A talk delving into the economics underlying virtual goods purchases in free to play games with stats and advice on how to make the most from your game.

1. Maximizing Monetization
GDC Online 2012
Emily Greer, Co-Founder & COO

2. What is Kongregate?
• Open platform for free browser-based games
– Flash, Unity, HTML5, Java, etc.
• ~200 games selling virtual goods
• Revenue from ads (30%) & virtual goods (70%)
• 16M monthly uniques, core gamers
• Acquired by GameStop July 2010

3. Select Developers

4. Huge Variations in Monetization
ARPU:
Average Revenue per
User
ARPPU:
Average Revenue per
Paying User
Size of bubble
represents LTD
revenue, minimum of 6
weeks

5. It’s not just genre
14 different CCGs
– All multiplayer
– All monetizing cards/card
packs
– All on Kong at least 3
months, well-rated
Top ARPU is still 100x the
lowest

6. It’s not just quality
There’s little relationship
between rating & ARPU
(It does matter for total
players, higher rated games get
more promotion & word-of-
mouth)

7. So what gives?

8. Econ 101
In perfect competition the market
price is set where demand & supply
are equal.
Real life example: the stock market

9. Imperfect Competition
Perfect competition assumes that goods
are homogenous, i.e. that there’s no
difference buying from one supplier or
another.
But nobody can sell a good that’s useful in
your game but you.
(Ignoring gold farmers)

10. Your game is a monopoly

11. But I’m surrounded by competition!
Yes, and the competition for player ATTENTION got so
fierce that it dropped the game price to free.
The market for in-game goods is separate: players are
not price-shopping packages of gold in two different
games and deciding which to buy.

12. But since players can leave your
game/market for goods freely
your monopoly is insecure.
You’re not a cable provider or
the like who can charge high
prices and provide poor service
and the player is stuck. Players
should be treated well and will
leave if you don’t.
What it does mean, though, is
that you look internally to your
game to set prices, not
externally.

13. Monopoly Revenue Maximization
Monopolies can set the price freely, deciding
whether to sell fewer units at a higher price
or more at a lower price.
Marginal revenue is the change in total
revenue from a change in price.
Example: 5 units at $5 = $25
7 units at $4 = $28
Marginal Revenue = $3
Total revenue is maximized where marginal
revenue = $0

14. Uh, how do I figure out where MR=$0?
In an econ class the professor would give
you a formula and you’d calculate a
derivative.
In the real world you need to deduce it
from trial & error: set a price, change it
and see what happens

15. It’s all about elasticity
When a good is elastic, quantity decreases rapidly
with a price increase and total revenue drops.
When a good is inelastic, quantity decreases slightly
with a price drop but not enough to compensate for
the change in price and total revenue increases.
Gasoline is a classic example of an inelastic good.

16. Now in graphs!
Area of the box = total revenue

17. So which are virtual goods?
Mostly inelastic.

18. Bloons Tower Defense 4 vs 5
Immensely popular series by
Ninjakiwi, BTD4 introduced virtual goods
and was the first big single-player success.
Sold 20 items ranging from $0.30 - $10
BTD5 launched recently, selling nearly 40
items from $0.60 - $100 (!) – at average of
70% higher on comparable items.
Results: 108% increase in ARPPU, -8% decrease in conversion, +92% ARPU
Player freakout? Nope. Rating is slightly higher, sales on pace to 3x+ BTD4

19. Mind the drop
Skyshard Heroes is a competitive kingdom-
builder with a steampunk theme from Synapse
games.
They A/B tested dropping the price of their
heroes 40% on cohorts of new users, expecting
that it would help conversion.
Results: +21% in conversion but -25% in total
revenue

20. More on demand curves…
Factors that shape the demand curve:
• Total players in the market
• Desirability (utility) of goods for sale
• Income/ability to pay
A demand curve is really the aggregation of
individual player demand curves.
If a market has a few people with high, inelastic
demand that can make the whole curve inelastic.

