The Economics of Microtransactions: Consumer Surplus And Whales

In order to understand why so many players are willing to spend money on microtransactions in games, one must understand a key economic concept: Consumer surplus.

Consumer Surplus is the amount of value the consumer receives from a product above what they paid for it. If you’ve ever eaten a $20 steak and said aloud “That steak was so good I would have paid $100 for it,” well, that $80 is the consumer surplus.

The game industry has been trying to close the consumer surplus gap for a while now with special editions and, to a degree, DLC.  But the truth has always been that many players spend $20-60 on a game (for a regular edition) and get between $0 and $infinity value from it. I’ve certainly received more than $100 of enjoyment from Doom 2, between replaying it over and over again and playing through many levels of user-created content.

And there are whole lot of games in my Steam library that I have received zero dollars of value from, because I’ve never even opened them yet!

F2P games take this equation and completely flip it on its head by making a gamble: If you give enough players the game for free, will enough of them find the game enjoyable enough to spend money proportional to the consumer surplus the game generates?

Now, you may have heard about the term “whale.” This is borrowed (unfortunately) from casinos, which watch and categorize players into different types, and will treat them accordingly. The whales are the big spenders, who get the personalized VIP treatment.

The modern age of game analytics has enabled a similar level of observation and adjustment in treatment for gamers, and the revelation that f2p games subsist mostly on whales the same way casinos do.

For these players, the amount of value the game is generating to them is massive, worth from thousands, to tens of thousands, to hundreds of thousands, to possibly even a million dollars worth. And they’re willing to spend that money, because they can afford it and, most importantly, because the game is making them happy.

This is dependent, of course, on the game being designed to facilitate spending that much money. Not all games are, and that kind of design may or may not be appropriate for any given game. Many skill-based games that focus on cosmetic items only are making a deliberate choice to limit the amount of money that can be spent on the game, whereas “loot box” games can manipulate the item odds so that it can take a nearly-infinite amount of money to obtain the most desirable items.

To wrap it up, there are a few important dimensions to consider:

  1. How much has the player paid for the game initially?
  2. How much value are they getting from the game after that initial investment? That’s the consumer surplus.
  3. How much additional money can they spend in the game to close the gap between 1 and 2?

Of course, there are myriad game design questions to answer as well, plus questions or marketing and even ethics, but those are all topics for another time.

Monetization Design: The Basics

Monetization Design: The Basics

Monetization can seem foreign to designers who are new to it, and I’ve actually seen designers throw up their hands and declare “Well, I don’t play f2p games and I don’t understand why people would spend money on them anyway, so I’ll just add a bunch of monetization features that I’ve seen in other games!”

This can lead to some bad decisions.

So, rather than create a guide that just contains a laundry list of design features and buzzwords, I want to try to dive deeper and explain why successful f2p games work, and specifically here, I want to focus not on what’s going on in the developers’ minds when they build the game, but instead on what’s in the player’s minds when they play it, and possibly even before that.

A few notes before we begin: First, what I’m saying here applies to all games with microtransactions. That includes entirely f2p games as well as retail games that feature microtransactions. I’m going to say f2p here, but the same principles can apply elsewhere. And second, I’ll often simplify the details for the sake of explanation. That’s because the point is to understand how to think about designing games, and not to learn the specifics of any one game. In other words, I want you to see the forest for the trees.

Let’s start with something that sounds obvious, but it’s worth saying out loud: Different games attract different audiences, and different audiences will prefer different ways to spend money in the game.

There have been many games with microtransactions that didn’t monetize (or worse, that pissed off their players) because they didn’t understand this rule and tried to apply the wrong business model to their game.

Now, the right business model should emerge based on player expectations of what the game is about. If your game is basically unknown to the player, then the game can set those expectations in the opening few hours of gameplay. If players are coming in with expectations already, then you better not disappoint them!

A lot of players complain pretty loudly online about pay to win. And for many games, pay to win isn’t appropriate. But there are some games that are completely pay to win, and their players are okay with it. Why? Because those games deliberately selected for those players.

Let’s take an example of a game that is very, very pay to win: Mafia Wars. Back in the early days of Facebook games, before FarmVille, there were a bunch of these types of games on Facebook that figured out a simple way to convince players to make the game viral: Tie their in-game power directly to the number of their friends they could invite to the game. Many of them were Mafia-themed, and Mafia Wars was the Zynga version. Inviting friends makes sense because the in-game justification is that you’re growing a criminal empire. Now, it logically follows that each member of this criminal empire is going to need at least a weapon, and you can buy that weapon with in-game currency… but you can also buy an even better weapon with real money. And thus, a very direct pay-to-win model is born.

