In the beginning, there was Mario, and everybody was happy. Then inflation came along, and while everything from a loaf of bread to a Hyundai increased in price, video games stayed relatively stagnant—thanks to consumers’ expectation that the latest game will cost as much as the previous one and the one before that—costing between $50-$60. The cost of producing these video games, however, skyrocketed.
Gaming tech advanced, development teams grew, demand and marketing costs went up, and what was once a somewhat fringe pastime became a dominant form of media (heck, there are college classes devoted to studying the art of video games).
All this is great for the consumer, but it’s less ideal for the bottom line. So how did these companies begin to make money even if they charged the same amount per game?
Game Developers Explored Their Options
Gaming companies tried everything to increase revenue. For a while, it was cutting-edge to offer massive multiplayer games with monthly fees, but this was largely chalked up as a failure—too much competition and too many games without monthly fees that sucked players in and kept them playing for years.
What about DLC (downloadable content), aka when gaming companies offer new pieces of content for a not-insignificant fraction of the game’s purchase price? This is great in theory (and is still very much a part of the gaming world), but ultimately you’re running into the same problem—it takes a ton of work to create an extra chapter in a video game, and if you don’t sell a lot of units, you don’t get a return.
Around that same time in late 2010, smartphones started flooding the market, and a few companies took advantage and thought of a new approach: microtransactions.
Reduce Cost Barriers to Increase Revenue
Microtransactions are when games are distributed for free or at low cost, followed by in-game purchase offerings at a low price. Mobile games are notorious for this, and for good reason—most consumers balk at paying more than $5 up front for a quality mobile game. So instead, companies offer cosmetic changes—the ability to customize your character’s outfits/armor, or use different weapons and items—in the game for a price.
Microtransactions work on a simple principle: people tend to dismiss large up-front costs, but will often pay more if the costs are spread out over time (this is why DLC remains a popular strategy). If your customers are balking at your up-front pricing, it’s time to get clever. How can you reduce those costs and tack them on somewhere in the backend? The video game series Destiny did exactly this. Rather than releasing new games every so often, the creators initially released quarterly DLCs.
Over time, they released the equivalent of a whole new game. If you bought every piece of DLC when it was released, however, you paid much more than you would for new game—typically double the price. Now why would anyone pay double the cost of a new game for the same amount of content? Was it really just a matter of reducing up-front costs?
No. It was something smarter: it was scarcity.
Reduced Up-Front Costs + Scarcity = Profit
Scarcity in gaming comes in many forms. One form of scarcity is completely psychological and often goes by the term FOMO (fear of missing out).
It looks something like this:
1. The new DLC just dropped
2. It costs too much. I’ll just wait until the price goes down to buy it
3. But all my friends bought the DLC and they’re all playing without me!
4. Oh well… I’m frugal and intelligent and not easily tricked by marketing tactics. I’ll just wait until…
5. What’s that? All the events happening now in the DLC are only available for a limited time? If I wait, I’ll never get to experience them with my friends
6. Guess I’d better go buy it. At least it’s only $30…
And there’s your sale.
The gamer saw that if she wanted to get a piece of that fun before it disappeared, she had to buy now. Otherwise, she’d miss the boat. But there’s another method of doing this that’s even smarter.
Combining Microtransactions with Scarcity
Charging money for cosmetic changes in a game is not the best profit-generating strategy. The reason is simple—no one needs this crap. You don’t need to have zebra stripes on your BFG-9000. But what if you could buy something you need to win the game? What if you couldn’t advance without making a purchase?
Some companies have attempted this profit model, but their execution was so poor that they mostly just angered customers and ended up with bad reviews. When there’s no other option but to pay money to access the next level, people get angry. They feel taken advantage of. They’ve worked hard to get to this point, and now there’s suddenly a monetary charge?
There’s a simple fix though: introduce the illusion of fairness. To make the whole thing seem fair, make that content accessible through hard work. Here’s how. Let’s say you need a certain number of in-game items to advance to the next level (let’s call it coin to keep it simple). You need 100 coins to advance. Now previously, coin was not something you could earn—you had to buy it with cash. You play the game for three hours, only to find out you must pay to advance.
This is where people rage-quit and trash you on social media. But let’s say you now make coin into a rare resource that can be earned. Some people (who were never going to spend money anyway) will spend many, many hours earning that coin.
But others will look at this and say “OK, well I could go earn the coin if I wanted to, but that will take a lot of time, so I’ll just buy it.”
And suddenly, a customer made a purchase they wouldn’t have made otherwise.
What Does This Teach the Retention Marketer?
Retention isn’t just about reducing churn—it’s about increasing customer lifetime value (CLV).
Existing customers are always more profitable than new customers. They are more willing to absorb price increases, more willing to make additional purchases, and are generally more trusting than the new, skeptical gamer who still thinks you’re out to steal his grandma’s pies off the windowsill.
Microtransactions are a superb way to get existing customers to spend more money. This works in basically any industry. Offer a much lower cost product/service (which must be purchased at higher frequencies than your flagship product/service) to boost sales and CLV. Combine those microtransactions with scarcity. Limit the time that they’re available. Limit the production of a much lower cost product. Limit the number of customers who can sign up for your new service.
Do this, and you’ll find that your existing customers are spending more, your flagship product/service doesn’t have as much weight resting on it, and the business as a whole profits.
So get out there and apply some scarcity to your life—and while you’re at it, check out Aaron Orendorff’s article on why most eCommerce blogs fail.
And good luck out there, marketer.