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The Truth Behind In-App Purchases

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Yaniv Nizan


Unless you have been living on another plant in the past 18 months, you must have heard that In-App Purchase is a great monetization model. Publications like Business Insider and others have provided a lot of data to support this claim but the reality is that the picture they painted is a bit misleading.
Let's take a deep look into the market of mobile games. The reality is that there are many kinds of in-app purchase methods but, believe it or not, only one of them is really effective.
There are games that allow you to upgrade to the premium version from within the app, others allow you to buy extra levels of features while some games are based on virtual economies and allow you to buy in-game currencies. All of these are considered in-app purchases - can you guess which one is making the most revenue?
Here is the punch line - out of the top 50 (grossing) games that use in-app purchases, 46 are selling virtual currencies and if we look at the top 100 the trend continues with 91 that are based on virtual economies.
So saying that virtual economies are powering 85% of the revenue in mobile games is much more accurate than saying that it's driven by in-app purchases.
This distinction seems subtle but it's actually critical for mobile game developers looking to turn their premium game to a freemium game or ones that are just designing their game. If you don't pay attention closely you might end up with a game that yields only poor revenue and might not even cover your investment.
Just to be clear - a virtual economy means that the game has at least one type of 'soft currency' that the user can earn by regular game play. It is not really about monetization. It's about engaging your users and giving them ways to advance in game play, measure their progress and add an extra layer of fun into the game. So the games are not successful because their monetization is better but actually because these games are more fun and engaging that way.
While some might think that virtual economies are only used in MMO games or resource management games the reality of mobile gaming is different. There are ways to add virtual economies to just about any game genre and the top games of all genres are games that have created complex virtual economies successfully.
Unfortunately virtual economies are complex to build and take experience and time to balance but they are well worth it. So next time you hear the myth about in-app purchases being a magic solution to monetizing mobile games remember that the real answer is virtual economies.

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real answer is virtual economies

... the real answer is market(ing) power. If you reduce the top 50 apps on the company behind it, how many companies will be left beside zynga ?


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Thanks for the research and article(s).  I was initially leaning on a freetoplay with flat-price monthly subscription upgrade available, and was deciding between that and virtual currency as the model.  After reading these and thinking about it some more, I'm now leaning much more on going with a virtual currency model ( both paid virtual currency  as well as a secondary currency earned through gameplay).   


One of my concerns is initially I won't have very many paid upgrades available.  In my spare time, I will eventually be able to produce and deploy a basic version of my game with a few upgrades available.  However, I don't have the resources to quickly produce all the additional content that is needed to populate a deep virtual store.   



I'll be directly funding the gameservers, and don't really have an idea yet as to whether the revenue generated from the virtual store will be sufficient to cover hosting costs or not.   I guess one related question is in a situation like this, would you recommend launching as soon as possible (even with a tiny, say 10 item store), or taking a much longer amount of time to develop many more features and paid content and only then launching?      


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Great to learn I was able to help.


I guess the answer to your question depends on the actual game. There are games that have been successful with very few virtual goods to buy in their store but that requires these items the items to be really crucial for gameplay to proceed.


Can you share more details about your game?


As for game servers - You don't really need servers to change your game to free 2 play. If you want to be able to edit the store remotely, you can use our service at http://designer.soom.la but actually many games do well with a store that resides on the client side only.


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The game is inspired by League of Legends-- but on tablets instead of PC, with spaceships instead of champions, and 100 players per multiplayer battlefield instance instead of 10.  


To play the game will require the player to have an internet connection to be able to connect to game server(s) that I host (and thus pay for).   There isn't a single-player mode per se, though technically there is in the sense that if literally there is only a single person playing the game in the US, there would be one single game instance running, consisting of that 1 player and 99 Bots.  That situation isn't ideal; the Bot starships are really meant more for placeholders during transition as Players enter and leave the game to keep starships from just disappearing and reappearing, the idea being at any one point in time a full game will have 90-95% of the slots being occupied by live players with just a couple of these Bots.


My current plan for an initial version is a total of 2 free spaceships, and 2 paid upgrade spaceships available.  The spaceships, much like champions in League of Legends, are a one-time, permanent purchase.  Getting at least 1 premium spaceship would be pretty compelling for any active player, as while the 2 free spaceships allow you to play a full game, they are starter ships that are underpowered than the premium ships (they are starter/noob ships).  They are still fun to play and don't just instantly die or anything, but active players would likely be interested in purchasing additional ships (if priced correctly) to be able to experience some variety, just as in League of Legends each Champion has a distinct ability set and gameplay so if you get bored of one playstyle you can just switch to another character.


I eventually would like to have a much bigger store than that-- something like 50 paid upgrade starships instead of 2, as well as things like XP Boosts that allow your meta-character to level faster to more quickly hit the level cap as well as slight ability boots you can itemize (much like Runes from League of Legends).


Unfortunately, building these additional paid content items takes a good amount of time.   I might be able to do an alpha launch in about a year with a very small amount of paid content upgrades available, or perhaps another year or two after that but with a much larger selection available.  I'm leaning on launching sooner rather than later, even if the game isn't as polished as I'd like and even though the limited amount of items available in the store would limit revenues, but at least it would get the game going and I would immediately start getting feedback from players and kind of see what's working.    


I guess, my concern is if let's say the servers cost $5/year/player ( this number is just a wild guess right now ), but revenue averages less than that because there aren't enough items in the store to purchase or the items aren't compelling enough to purchase.   In that case, the business model would not be sustainable as the more people play, the more money I am losing.  In that scenario, I would have to put a hard cap on the maximum number of players to keep my financial losses manageable.


I'm leaning on just going for it (by this I mean launching as soon as possible, with an unpolished game and with a small store), and seeing what happens to at least get a rough idea of the overall viability of the game and what people think.  If I wait longer, I could certainly polish the game and add a lot more content, but by then other competing games by have been produced, so it's a tricky balance.   Thanks again!


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Hi There,


Thanks for sharing. I would recommend investing a bit more time before launching. Since it's a multi-player game, you need a critical mass for it to be interesting so if you launch too soon you will get burnt.


I think you missed a big part of what makes games that use in-app purchases successful. It's not so much about selling the user stuff but rather creating a micro-economy in your game so he can earn coins and thus he can justify the purchases. 


Based on what you mentioned, I would try take a look at the game CSR racing and try to model the store of this game after their store.


The store in CSR racing have many types of cars and each cars have 5 types of upgrades but since everything comes at different levels it creates infinite amount of purchase possibilities. At the same time all the different cars and upgrades boils down to 4 parameters: bhp, weight, grip and gearbox so it's easy to support all the different car configurations in gameplay.


I recommend taking a look at a deck of slides from a speech I gave at the Shenkar Game Design School.




As for the server cost - my gut feeling is that your estimates are way too high. A $50/month machine on Amazon should be able to handle millions of users as long as it's just handling meta data and not rendering the display for all the players (which it shouldn't)


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