Evolution of the Price Metric for Mobile Video Games

As video gaming grew from being the passion of hard-core fanatics with dedicated equipment to a widely
practiced pastime on practically any device with an internet connection, the challenges for pricing multiplied.
How could a game developer optimize revenues from games with which some hard-core users engaged
intensely while millions of others simply dabbled? And in a market with a huge and growing number of substi-
tutes, how could a developer induce lots of players to try a game without giving away the value if it turned out
to be highly engaging? Fortunately for game developers and the gaming category, game marketers have been
particularly adept at adapting their price and revenue models to rapid changes in their market.
For several decades, video games were largely published for three mediums: Personal computers, TV-based
gaming consoles, and portable gaming consoles.9 The established consumer price metric for the industry was
price per video game title, which resulted in the acquisition of a physi- cal DVD or a cartridge containing the
software. Customers were then free to play the video game as much or as little as they wished. Most games
were designed to be played either in narrative form by a single individual (as is the case with first-person shooter
games) or in a multi-player format with several players in the vicinity of the same game console (as is the case
in sports and combat titles).
Although the price-per-title metric served to recover development costs, it was far from optimal. Yes, price per
title was easy to measure and consistent with how retailers liked to acquire products for resale, but it didn’t
really allow for differences in value across different segments of players. It didn’t align with how a user might
experience value when playing the game, and it didn’t really track with cost to serve. It also did not lend itself
to discounting to induce product trial. Unfortunately, given the developers’ loss of control once the game was
sold to a retailer, it was difficult to imagine how game publishers might overcome these limitations—although
retailers tried alternative pricing schemes such as membership fees to borrow games and buy-back options to
induce heavy users to try new games.
The success of the Apple and Android smartphones beginning in the mid-2000s created a relatively huge new
market for games—there are an estimated 2.9 billion smartphone users worldwide,10 compared to an
estimated 529 million game consoles sold from 2008 to 201611—and new opportunities to engage more
directly with game players on an ongoing basis. In the United States, for example, close to 80 percent of
consumers with mobile phones were using smartphone models at the end of 2015.12 Prior to smartphones,
mobile devices lacked the high-performance com- puting and graphics-processing capability required for really
engaging games. With a much larger potential market suddenly opening up, the traditional price elasticities of
video games changed. The relatively huge installed base on this new platform created at least the possibility to
sell many more units and to earn much more revenue at a lower price per sale than game publishers were
earning selling games to people with dedi- cated game consoles. Still, the volume gain would have to be huge.
Con- sider that while the average price of a game for the Nintendo 3DS console was $40, a similar game title on
the Apple Store® was priced at around $2.13 .
The fundamental problem that the price metric didn’t track well with how buyers experienced value remained.
A game that people loved and kept them engaged for a long time could earn no more revenue than one that a
gamer found interesting initially but tired of quickly. Fortunately, two other evolutions in technology opened
opportunities for improve- ment. Access to cheap, high-speed internet ultimately became ubiquitous in most
developed markets, allowing for online multi-player gameplay and the digital delivery of IP versus physical
delivery through a retail store.14 Even more important, platforms developed to enable in-app pur- chases that
some creative game developers recognized could be used to make revenues track more closely with a gamer’s
engagement.
Publishers of popular, technically sophisticated, but previously expensive game titles soon realized that it was
possible to compete with less sophisticated free titles by transforming the price structure of games to a
“freemium” model, in which it is free for the end-user to download a game, and then pay for value delivered
within the game. The next ques- tions that each game developer needed to answer were: How do users

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experience value? and, What are the primary drivers of the differences in value experienced? The answers
would drive decisions, unique to each game, about how best to design product options and price metrics that
would effectively drive revenues based upon value received.
The most sophisticated game publishers now either give away access to the game or charge a very low price to
download it. They earn revenues reflecting the amount and intensity of players’ engagement with the game as
revealed by their purchases within three broad categories of virtual products offered within a game:
1. Consumables help a player to continue playing a game or to ascend to the next level in the game without
the effort of earning it. They are “consumable” because once they are used, they can’t be used again.
Virtual poker chips in the game Zynga Poker, a category-leading title, is an example of a consumable
available for purchase.
2. Durables are in-app purchases that help a player to succeed in the game but do not get consumed. An
improved billiard cue for use in the 8 Ball Pool mobile game can be purchased to achieve greater
shooting and spin precision, nicely mimicking the real-world expe- rience for a high-end billiard cue.
3. Personalization enables the user experience to be customized—as the social media game Highrise, that
lets users purchase clothes for their game avatar that don’t directly impact gameplay but enable a more
customized user experience.
Rather than initiate a credit card transaction for each purchase, games generally involve the purchase with real
money of a digital currency used for making smaller purchases quickly. Some mobile video game publish- ers
have taken game monetization and value capture a step further by paying gamers in digital currency to view
online ads. When they do so, their ad network partners pay real money to the game publisher based upon
views.15
By all accounts, this evolution of price metrics has been an extremely successful strategy for mobile game
publishers. According to Distimo, a market research firm, in-game purchase revenue accounted for 79 percent
of iOS mobile app revenue (and up to 94 percent in Asian markets) with only 21 percent coming from the
traditional model of paying for the title upfront at the start of 2014.16 More importantly, popular games that
col- lect revenue from in-game purchases rather than from upfront purchases earn up to three times more
revenue per game.

Required:
1. How did the evolution of video gaming platforms, particularly the advent of smartphones, impact the
traditional price metrics used by game developers? Discuss the challenges and opportunities presented by
this shift in pricing strategy, considering the vast differences in market size and consumer behavior between
traditional gaming consoles and mobile devices.
2. Explain the limitations of the traditional price-per-title metric in accurately capturing the value experienced
by different segments of players. How does this metric fail to align with users' gaming experiences and cost-
to-serve considerations? Discuss alternative pricing schemes attempted by retailers to address these
limitations, such as membership fees and buy-back options.
3. Describe the transition from the traditional price-per-title model to the freemium pricing structure in the
mobile gaming industry. What factors drove game developers to adopt this new pricing model, and how
does it allow for a more accurate reflection of players' engagement and value received within the game?
4. Analyze the three broad categories of virtual products offered within mobile games (consumables,
durables, and personalization) and their role in driving revenues based on player engagement. Provide
examples of each category from popular mobile games and discuss how they contribute to enhancing the
gaming experience and generating revenue for developers.
5. Reflecting on the success of in-game purchase revenue models in the mobile gaming industry, discuss the
implications for future pricing strategies and revenue generation in the broader digital entertainment
landscape. How might other industries leverage similar pricing structures to capture value and engage
consumers in an increasingly digital and interconnected world?