The Freemium Model Explained....

Ok folks, let’s talk about the freemium business model that’s in use on so many games today.

Any person or company that makes a product wants to find a way to sell that product for money.  After all, we need money to keep the lights on, fill our bellies, and ensure our heads are dry, feet warm, and toys safe, right?  Finding a way to sell your product is called monetizing the product.  Monetization is the goal of every business…well…ever.

The simplest form of monetization is to manufacture a product then sell it for currency.  Likewise, if you can provide a service, you sell that service and continually produce it for sale.  However, we live in the 21st century where not all products are tangible goods and not all services require direct labor.  That opens the door for recurring revenue in a big, big way through licensing and automation.

Software developers learned long ago that they could create a product to fill a need, sell a license to use that product, then generate recurring revenue by simply adding features, upgrades, and various fixes.  This is very lucrative and so long as you’re filling that need with an ever improving product, you’ll keep making money.

The gaming world saw this and decided they wanted a piece of the pie.  Many amateur developers started providing customers with a preview of their products in a business model called Shareware.  Customers would try it and if they liked it, they could buy a license for the full featured product.  Sometimes they used a timer - allowing access to all features for 30 days or such - other times it was a case of getting basic features and paying to upgrade to “Pro” where you get all the features you could ever want.  Some even went so far as to sell individual features or package them in bundles to sell.

This eventually developed into what we now call the “Freemium” business model.  An app is provided free of charge - you can use it all you want.  BUT…if you want certain features or services, you pay extra to receive them.  This can take many forms - today we’ll focus on video games.

The typical freemium game advertises itself as “free to play” - and it is just that…so long as you are willing to invest significant time into the game.  These games use in-game currency - gold, silver, gems, wood, stone, iron, and so forth - as the means of building your game.  In some cases, you are building structures and upgrading them; in others, you are unlocking troops, weapons, and abilities then upgrading them.  As you build/unlock/upgrade, your game becomes stronger and more playable - you become increasingly competitive due to better gear, stronger defenses.  You may even be able to generate more in-game currency from within the game.

Of course, this takes time - often a LOT of time.  Building an item takes hours, days, and weeks.  Likewise, upgrading them takes even longer than the build.  During this time, you are less competitive - you have weaker troops and therefore more attacks fail; your defenses are weaker, so other players are able to hit you harder, often stealing loot (those in-game currencies we were just talking about).  Most freemium games employ some kind of ranking system and as you become more competitive, you rise through the ranks…which means you face stronger players who have either put in the hours or paid for improvements and they are able to beat your base/troops and take your resources!

Now, I don’t know about you but I know that *I* absolutely HATE losing.  I especially hate to lose precious resources (in-game currency) that I’ve worked so hard to build up!  Even worse, I want that new XYZ right away; I don’t want to wait a week for it to be built, or for my defenses, weapons, and troops to upgrade.  So what’s a competitive player to do to remain competitive?

And now we see the hook - they got ya.  Your competitive nature and your impatience are the selling point and the gaming company has the answer - buy stuff!

Remember what I said - every business EVER wants to monetize their product.  This is how gaming companies monetize their product while building the much needed player base to gain critical mass.  In addition to enjoying their product for free, you can spend a little bit here and there to improve your game - to advance more quickly and become more competitive.

These purchases are called microtransactions.  Generally speaking, they’re very small - sometimes only a dollar.  They take the form of premium in-game currency (gems, diamonds, sometimes gold) that can be exchanged for in-game items, in-game currency, or reduced time.  In many cases, the gaming company sells items outright - new weapons, troops, buildings, and so forth.  Naturally, they also offer special bundles, discounts on regular pricing, and even firesales where something otherwise really expensive is dirt cheap by comparison.  Many games now offer a “season pass” where you pay some amount each month for special access to decorative items, in-game currency, and time reduction.

Some companies even add a bit of gambling into the mix.  They offer “loot boxes” you can buy or win that contain one or more of X number of items.  You spin a wheel, buy a chance, roll the dice!  These loot boxes can be very lucrative for both the player and the business - if you spend enough, you’ll eventually get something you really want.  Well…usually you will.  See…the gaming company has COMPLETE control here and unlike casinos, they do not share things like the odds of winning each prize.

Keep in mind too - all of these items are virtual goods and, under the software license, the company can restrict and remove anything at any time with neither notice nor remuneration.  

That’s right - you own nothing.  Nada.  Zilch.  Zip.

Now, a little bit of monetization is actually a good thing.  Let’s be honest - these gaming companies are businesses, after all.  They have to pay employees, taxes, utilities, and a wide variety of operating costs some of which are astronomical.  Consider massively multiplayer games that run dozens of servers and use massive bandwidth.  Games is big money - as in big investment bucks, which means there are stockholders to appease too.

However, heavy monetization is a BAD thing.  While most freemium games keep things relatively even for Free to Play (F2P) players, some go a bit off the deep end and become either Pay to Win (P2W) or even Pay to Play (P2P).  These games are where the industry runs into trouble.