21. Big Spenders are a Big Deal
Four of the top five games get the majority of revenue from those spending $500+
Every top ten game gets the majority of revenue from players spending $100+

22. What do players want?
Permanent Upgrades! Items that give real and permanent advantage in the game.
Permanent Upgrades > Consumables & Convenience > Cosmetic Items & Content
Consumables tend to be in the 10-
30% range of sales.
Impermanence reduces the value to
the player, which makes it hard to
price high, and then friction of
purchase makes it hard to get enough
repeat buys to drive $s up.

23. What do players want?
Cosmetic-only items sell poorly
though cool looks can help functional
items sell.
Real-life example: I buy a coat to keep
me warm, but am willing to spend
more on one that looks good on me.
Content is a tough proposition in a
world of free, only appeals to those
who have finished game.

24. Balancing advantage vs pay-2-win
If powerful items sell, a winning item will sell even better!
Maybe temporarily, but if you break your game players
will lose interest and leave, even those buying wins.
Players want to achieve in the face of challenge, over-
powered items are boring.
Items can be powerful if they also require skill to use well
(CCGs are great at this) and should mostly be acquirable
through a very large amount of play.

25. Beware of diminishing returns
Be careful in designing permanent upgrades/items as it
is easy to cap the amount a player can or wants to
spend.
Example: selling a weapon that is effective at all
times/parts of the game, even worse if you can only use
one weapon at a time. Why buy another?
Ideal: players should be able to invest continually with
(close) to linear benefit – players will spend only as long
as the in-game benefit is real.

26. Demand curves change with time
A player won’t desire goods from your game
until they care about their status & progress
in the game.
The longer someone spends playing a game
the greater their investment and emotional
attachment, and therefore their willingness
to spend.
Demand goes up, price elasticity down.

27. Commitment REALLY matters
Type of Player % Buyers Avg Trx ARPPU ARPU % Players % of Rev
Non-Repeats 0.03% 2.10 $ 24.69 $ 0.01 43% 0%
Repeats (2-9 plays) 0.40% 1.85 $ 19.61 $ 0.08 40% 3%
Regs (10-49 plays) 4.68% 2.61 $ 21.35 $ 1.00 10% 12%
Committed (50+ plays) 16.53% 7.03 $ 96.92 $ 16.02 7% 84%

28. Gameplays before 1st Purchase

29. Retention = Security
The more time a player invests in a
game, the more they value their status and
progress, the higher the switching costs to
another game/hobby become.

30. So what can I do as a monopoly?
Price differentiation by customer segment
Classic example: student & senior movie tickets.

31. How should that work in games?
Player stage in game is a good place to start.
Have some low-priced items that are useful early- to mid-game.
Have lots and lots of compelling end-game items; price those high.
Don’t push too hard too early – you’re more likely to repel players than convert
them. High-priced end-game items should ideally not be available at first.

32. Upgrade paths: naturally different
Upgrade paths do this naturally – prices &
power can scale organically within the game.
Crystal Saga does this well. Wings and pets can
be upgraded by combining with tokens
(available through loot drops or sold for $0.30-
$0.50). Each upgrade costs more tokens and
involves more luck, scaling costs significantly
with items that are cheap on their own.
Fully upgrade wings add 1000s of hit points and
look cooler, too.

33. Experiment!
Start with prices high as it’s easier to lower than
to raise. You’re also setting the initial impression
of value in players’ minds.
You can look to other games for ideas but don’t
price around $10 just because that’s what
League of Legends does.
Use promotions on individual items to test prices
& elasticity – but take with a pinch of salt, as
people behave differently in the face of “deals”.

34. Don’t abuse your power
Player manipulation is a short-term strategy. If they feel taken advantage of, they are
more likely to leave. If they stay they will be less likely to buy again.
This game had a strong start, then
added a manipulative/deceptive
monetization mechanism that drove a
huge spike in sales in weeks 15-16. But a
combo of bugs & resentment led to a
player revolt soon after.
Week 10
Week 31
Week 1
Week 4
Week 7
Week 13
Week 16
Week 19
Week 22
Week 25
Week 28
Week 34
Week 37
Week 40
Week 43
An apology and a make-good led to a
partial recovery, but only partial – game
sales are 30% lower than equivalent
games.

