Many consumer surveys point to an obvious conclusion: most people hate seeing ads on smartphones and tablets. But the truth is, contrary to the desire for an ad-free experience, when faced with the choice between free apps with ads, or paying even $.99 for apps without ads, consumers overwhelmingly choose the free apps and tolerate the ads.
In this post we explore that revealed preference for free content over content free of ads by examining four years worth of pricing information for the nearly 350,000 apps that use Flurry Analytics.
Our Apps Tell A Story
Each time we download an app, we reveal a little bit about ourselves. A glance at the apps on your phone can indicate whether you are a fan of sports, gaming, or public radio, and whether you love to hike or cook or travel. But our choices of apps also reveal our individual tolerance for advertising, and how we feel about the trade-off between paying for content directly, or paying indirectly by (implicitly) agreeing to view ads.
In many cases, apps are available in two forms: free (with ads) and paid (no ads). If you truly can’t stand to see ads in apps, you can usually pay $.99 or $1.99 to eliminate the ads and possibly get some additional functionality too. Even when a specific app does not come in paid and free versions, there are often other apps to choose from, free and paid, that perform very similar tasks like calling a taxi or looking up recipes.
So what are consumers choosing? Let’s start by considering iOS apps since they have been available for longer than Android apps. Note that all of our measurements in this post are weighted by user numbers so the apps with more users contribute more to the total trend.
People Want Content To Be Free
The chart below shows how the proportion of free versus paid apps has changed over the years in the App Store. Between 2010 and 2012 the percentage of apps using Flurry Analytics that were free varied between 80% and 84%, but by 2013, 90% of apps in use were free.
Some might argue that this supports the idea that “content wants to be free”. We don’t see it quite that way. Instead, we simply see this as the outcome of consumer choice: people want free content more than they want to avoid ads or to have the absolute highest quality content possible. This is a collective choice that could have played out differently and could still in particular contexts (e.g., enterprise apps or highly specialized apps such as those tracking medical or financial information).
Android Users Are Even Less Willing to Pay For Apps
Up until now, we have focused on iOS apps because they have been around longer, but what about Android? Conventional wisdom (backed by a variety of non-Flurry surveys) is that Android users tend to be less affluent and less willing to pay for things than iOS users. Does the app pricing data support that theory? Resoundingly.
As of April 2013, the average price paid for Android apps (including those where the price was free) was significantly less than for iPhone and iPad apps as shown below. This suggests that Android owners want app content to be free even more than iOS device users, implying that Android users are more tolerant of in-app advertising to subsidize the cost of developing apps.
These results also support another belief derived from surveys and some transaction data: iPad users tend to be bigger spenders than owners of other devices, including iPhone. On average, the price of iPad apps in use in April of this year was more than 2.5 times that of iPhone apps and more than 8 times that of Android apps. This is likely to be at least partly attributable to the fact that on average iPad owners have higher incomes than owners of other devices.
Developers’ Pricing Decisions Were Data-Driven
On the surface, the rise of free apps could be seen as herding behavior: maybe app developers saw how much free competition there was and decided to make their apps free too. It’s certainly possible that may have happened in some instances, but by digging deeper into app pricing patterns over time, we were able to see that many developers took a much more thoughtful approach to pricing.
We looked at historical iOS app data (again because iOS apps have a longer history) to identify apps that have been the subjects of pricing experiments. That typically took the form of A/B testing, where an app was one price for a period of time then the price was raised or lowered for a period of time, then raised or lowered again. This lets developers assess users’ willingness to pay (i.e., price elasticity of demand) based on the number of downloads at different price points.
The chart below shows the percentage of tested and untested apps that were free (again, weighted by user numbers). The vast majority of untested apps in green were free all along, so it’s most interesting to look at the trend among apps that were subject to pricing experiments, in blue. As shown, there was an upward trend in the proportion of price-tested apps that went from paid to free. This implies that many of the developers who ran pricing experiments concluded that charging even $.99 significantly reduced demand for their apps.
The People Have Spoken; It’s Time To Change The Conversation.
While consumers may not like in-app advertising, their behavior makes it clear that they are willing to accept it in exchange for free content, just as we have in radio, TV and online for decades. In light of that, it seems that the conversation about whether apps should have ads is largely over. Developers of some specialized apps may be able to monetize through paid downloads, and game apps sometimes generate significant revenue through in-app purchases, but since consumers are unwilling to pay for most apps, and most app developers need to make money somehow, it seems clear that ads in apps are a sure thing for the foreseeable future. Given that, we believe it’s time to shift the conversation away from whether there should be ads in apps at all, and instead determine how to make ads in apps as interesting and relevant as possible for consumers, and as efficient and effective as possible for advertisers and developers.
GDC is in San Francisco this week, just next to Flurry’s headquarters. By the size of the crowds, we (very scientifically) estimate that attendance should easily surpass last year’s record of 22,500. Having tracked the growth of mobile games for several years, we weren’t surprised to see more than 30 sessions during the week focused on smartphone and tablet gaming.
Here’s the big picture, based on our estimates: There are now over 1 billion active smartphones and tablets using apps around the world every month. And of all the apps consumers use, games command more than 40% of all time spent. Looking at revenue, games also dominate. Today, for example, 22 of the top 25 grossing apps in the U.S. iTunes App Store apps are games. Gamers spend money, and game makers are in love.