This is actually cleverly tempered, though, because you can only have a certain number of mafia members per player level, which means that the more a player levels up, the more friends they can invite… and it also means that the more they level up, the more money they are allowed to spend. That has the added side effect that the power difference between free players and paid players starts small and increases over the course of the game. When you start, the ‘pay to win delta’ feels small because it is, and after a few months of play, the ‘pay to win delta’ is massive.

Now, you might be thinking, that sounds really obnoxious – the game wants me to pay money for every person I invite. And you should know that it’s all optional – you can play the game forever without spending any money. But… the game also has some very powerful items available as rewards in PvP, and if you want those items, you need the most powerful mafia. And if you want the most powerful mafia, you have to pay.

The game makes this clear early on – all of these elements are available to the player pretty quickly. And so, having most likely entered the game via an invite from a friend, and with no other knowledge of the game, players get all the information they need and can decide whether or not to keep playing, and whether or not to pay.

Heavily pay to win games like this have poor early retention; Players will decide whether or not they want to invest the time or money in the game, and most will make the decision that, well, it’s not worth it.

However, heavily pay to win games like this, when executed well, can have excellent long-term retention for the small percentage of players who stick with it. These types of players are competitive, they’re often willing to spend money to feel the satisfaction of winning against another player, and they pick one or two games to invest that kind of time and money into. It basically becomes their main hobby. And it can last for years.

Let’s get back to rule number one: Different games attract different audiences who have different preferences about how to monetize the game.

Can you imagine if the Mafia Wars model was applied to a modern AAA game? What if Destiny scaled your character’s power based on how many friends you could add to an in-game contact list? And what if you could pay money to increase your power based on your friend count? Fans would be livid, they might even burn down the internet. Yes, the whole internet.

Now, let’s look at a game that started as a retail game but became f2p in a way that reinforced the core gameplay: Team Fortress 2.

TF2 recognized two key things that would make it work as f2p: First, that the game is fundamentally based on skill and teamwork, and that any changes absolutely could not undermine that. And second, the game is basically a silly cartoon version of the original Team Fortress concept, and that’s what made it unique in a genre dominated by super serious military shooters. The f2p elements doubled down on both of those core principles.

First, let’s just reiterate how TF2 handles its economy: Players earn items simply by playing the game. The items appear in players’ inventory randomly while they play. And sometimes, players will receive ‘crates,’ which contain items but can only be unlocked with keys, which can only enter the economy via direct purchase with real money. Players can trade any combination of things with each other – keys, crates, and items – so a free player can still get keys if they have items that a paid player wants and they make a trade.

The items themselves are mostly cosmetic, and many are quite silly. This solves a key problem that players have in a game like this, where players can choose their class of character but otherwise look the same as everybody else playing the same class. The cosmetic items give players a chance to customize the look of the character without affecting their silhouette, which means that players and enemies alike can still identify which character class they are at a distance.

The non-cosmetic items are where the game gets really interesting. Every non-cosmetic item has some kind of tradeoff – for every stat it increases or ability it adds, it compensates by removing an ability or reducing a stat. This means that all players are basically on even ground regardless of their equipped items, and equipped items effectively create additional character subclasses. Tradeoffs get very, very creative, too – there’s a rocket launcher that heals its user on hit but has to be reloaded more often, various items that have additional abilities at the cost of not being able to do critical hit damage, and a weapon that does less damage but allows switching between weapons faster. There are a few weapons that completely change the functionality of a class, like replacing the sniper rifle with a bow and arrow, or replacing an entire class loadout with a sword and shield.

For players who learn their alternate weapons and items exceptionally well, there is kind of an advantage, but only insofar as other players have to learn how to deal with them.

So, that’s a f2p model that completely respects principles of the original game: The game continues to be skill-based and reinforces its silly aesthetic.

These games are polar opposites on just about every spectrum. TF2 was a mass-market retail game that became f2p; Mafia Wars was a game exclusively on Facebook that was always f2p and spread via social network invites and ads. But what both games have in common is that they have a thorough understanding of the expectations of their players. And they consistently build features that reinforce those expectations. Team Fortress 2 rewards play time with items but only ever favors skill level and teamwork when it comes to actually winning, and Mafia Wars rewards play time with power while rewarding real money with even greater power.

So, if you’re a designer building a f2p game and you’re considering a feature, always ask: What kind of game do players think this is? What are their expectations? What parts of the game are sacred? Is the audience interested in rewarding skill, effort, time, money, or some combination of those?

The answer is different for every game, and it’s your job to figure it out.

Need help? Get in touch and let’s talk!