There is no doubt that achieving monetary success in the games business is getting harder. In the face of declining marginal production costs, zero distribution costs and increased competition, games are rapidly adopting more aggressive business models based around the theory of ‘Free’. Many are using advertising and sponsorship to earn money. Others are adopting a freemium model and, in so doing, typically look to provide the game for free and then charge for additional content within the game beyond the initial free package. However, the most radical model being adopted by many of the larger games studios and publishers is Free-to-Play.
I use the term ‘radical’ because it’s having far-ranging implications for developers. In the past, games developers primarily needed two key skills: strong creative and strong development. For that reason there are large numbers of small indie studios with only a couple of people: an artist and a programmer. Of course other skills have always been desirable too such as sound and audio, animation, story telling, testing, server-side programming, infrastructure set up etc. However, the shift towards Free-to-Play now alters the playing field and means that developers now need to have a new skill set around retailing.
Free-to-Play (F2P) models primarily focus on making money from players through in-app purchases (IAPs) or micro-transactions. Creators of F2P games usually do this by creating virtual goods and currencies within the game and getting the players to purchase these items at various points in the game. Inevitably, some kind of virtual store is added to the games transforming the game operator into a retailer.
Retailing is an old skill that is constantly developing over time. Today’s retail experts have had to master new skills such as consumer psychology often referred to as behavioral economics. Behavioral economics is the field that studies the impact of social, cognitive and emotional factors on people’s economic decisions. In the case of retail and therefore in Free-to-Play games, we are primarily interested in people’s purchasing decisions.
By definition, not all people who play Free-to-Play games convert into paying players. Typically, games that convert reasonably well have conversion rates of around 5%. However, some companies are successfully getting much higher conversion rates. King, with Candy Crush, for example has conversion rates reportedly above 20%, which is staggering. King has invested heavily in developing tools and expertise around retailing and retailing psychology.
Behavioral economics applies to many fields outside of retailing. However, in terms of retail, a relatively small subset of principles are widely held up as the key examples of where these two fields merge and in analyzing these further I would suggest there are basically 5 key principles that game developers should heed.
Principle #1: The Power of Free
By making your game free, you are effectively heeding this principle straight off. In its essence, Free-to-Play is based on this principle. Whilst it is possible to have an initial non-zero price for your game and still earn more money from in game purchases, I think it’s the wrong strategy. Quite a few developers struggle to take the leap fully, for understandable reasons, but the result is that they can end up falling between two stools. You have to embrace the concept of Free and use it for what it is. People cannot resist the offer of free – it has been demonstrated in retail tests time and time again. If you decide to go down the Free-to-Play path then bite the bullet and harness the psychological power it yields. Create the feel good emotions in your players by providing them a great experience at this initially unpalatable price point and then focus your efforts on getting that elusive first payment.
Principle #2: Dominated Alternatives
The principle of dominated alternatives is perhaps the second most important principle and has some strong use cases in Free-to-Play games. The example everyone quotes when talking about this principle is the Economist magazine. A few years back, the Economist ran a promotion that presented potential customers with 2 options: option 1) get the online version of the magazine for $56 or 2) get both the online and the print version for $125. The result of this promotion was that most people went for option 1, as it was cheaper. People elected to save money by going for the online only version and economically speaking that seems like a pretty rational decision. However, the Economist wanted to sell more print editions and it would have preferred many more subscriptions at the higher $125 rate but the initial offer was flawed. To fix the situation, some genius decided they should add a third option – option 3) get the print only version for $125. The result of this was eye opening. Some people still opted for option 1 but the majority of people now went for option 2 perceiving it to be the best value option. It turns out that the amount was not the issue for these people it was value. By introducing a third decoy option, the Economist convinced many people that, at $125, getting both the online and print versions represented the best value for money.
Game designers should take note. Often it is not about the absolute amounts but rather the perceived value. The human psyche is pretty easy to, lets say, guide into making decisions based on their perceived value. I had a quick look around at some of the leading F2P games (in terms of games that are deemed to apply the model very successfully) and it surprised me to see how little this principle was being applied. I would love to get your thoughts on why this might be so please leave a comment.
Principle #3: Irrational Value Assessment
This is perhaps the most perplexing principle of all and certainly one I hate myself for exhibiting or falling victim to. This principle relates to the observation that people tend to place a higher value on the things they pay more for. It can be seen with wine, for example, where taste tests have shown people to rate the higher priced bottles better than the lower priced ones even though some of the wines are in fact the same or inferior. In a study in the US, Prozac was tested against a higher priced placebo and the placebo outperformed the actual drug in satisfaction ratings. Incredible really but we are all victims of this.
With respect to games, though, it is harder to pull this one off as we are, after all, selling only virtual goods and the satisfaction derived from these goods is as much a function of the game itself as it is the mind of the player. Perhaps, the exceptions are non-consumable goods that can be used to decorate a player’s avatar, for example. Here, the relative exclusivity of the higher priced goods will likely lead to increased satisfaction. Given the virtual nature of all of the goods, this is, in fact, an example of irrational value assessment albeit in a different way to the wine example.
Principle #4: Decision Paralysis
Decision paralysis occurs when we are presented with too many options. Fewer options can, it turns out, result in a higher conversion rate and games designers should definitely look at this as sometimes there are simply way too many choices available at a single point in a game. To prove the concept of decision paralysis, an experiment was conducted with jam in a supermarket. Researchers put out a stand with a selection of different jams and encouraged customers to try them out. The idea was that a certain number of customers would stop, fewer would actually taste and fewer still would convert to a buyer representing a standard sales funnel that echoes nicely with the sales funnel games companies are faced with in Free-to-Play games. One group of researchers put out 6 different jams on their stand and the other group out 24 different jams. Interestingly, and perhaps as one might expect, more people stopped by the stand that had 24 different varieties but far fewer converted into sales. Sales at the 24-jam stand were only 10% of the sales at the 6-jam stand. Wow … what this effectively means is that some games companies could increase their sales many times over by giving their players less choice.
Principle #5: Attribute Priming
Attribute priming refers to the principle that just talking to customers about certain attributes can make them weigh that factor more highly when it comes to buying. There are lots of tests and examples of this and the best one I can recount is again a study with two groups – this time consumers buying laptops. Those asked in advance about their memory needs ended up weighing the memory characteristics of the laptop more highly when they went to buy. Those talked to about processor speed did the same – they weighed the CPU spec. more highly. Of course we don’t get the opportunity to dialogue with our players so much during games as we do in real stores … or do we? Narrative, game hints / help, written dialogue are all ways to get the player thinking about certain things prior to making a purchase. Attribute priming is really a fundamental sales technique that is done all the time in the real world. Currently, there are not as many signs of it in the virtual world but I suspect we need to get better at it.
In summary, for most games developers, making money is secondary to entertaining people and doing it well. However, to survive, even medium term, in this business one has to make money and the rapid shift towards Free-to-Play leaves many exposed in terms of their expertise in how to successfully do this. Retailing, which is what in-game selling is, is a pretty advanced topic and the psychology of retailing, often based around behavioral economics can be daunting. Thankfully, like many things, the 80 / 20 rule applies and the above 5 principles which are often cited in retailing material as the most important can equally be applied to games and developers that heed these principles will be well on their way to being good retailers.