35. Riding the rocket
Promotions & sales are very, very powerful –
players react emotionally as well as
rationally, can drive huge (5x) spikes in
revenue.
But powerful things can also be destructive.

36. Cautionary tale from…catalogs?
Typical 3-month test, 250k recent buyers in each group:
We’d see a strong spike in demand but usually we were just moving sales
around. The stronger the spike, the bigger the following dip.
Even though buyers responded to the promotion demand wasn’t truly elastic.
Repeat promotions would become less and less effective and base sales would
spiral down as customers waited for discounts.

37. So are promotions bad? No.
Same test to lapsed buyers:
Same spike on the promotion, but less of a down on future sales – most of the gain
was from people who would not otherwise have bought, and reactivated buyers
were more likely to buy again. So the demand of lapsed buyers was truly elastic.

38. Even better for non-buyers
Same test to prospects (only mailed 2x per year):
Even though the value of buyers brought on through promotion was somewhat
lower on average, it’s dwarfed by the gain in 1st time sales and the increase in
buyers.

39. Week 1
Week 3
Week 5
Week 7
Week 9
Week 11
Week 13
Week 15
Week 17
Week 19
Week 21
Week 23
Week 25
Week 27
Week 29
Week 31
Week 33
Graph of this game’s sales (along with anecdotal data) suggests yes:
Week 35
Week 37
Week 39
Does this translate to games?
Week 41
Week 43
Week 45

40. Maximizing Promotions
To get the most of out promotions you need to design them very carefully.
Things to focus on:
• Customer segments have very different price elasticity: target accordingly
• Transactions are relatively rare: increase their size (bonus for volume buys)
• Related: increase value rather lowering price (buy one, get one > 50% off)

41. An elite 1st-time buyer offer
Great example of a lot of those principles in Tyrant, a CCG by Synapse Games
“Elite” membership gets you $20 worth of paid currency for $10 plus an extra
card. Big value bonuses targeted at non-buyers, mid-level price point, positive
“elite” branding.
Results: exceptional conversion to paid, 86% of buyers have bought Elite

42. Another good example can be found in Fantasy Online by Pixelated Games, an
open-world MMO with cute retro graphics.
FO bonuses exclusive items on larger purchases. Items changed regularly, top
package includes a monthly special item encouraging committed players to buy
every month.
Results: Monthly ARPPU jumped 75% the month this was added, and stayed up.

43. So what about event sales?
Tight communities make event sales difficult to target in core games. On the
other hand communities can strengthen a sale they get excited about, fence-
sitters more likely to convert if others are talking about it.
Additional concerns with periodic events:
• How quickly will players use what you’re selling?
• Players get trained to wait for sales: be unpredictable
• Related: don’t let your company become addicted to big promotions (this is
hard)

44. Emphasis on event, not sale
The best events serve two purposes:
1. Energizing committed players & giving Dawn of the Dragons Sales
them more to do (and spend on)
2. Incenting non-buyers/lapsed buyers to
spend (and keep on spending)
An event that does both spikes
revenue, then resets to a higher base.
Occasional world raids with high
damage/high reward spikes spending in
Dawn of the Dragons, even more when
combined with currency bonuses every 1-2
months.

45. Beware the event treadmill
Make sure players have enough to do
between large events, and enough variety
in events or they become less effective.
This game had great success with large
holiday-based monthly events for 18
months, but effectiveness diminished and
baseline dropped.
Week 1
Week 12
Week 23
Week 34
Week 45
Week 56
Week 67
Week 78
Week 89
Week 100
Week 111
Week 122
Week 133
Going to weekly events helped for a
while, but those stopped working, too.
Events can juice content, not replace it.

46. Mileage will vary!
The right strategy will vary dramatically game to game based on retention and
base monetization design.
If retention is poor (and unfixable) then shorter-term monetization is probably
the best bet.
If your audience is younger and/or poorer, demand will be more elastic.
If your base monetization is capped, then events and sales may be less
productive.
Remember that the most important thing is to make a fun game that people
really care about. Without that there’s nothing to leverage.

47. Finis!
To learn more/find links to other talks visit dev.kongregate.com
Contact us at apps@kongregate.com
Follow me on Twitter: EmilyG