This article looks into the basics behind offering a product under the “freemium” concept. It discusses the background of “freemium”, how money is made, the conversion rate from free to paying, as well as the place of “freemium” in China’s current market environment.
This article follows up on the Glu article which first touch on the “Freemium” concept. It can be found here.
Freemium: The Basics
I introduced the concept of “freemium” yesterday, so let me use this piece to give you the basics. The original monetization strategy in the world of mobile apps was a carry over from the digital music industry. Selling an app for $0.99 worked well for some things, but games that depended on having lots of users to make the gaming experience enjoyable needed to have lots of users from the very beginning. Trials worked, but typically people would drop out after the trial was over leaving behind an empty wasteland for the few that actually paid.
It’s probably easiest to explain the effects of freemium by looking at MMORPGs. MMORPGs traditionally are pay-to-play, monthly subscription based games. This concept was used because new content was constantly being added to the game to keep it fresh for subscribers which in turn required committed resources from the developers. Gaming consumers bought this trade off originally, but even new content is not enough to keep most gamers committed long term, so user bases dwindled over time.
So along came the concept of freemium to save the day. Most of the MMORPG’s on PC began switching to the freemium concept to keep their user bases from dwindling below the necessary critical mass a while back. The first major Western brand to switch successfully was Dungeons and Dragons: Online by Turbine. I remember when this first was announced and the skepticism surrounding its chances of success – it paid off though, and DD:O was brought back from the brink of extinction and revitalized. World of Warcraft by Blizzard is the only one that has been able to sustain a massive user base over the long term, but even Blizzard’s behemoth, which once commanded over 11 million paying subscribers, lost 800,000 users just this past quarter – so we may see the giant go freemium next year and Project Titan get pushed up (Pandas aren’t going to save WoW, guys).
For the same reasons that make freemium attractive to the MMORPGs, social games also like the freemium concept. Both need lots of users to be viable. The concept is becoming so popular right now that the various platforms want in on the cut as well. Initially, some developers were running the transactions on their own site. This was adequate, but users often felt wary of giving credit card information to some unknown game company operating out of a basement. The benefit to the developers though was that they kept all the money.
This has begun to change on some platforms now, though. Facebook for example, takes 30% (Google takes 5% on the Android Market) of any transaction that takes place on its web app platform by forcing users to buy credits and developers to sell their freemium content in terms of these credits. It’s good for the consumer because they know only Facebook has their financial information(well, that’s debatable, but the FaceBook talk is better left to another day), but bad for the developer because they now share their profits with Facebook. This also serves as a barrier to entry as the little bits of money the developer gets is now even less.
With all the above, this makes freemium sound like the messiah of any game that needs a certain level of users to be viable. This is not true. Freemium is not a universal cure. It must be implemented in a way that lets the free game still be enjoyable to the free players, but offer premium services that are good enough to be worth paying for. The premium content cannot be so good that the free guys feel the only way really the enjoy the game is if they pay, because then you will lose them. Clearly this is a delicate balance, and one that takes a lot of play testing and understanding of gamer psychology.
Show Me The Money!
So this all sounds great, but if its free, how many people actually pay? On average you’re looking at a 2-5% conversion rate from free to paying, at best. That’s a really low percentage, but still its cash and a necessary evil because without users there is no social game. If your game is good enough, that 5% can be a lot of users and a lot of cash.
Freemium also generates “goodwill” in a developer. Yes, that financial term somehow snuck its way into an article about games. When a developer produces games that are good, it builds goodwill and loyalty – fans are very protective of Valve Software and Blizzard Entertainment because of this very effect. When a developer makes a game that is good and then gives it to the gamer for free, that builds even more goodwill. It shows you care, and the gamer community is very “anti-establishment” stereotypical.
Loyalty doesn’t always convert in to sales and a bad game will still do poorly, but if you have a history of being good to me, I’ll make a habit of giving your game the benefit of the doubt when making a decision to purchase or not. I feel much better about giving Valve Software my money than I do Electronic Arts because I feel Valve cares more about me as a gamer than EA does. Speaking of EA, they are a prime example of what happens when you make your user base feel like you don’t care. Gamers publicly attack anything that EA does that even remotely smells like its an effort to rip them off. EA obviously still makes money, but the life of their PR Manager is much more stressful than Valve’s, for sure. Valve just has to say, “Hey, we got a new game for sale!” and the masses stop and listen, so its something to always keep in mind.
Personally, having a psychologist on staff might not be a bad idea these days if you are trying to work in the industry but were never part of the culture. The gamer mentality is very foreign to outsiders, and you practically need someone that’s been there to really get it. Something that may be common sense to you, might look like a hammer coming down in the eyes of a gamer. Heck, I feel like I’m out of touch to some extent and I’ve been a gamer since I was 5.
To wrap-up the discussion of freemium, I’ll mention that freemium is about the only way to be successful in China outside of in-game ads. The culture demands it. You can try to fight it, but until the climate changes here, you aren’t going to win.
Freemium = Free core content + the option to buy additional elements that serve as added benefits. China likes free things, but will pay for add-ons. Goodwill = good. Badwill = bad.