August 30, 2016
Nickeled and dimed. We’ve all been there. You plan on paying a specific price, only to have “nominal” fees tacked on before the final price becomes something much different than you expected. These nickels and dimes can really add up, and some businesses have adopted strategies that generate revenue solely through these nickels and dimes.
On July 6th 2016, Pokémon Go (developed by Niantic) was launched in a few select countries around the world. Two of my children who are long-term Pokémon fans immediately downloaded it and started rambling on about Pokéstops, Pokéballs, and other nonsensical terms I couldn’t quite follow. A few days later I downloaded the free app in an attempt to garner some “bonding” material with my tween/teens. By the end of that day I was not only addicted to Pokémon Go, but fascinated by the massive scope of microtransactions.
“Freemium” is a game pricing strategy where a game is free, but contains microtransactions (a dollar here, a dollar there) that allow in-game purchases of various items or benefits. A recent study found that microtransactions account for ~80% of all US app store revenue (iOS and Google Play). Several freemium games have grown extremely popular in the last few years, but I wasn’t aware of the magnitude of annual revenue these games were achieving – Clash of Clans: ($1.3B), Candy Crush Saga (and Soda Saga): $1.2B, Game of War: Fire Age: ($800M) – and that’s just the tip of the iceberg.
(My introduction to microtransactions came in the form of my better half’s short-lived foray into Candy Crush).
These are very serious numbers – higher than the revenue of any Hollywood blockbuster in 2015… and it looks like Pokémon Go may quickly eclipse them all. The game is estimated to have pulled in ~$250M in microtransaction revenue in the first 5 weeks, with those numbers coming from just the initial launch countries. Annual run-rates are estimated to fall in the $500M to $3B range once all countries are launched and the game is stable.
Many important questions are still being discussed: Can the game sustain this level of interest over the long run? What is the potential from other related revenue streams? (one article estimates that paid sponsor locations could be worth ~$17B annual revenue). One topic I haven’t really seen discussed is whether the current microtransaction prices could be optimized.
In Pokémon Go, you don’t directly buy items, you buy tokens, which you then spend on items. Decades of research has shown that by dissociating purchases this way, people are less likely to be negatively impacted by changes in the second-level prices (i.e. changing the number of tokens an item costs, instead of changing the number of tokens you buy with a dollar). For example, if Niantic raises the number of tokens for each item by 5%, the impact to sales will probably be minimal, but the potential revenue impact could be $50M-$150M.
Only time will tell where Niantic lies on revisiting their microtransaction prices. As mentioned above, they may see their true revenue potential in sponsored sites and not want to rock the boat. Or perhaps they plan on releasing more/different products over time, thereby decreasing the importance of existing prices. Or maybe they do have a proactive pricing strategy in place and we’ll eventually see an attempt to maximize microtransaction profitability through price modifications.
In the meantime, I need to go catch a nearby Snorlax… I mean, spend some quality time with my kids.