While projections for the social casino (free to play slots and poker) industry continue to be overwhelmingly positive and the industry has never seen a revenue decline on a sequential basis, there is an ominous KPI that nobody is discussing. While the industry continues to grow, that growth is from better monetization, not bringing new customers into the market. This fact potentially puts a ceiling on potential growth or worse portends to a future decline.
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.
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.
- 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.
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.
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.
- 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.
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.
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
- ”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.
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.
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.
- 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.
A friend recently mentioned how he met with a game company who told him they were doing great but not focused on monetization yet. This should be a red flag if you hear this at your company or a company you are thinking of working with.
What it means not to be concerned about monetization
If there was a Google translate for game development, when you type in the phrase we are not focused on monetization yet, the output would be “want don’t want to admit to ourselves or to you that our game does not work and is a failure.” Continue reading
This article clearly shows why you need to focus on your best customers or VIPs,. Development, product management and marketing need to all understand the need to attract and retain VIPs. I also appreciate the fact that the post does not suggest that your revenue should be a bell-shaped distribution; as I previously wrote, there is nothing wrong with a heavy-tail distribution.
Below is a presentation that I gave yesterday on lifetime value (LTV) to the portfolio companies of YetiZen. It covers the importance of LTV, key variables (monetization, virality and retention) and how to affect them, importance outside gaming, cohort analysis and the predictive nature of LTV. Other than the final section on uncertainty, which echoes my blog post on Tuesday, the presentation is largely consistent with the one posted earlier that I gave at Groundwork Labs a few months ago. Here is the one from last night:
Many do not understand, or even accept, the motivation for people to spend real money for virtual goods. Some are even more amazed at the success of virtual casinos, where players gamble but can never collect their winnings. They discount it as manipulation or irrational thinking by the consumer. In fact, purchasing virtual goods is a very rational behavior consistent with how people conduct other aspects of their life. Understanding this motivation will help you develop a game that better satisfies your customers’ needs.
Why people shop
Although some people shop because they need something (food, clothing, steak), yet there are many other reasons people shop. In a seminal piece from the Journal of Marketing entitled “Why People Shop?“, Edward Tauber wrote that the obvious answer (“to purchase something”) “can be a most deceptive one and reflects a marketing myopia.” Below are several reasons that Tauber hypothesizes drive shopping behavior, which do not reflect ending up with a physical good. These reasons can also drive monetization in a game: Continue reading
One of the greatest mistake game companies make is building or launching products that are paid apps, not free-to-play (F2P), which then monetize through micro-transactions. Despite the fact that survey after survey shows F2P games generate more revenue than paid apps, virtually all the investment money goes to F2P products (and VCs are pretty intelligent) and most companies that abandon paid apps for F2P never go back, there are a surprisingly high number of companies still focusing on the paid app model. In particular, many mobile studios whose roots are in the traditional (console) gaming world still prefer the paid app model. As I am often asked to help game companies, it is very frustrating when they forgo my advice and build a paid app. The usual refrain is “But look at Angry Birds.”
A recent analysis by Forbes (“Rovio’s Revenue Crisis and the App Market Evolution”) shows beyond a shadow of a doubt it is just foolish to still be building paid apps, even if you are Rovio. To summarize the key analysis and findings from the Forbes data: Continue reading