How to convert players into payers

Introduction

From paid apps to small banners shown on top of the screen and rewarded video - there are a myriad of ways to profit from a game. The key factor in generating revenues, however, is always users: without players the game will not make any money either. This should always be kept in the back of the mind when deciding on the right monetisation strategy. 

The two ways a user can pay

Users have two currencies: money and time. When a user offers their time there needs to be a second business to pay for that user's time. An ad network is usually the easiest way to make money from a player’s time. In return for displaying an ad, or showing a short video between e.g. two levels, the ad network will pay a price per view or impression. This method is often used in hyper-casual games since low-engagement users are less likely to spend money on a game but often don’t mind spending those extra five seconds on the game.

When users are willing to pay in real-life currency there are several different channels through which the money reaches the developer. If the game is offered for a price in the app-store, the app-store will collect the money from the users for the gaming studio, and at the end of the month send it a bill with the generated revenue. The time-lag between the purchase by a user and the pay-out from the app-store can sometimes be 60 days! The same applies for a freemium version offered via an app-store which is why some gaming studios prefer offering an extended version in an in-app store. In that case the developer is responsible for the cash-flow administration and this includes responsibilities such as tax regulation in the different countries, local pricing customs and customer service but some development studios think it is worth having control over their own revenue flow. 

Microtransactions

Microtransactions are the (virtual) purchases that are particularly popular in mobile games. They are a type of monetisation model and usually apply to non-subscription in-app purchases (IAP). Microtransactions are not to be underestimated. Approximately 90% of users will buy downloadable content; new “skins” for their characters, a new weapon or an extended version of the game. The idea behind microtransactions is not to lower the cost of entry but to remove a payment ceiling. In the traditional model users buy a game for a fixed price and that is the maximum profit the gaming studio can make from their customer. With microtransactions each user is allowed to customise the game and thus maximise their own spending as they desire. Indeed with the introduction of microtransactions a clear division of gamers can be seen. Casual players spend on average $1 per month on gaming. More engaged players spend around $5 per month on their hobby but it is the big fish, the so-called “whales” that make the microtransaction model so lucrative. A study by gamesindustry found that 1% of users make up 29% of the revenue. BusinessofApps.com measured in-app spending of different iPhone apps with gaming showing five times higher revenues than any other type of games. The microtransaction model has become a staple in the gaming industry because it gives participants what they want: users get to adapt games to their wishes and studios receive higher than ever profits.

Durable vs. consumable

...is just a fancy way of saying: one-time payment or subscription? When offering a premium version of the app, should the user make a one-time payment to access it or continuous (smaller) payments? The one-time payment will generate more immediate revenue, but might be a deterrent to potential customers and will only generate revenue one time. Depending on the financial situation a higher immediate revenue might be preferable to a consistent long-term income flow. 

Hybrid-monetisation, the not so new trend

Hybrid-monetisation can be traced back to the early 2010s when mobile games as we know them today became popular. With the expansion of the market a new monetisation method was needed. As different types of users started playing the same games a one-fit-alls approach was no longer profit-maximising. The result was hybrid-monetisation. In a hybrid-monetisation strategy multiple monetisation methods are included in a game to appeal to the different user segments. Hyper-casual players can be profited from by showing ads, while a more engaged user would buy an extended ad-free version and yet another user interested in their ranking can buy a game boost. Sometimes it can be a good idea to combine different monetisation incentives. By adding a free game boost to a premium version a user’s playing time can be increased thus increasing revenue from in-app ads. Google AdMod suggests the combination of IAP and ads can raise revenues up to 117%. Mobile game developer and publisher Mobirix experienced a 44% increase in revenue per paying user after adopting this strategy.It might now sound appealing to create multiple extended versions, a myriad of in-app purchase options, and different in-app ads. However, the design and administrative costs of such endeavors should not be underestimated. Cost-and-benefit analysis and A/B testing help find the best hybrid-monetisation strategy for a game and as the game evolves and grows, so does the monetisation strategy. 

Cannibalisation, the danger of hybrid-monetisation

Once a user purchases an upgraded ad-free version of your game, that users’ generated revenue from in-app ads disappear. The revenue from one monetisation method “eats” the other revenue. Cannibalisation is the reason why hybrid-monetisation is such a tricky thing. The cannibalisation rate measures the rate at which new sales replace existing sales. 

cannibalisation rate = new products that replace existing ones / total new product sales

The easiest way to by-pass cannibalisation is by designing products in such a way that they are not in competition with each other. Each item or product should approach a different angle of the game and offer unique enhancements. When cannibalisation is not avoidable the profit from the new sales should be enough to compensate for the lost profit of the other product(s). Otherwise by introducing the new product the studio will only be decreasing its profits. 

Conclusion

In the end there is no right or wrong. The monetisation strategy should be interwoven into the game and adapted to the user market. Ideally, the ads and IAP will expand the game in a manner that makes players want them. The user should not feel used by the monetisation strategy but see it as advantageous for them. As the game and market changes, so should the strategy. Is it good to recheck the monetisation strategy regularly and ask: is this the best the game can do? Or has the user audience changed and with it my revenue stream(s)? While it is okay (normal!) to have a cost-per-install (CPI) higher than average-revenue-per-user (ARPU) at first ultimately the goal is to make profits which is to say the game should be generating more revenue than it costs to maintain. So when deciding on a monetisation strategy, get to know the target audience(s) and think about what opportunity cost is best for them: time for a short game boost? Time for permission to keep playing? Money to personalise the game? 

Reach out to our experts at 1Up Capital if you would like to discuss the different ways you can monetise your game and to find out which of these might be best suited for your game.