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Dynamic Pricing Strategies: Do You Want More Revenue, or More Engagement?

There's 2 important varieties of dynamic pricing in mobile games: The price of IAPs, and the virtual currency price of in-game goods. Both are important but serve very different use cases. This post explains both -- and why it's key to keep them separate.

Mobile Game IAP.jpeg

As we walk the earth talking to mobile game developers, we notice more and more of them starting to experiment with dynamic pricing in their titles. Discounting in-app purchases during a holiday, for instance, or taking advantage of lower IAP price tiers throughout the developing world.


At the same time, we also notice some confusion around two varieties of dynamic pricing in mobile games: The price of IAPs (or real money transactions, as MMO devs call them), versus the price of in-game goods bought using virtual currency. Both are valuable tools for game developers, but they have two very different primary use cases.


Very briefly, we put them this way:


For increasing revenue, developers should make IAP price adjustments to virtual currency (i.e, coins, gold bars, etc.), but generally speaking, not for virtual goods (powerful weapons, armor, etc). For increasing user engagement, we recommend making price adjustments to what players can buy with that virtual currency -- i.e., virtual goods.  


But should you change IAP price for virtual currency, or the price of virtual goods for virtual currency?


Both, actually. Let’s take a closer look at each of these strategies:


Adjusting Virtual Currency Prices to Encourage Engagement/Change Gameplay

In this game’s paywall, the first IAP is best for growing revenue --  the other two are better for growing engagement and retention


Most games contain a lot of content that many players simply ignore or fail to even notice -- especially when players’ interest in the overall game begins to wane. Discounting items is a good way to gently nudge players back into engaging, or convince them to engage with a different aspect of the game. This ties in well with game-related quests and seasonally-themed sales. (As above, with discounts of Halloween-related decorative items, meant to encourage players to customize their house.) Typically, developers can measure the outcome -- did players buy the items, and did they consume the related content? -- and then adjust accordingly.


The key thing to understand is that these discounts aren’t meant to drive monetization, nor should you expect them to do so. Here’s why:


Engagement & Revenue Are Two Different Masters


While it’s sometimes possible to successfully discount in-game goods in order to drive revenue and engagement, we generally don’t recommend it. Discounts are a great way to encourage players to experiment with different content. Notice some players are not venturing into a risky castle your developers spent a month to deploy? Discount the price of special armor needed to survive in it. Notice other players are playing less in recent weeks? Send a discount offer as an app notification. But typically, only a small fraction of players will take you up on any particular discount offer -- leading to disappointment, if you were hoping to see a substantial revenue uptick. Even if you start out with gameplay change as your goal, there’s a natural inclination to start thinking about monetization, too. The temptation is to try doing both (and achieve neither).


Resist that urge. Instead, focus on in-game discounts solely to drive engagement. That way, you have a single yardstick to judge the outcome and determine which discount of what item led to the most substantial increase/change to gameplay.


There’s an added advantage to this approach: Increasing gameplay indirectly drives revenue, if only because the longer someone plays a game, the more likely they are to make an in-app purchase. Discounts encourage players to enjoy more game content, which in turn makes them more aware of the in-game economy -- and more interested in buying in-game currency in bulk.


Speaking of IAPs, this takes us to a related topic:


IAPs: Why It’s Better to Sell Virtual Currency Than Virtual Items


When developers ask me whether they should sell virtual in-game items for IAP or in-game currency for IAP, I strongly encourage them to go with the latter. There’s some exceptions to this rule, such as IAP for expansion packs (i.e. extra gameplay levels) or randomized or customized bundles of items (neither of which are in-game items per se). Those cases aside, selling virtual items for IAP brings up several challenges:


  • Purchase Friction: Anytime players opt to buy something for real money, their device pops up a non-game IAP dialog: “Do you want to buy the Flaming Sword of Doom for $1.99?” This is mobile gaming’s major monetization choke point, and the last possible place you want players to try and make a cost/benefit analysis of paying real cash for an item that doesn’t actually exist. In contrast, if you’re selling the Flaming Sword of Doom for gold coins, and the player has the coins, you don’t even need a confirmation dialog. Buying virtual currency is similar to buying poker chips at a casino, or ticket rolls at a neighborhood fair. Once purchased, players generally don’t think of their game currency as actual money, which typically increases retention, engagement, and further purchases. (Deconstructor of Fun has a really good post explaining these effects in detail.)


  • Analytics Challenges: Consider how difficult it is to track purchases across a wide array of virtual goods. In that case, your variables will often be spread out among dozens of virtual goods and virtual currency options that can be bought, leaving you with a shallow data set which tells you little about what goods to price differently in the future. In Cut the Rope, for instance, players who buy customizations for Om Nom are likely to be very different from the players who buy level solutions. So measurements of price elasticity and sensitivity inherently are restricted to smaller data sets and have much more variance. In comparison, selling currency for IAP helps you leverage commonalities when you run analytics. Since everyone’s buying the same IAP purchase type, you can generalize from their purchase (or non-purchase behavior). The option to buy bundles of virtual currency through IAP is something that all potential purchasers encounter at roughly the same time. As a developer, you get data faster, which means you get to see statistical significance faster -- what percent of your players made an IAP, and when, and what they bought with it. (Though, of course, you shouldn’t rely too much on statistical significance when figuring out the impact of a pricing change.)


  • In-Game Items Often Have Economic “Companions”

If you have a complex in-game economy, adjusting item IAP prices brings up elasticity and cross-elasticity issues. You can see the challenges with a marketplace as deep as Uberstrike (see above). There are substitutes and partial substitutes for players to consider: Rifle too expensive? Buy the shotgun. Upgrading the gun too expensive? Buy some flares. In every case, changing these prices have all kinds of implications, many of them unintended. Price extremely valuable items too high, and the player feels like they’re being forced to buy currency (instead of earning it through gameplay). Price items too low, and players can easily buy the most powerful in-game items -- consequently making the game feel too easy, simply causing them to quit.


  • IAP Items = More Community Drama: Generally speaking, players make IAP purchases less than they buy virtual goods with virtual currency. This makes IAPs for virtual currency less susceptible to negative feedback from the community, even when the IAP price changes over time. By contrast, active players frequently buy virtual goods for virtual currency (often every gameplay session), and so are much more aware of any price changes to specific goods. Suddenly drop the price of an incredibly coveted magic ring, and you can bet many of your players will complain -- especially those who’ve already spent much cash to buy it. Your very most hardcore players carefully track the price of important game items, and are quick to protest changes. (For instance, see the community drama caused by Diablo III’s slight changes in its ownership model.) On a related note, a game’s most passionate players are the ones most likely to buy a virtual good with an IAP -- which means they’re also the most likely to know you discount them from time to time, and wait for the next sale.


Which brings us back to the point we started with: Adjust IAP prices to increase revenue, and adjust virtual good prices to change gameplay and increase engagement/retention -- and above all, for reasons we covered, keep those two tracks separate. Your players will be happier. And so will your accountant.


Bottom pic credit: The Next Web.

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