Some games sell only decorative items - things like costumes for your avatar, decorations to place on the game grid, and so forth.  Some sell time - the ability to finish builds and upgrades faster or even right away.  These provide the advantage of getting there faster than an F2P player but the playing field quickly levels so the advantage is fleeting at best.  Others, though, actually sell things that directly impact your ability to play and advance in the game.  Weapons, troops, defenses, and so forth that are only available through purchase with real money or are exorbitantly expensive and time consuming to obtain with in-game resources.

It’s this latter category where you start running into P2W an P2P schemes and they are the bane of the gaming world.  These gaming companies make it so players at the top of the game are essentially ALL paying customers.  Players who do not spend significant sums (often thousands of dollars each year) are unable to reach the topmost tiers of competition at all.  They can still play - and they’ll get lots of enjoyment out of the game - but they are artificially limited by the monetization scheme deployed by the company.

Sometimes, these monetization schemes go so far as to render competition utterly unviable without paying significant sums of real money.  When that happens, the game turns from P2W to P2P - you must pay to play the game.  You might be able to play a round or two each day, but anything more requires payment.  The most extreme of these games use a subscription model and do not allow any play without it.

There’s a slider that includes F2P, P2W, and P2P, as well as everything in between.  It can be tough to determine when a game has moved too far in one direction and crossed over from reasonable to unreasonable to outlandish.  Games like Clash of Clans, WarFrame, and  War Robots are all examples of Pay to Win games but they’re at very different positions on the slider.  Clash of Clans rests squarely in the middle between F2P and P2W - all players can access all things, but getting there takes much more time if you don’t spend money.  Some things can be bought outright, but most require the use of in-game currency and grinding out the upgrades.  The grind is actually quite reasonable, though, and the makers of the game have made great strides in reducing the time requirements.  This is why Clash is closer to the F2P side of P2W than most other games.  WarFrame is closer to the P2W point - you can buy just about everything to instantly jump ahead and that’s exactly what a LOT of players do.  This is where many (most?) freemium games reside - small investments make you a much better player, much more quickly.  War Robots, on the other hand, has move beyond the P2W center point and is edging further out.  With the exception of some old-timer players, most players buy their gear with real money and grind out the upgrades.  Everything is heavily monetized and the company is continually adding monetization schemes.  There are regular sales and older equipment can be purchased for relatively reasonable prices but newer gear sometimes costs as much as $100 for one item - and it isn’t even upgraded!  The game is still playable as F2P but becoming increasingly less so, at least if you want to be at all competitive.  Their answer has been to run in-game events, giveaways, and firesales to get the better equipment out there more quickly among more players, but both events and firesales are monetization schemes edging them closer and closer to the P2P realm.

And there are many, many other examples.

 The freemium model - applied in the form of micro transactions, loot boxes, and P2W/P2P designs - is capable of generating millions, even billions of dollars for companies each year.  The games that use it often have hundreds of thousands to tens of millions of regular players, many of which spend a dollar here, a few dollars there…and that all adds up quickly.  It’s easy to get sucked in and overspend - just like the rush of gambling, there’s a rush to buying the latest shiny in a game and becoming more competitive.  Gaming companies often employ psychologists that will help them design their games and monetization schemes to be more appealing to their customer base.  They generate multiple monetization schemes and in-game currencies as part of their business strategy to increase revenue.

There are essentially 5 types of spenders in the freemium game world….

1) Dyed-in-the-wool F2P (Free to Play) - Spends not nary one, thin dime.

2) Minnows - Spend a little here, a little there, but typically not more than $10 in any given month. Known to occasionally splurge on a $20 bonus pack or similar.

3) Dolphins - This is where most spenders reside. These players will spend $20-$50 a month on their gaming habit, occasionally a little more if there's a good reason to do so.

4) Whales - This is a broad category that covers players who spend $50-$100 a month or more. 

5) Kraken - This is the big spender. This player will drop $2000/year or more on the game. I've known some who drop closer to $5000+ a year on their primary game.

The numbers may adjust up or down by game, but these are decent enough ranges.  The vast majority of players of freemium games are actually minnows - they spend a little here and there. Among the more serious players, you'll find most are dolphins - willing to spend a little bit more, never miss a level-up bonus pack, occasionally buy new gear, and so forth. The Kraken is a legendary beast and you don't see many of them but they do exist in the unknown, murky depths....

The big question here - is all this really a bad thing?  One can certainly argue it is predatory and, in fact, several world governments are looking at legislative tactics to regulate software companies and reign them in.  At the same time, managed well, consumers can get quite a lot for their money.  Consider how much some spend on Starbucks, cigarettes, alcohol, eating out, and various hobbies, arts and crafts, and so forth.  It’s all about disposable cash and where you want to spend it.  For gamers, video games are their passion - they do not want beer, coffee, McDonald’s…they want leg up in their game.  An average Starbucks devotee will spend between $1000-$2000 a year on coffees.  A classic car enthusiast  will spends hundreds to thousands in any given year on mods for their vehicle, easily as much on a paint job, and hundreds in fees entering car shows.  Many will spend $2000-$3000 eating out each year, and even the avid arts and crafts type will spend over $1000 on supplies in any given year.  Competitive athletes spend thousands on gear as well.  Is it all that big a deal for a diehard gamer to spend several hundred on his/her game?