a discount. Rather than charge a fee for maid service, some hotels now give customers a credit or loyalty points for waiving the maid service. Rather than being upset that they are being charged for maid service, the customer is happy that they just received a $5 credit for not having their bed made. I am sure this $5 is included in the cost of the room but the customer leaves with a better impression of the hotel than if they had been charged a fee.

There is an argument that people will select the lowest cost provider regardless, and if the fee is built into the price the customer will go elsewhere, but Southwest Airlines proves this argument does not have much validity. Southwest is one of the few US airlines not to charge for baggage (and thus probably adds the cost to the ticket price), yet Southwest is the only airline to be profitable since 1971. Customers are savvy and those companies that are condescending towards them pay the price in the long-run.

What this means to you

If you do not run an airline or hotel, you may think that there is no way to apply this understanding but that is not the case. It applies to virtually any business, particularly e-commerce. Rather than charging for overnight shipping, offer free shipping but give customers a discount if they accept standard delivery. If you have a free-to-play game, rather than charging users extra if they are not VIPs, give a discount if they join your loyalty program. The key is turn your pricing into something that enhances the customer experience.

Advertising is not a bad thing

I have heard many people in the game industry complain that advertising in games (free to play or otherwise) is a bad thing, or even immoral. The reality is it is actually a benefit to people—your customers—if done properly. It provides players with more options, allows developers to create games they would not try and allows people’s favorite games to remain live.

More options and value for players

The most effective advertising in games is advertising that the player sees as creating value. These benefits manifest themselves in several ways:

”Watch to earn” videos or other advertising that allows players to earn in-game currency by participating in advertising rather than spending money. This often takes the form of watching video ads or participating in special offers (such as taking a survey or subscribing to Netflix. This is a huge benefit, not detriment to they player, as they control completely whether they participate in the advertising or decide not to (and either forego the benefits or use real currency to acquire them).
Allowing development of advertising supported games. Some of the most popular games would not be possible if there was no in-game advertising. Virtually all of the revenue from games like Words with Friends comes from advertising. The game is incredibly popular with tens of millions of players and requires a development team to continue creating content to keep those players happy. Without advertising, those games would not exist and the millions of fans would not have a great source of entertainment.
Players are always unhappy when their favorite classic free-to-play games are “sunset,” which is the equivalent of sending a horse to the glue factory. Advertising sometimes provides an alternative to euthanizing a game. If a developer can incorporate advertising to cover its costs of maintaining the game, it then has no reason to sunset the product.

Other industries

Most other industries embrace advertising because it provides the same benefits to users. Viewers of television often prefer networks that do not charge (though they complain about it sometimes) rather than pay subscription fees. Those who hate advertising, though, have options to focus on networks like HBO or use services like Netflix. Print readers often enjoy subsidized costs for newspapers and magazines as advertising revenue allow the magazine to offset most or all of its costs. Additionally, advertising allows many publications to give away their product for free in exchange for the user to consume ads.

Parting thoughts

The reality is that advertising benefits players in many ways and developers should embrace it as a way to provide more value to users. By integrating advertising into the business model, you can find ways to add value to your players and give options to players you other wise had to neglect because they did not monetize through in-app purchases.

Key takeaways

In-game advertising is a way to provide additional value to your players.
It allows players who do not want to purchase items to earn them by participating in the advertising.
Advertising allows game companies to provide games or maintain games that otherwise would not exist.

Opportunities

Challenges

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Use subscriptions to drive acquisition and convert players

Making subscriptions a reality

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Acquisition

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Subscriptions in gaming in days past

Other online entertainment have gone the opposite way

Subscriptions in gaming now

The opportunity for subscriptions in gaming

Try it

Key takeaways

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Why advertising is the natural hedge

Advertising 2.0

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What this means to you

More options and value for players

Other industries

Parting thoughts

Key takeaways

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