In this installment of research, Flurry studies how age, gender and engagement vary across key game types. Understand this, and a game developer can design a more engaging game that appeals to the right audience. In short, they can build a better business. In this study, we included more than 200 of the most successful free iOS games, with a total audience of more than 465 million month active users. For a better comparison, we organized these games by their game type (aka game mechanic) instead of traditional, less granular genres. Let’s start by looking at how different kinds of games appeal to gamers by age and gender.
The chart above plots game types by age and gender. From left to right, we show what percent of the game audience is female, with the far right equaling 100% female. The opposite is true for males. For example, 0% female equals 100% male. From bottom to top, we show the average age of the game type’s user base, between 20 to 50 years old. Putting it together, games in the upper right quadrant are preferred by older females. Games in the lower right are preferred by younger females. Games in the lower left are preferred by younger men, and so on.
Young Men and Their Competition
Inspecting the chart, the tightest cluster appears in the lower left; specifically, game types such as Shooters, Racing, and Action RPG skew younger and more male. Card-battle and Strategy games also skew toward younger males. The only genre that skews toward males over 35 is Casino/Poker, with pure poker games skewing even more male than the game type as a whole. This appears to leave a big gap in the market for developers who can create games that appeal to middle-aged and older men.
While men tend to gravitate toward competitive games, women gravitate toward games that are less competitive and tend to be played in a more enduring way. These include Management/Simulation games where players can build out an environment, Social Turn-Based games in which they can play over time with friends, and Match3/Bubble Shooters and Brain/Quiz games, to which users can frequently return when they have a few spare minutes. Slots and Solitaire are both solo-play game types that skew toward females who are over 40, suggesting that they serve as long-term time-fillers.
From a marketing perspective, mobile game publishers can also leverage this knowledge to design targeted campaigns appropriate for the kind of audience to which a game appeals. Flurry’s ad network, AppCircle, allows publishers to target specific demographics for efficient spending.
From Courting to Betrothed
We find that mobile gamers tend to prefer playing a few kinds of games and demonstrate highly predictable play patterns. In other words, they form relationships with their games. Savvy publishers understand these dynamics and use them to inform acquisition strategy, gameplay design, and both in-app purchase and ad-based monetization tactics.
In the chart below, we map game types by usage and retention. On the y-axis we show the number of times per week consumers play different game types. On the x-axis we show how long different games retain their user (i.e., Flurry defines Rolling Retention as the percentage of users that return to the game 30 days after first use, or any day after that). To see how usage and gender work together, we’ve also colored-coded game types by whether they are more male, female or neutral in appeal. Let’s take a look.
The chart above reveals that different strategies should be employed for different kinds of games. It also shows, loosely, that women are more committed while men are more fickle. Sound familiar in life? Hmmm. For the gaming industry, the universal take away is that to optimize engagement, retention, and monetization, developers must tailor their mechanics and messaging to match their ideal target audience. Let’s take a tour of the quadrants.
“Players” try a lot of different games, play for only a short time and tend to be found in highly competitive games (e.g., “Player vs. Player style games). While fickle, they tend to have a high willingness-to-pay in order to progress faster in a game or increase their ability to compete at a high level versus other players. Attracting the right users through targeted acquisition can pay off, as those that stay will pay. Notably, Card-Battle games have very low retention but off-the-charts monetization, extracting enormous revenue from the small number of users that stick. One implication is that these games need to be highly polished at launch with updates ready to go, as gamers will discard games quickly and move on if the game fails to resonate. From a design standpoint, these games should offer immediate opportunities for users to advance by purchasing upgrades and boosts. For the users that might not spend, a lucrative option is to offer in-game currency for watching video ads.
“Going Steady” game types are found in the lower right quadrant of the chart. Usage is less frequent but retention is very high. While these gamers don’t play as often, they are loyal. This group of games tends to be easy-to-learn and easy-to-return-to even after a lapse in playing. They lend themselves to quick play while in a “wait state” (e.g., waiting in line, taking a bus or perhaps checking out of the meeting or class they’re in). Since these are not particularly immersive or competitive games, they are less likely suited to in-app purchase. However, they can generate significant ad impressions over time, and can be designed to show banner or interstitial ads without being overly disruptive to the experience. For games with larger audiences, publishers are utilizing mediation platforms that enable the use of multiple ad networks in one system, ensuring maximized fill and ad-revenue for each space.
“Committed” comprise of consumers who play games for the long-haul. As such, game makers should think of it like a marriage. Think about appoint mechanics like setting a date (hey, even married people need to keep it fresh). These games should be designed with deep content and not try to sell too hard to their users too quickly. From a monetization perspective, commitment-oriented games have great potential for in-app purchases since users of those games are likely to value such purchases and amortize them over long periods of gameplay. And while only the largest titles have achieved this to-date, this group of games are great candidates for in-app product placement. Additionally, with high impressions counts, it is worth publishers’ investment to implement monetization platforms that make ad spaces available to real-time bidded ad exchanges, ensuring they reach the brands and advertisers that value their audiences.
“Infatuated” consumers have fallen hard and fast for their games, but the candle that burns twice as bright burns half as long. They have crushes, and show binge behavior. During the “crush” window, the developer needs to work hard to extract as much revenue as possible. As such, developers must provide vast amounts of content to the users, consistently, in a short-window. Matching monetization to game type, the competitive nature of Strategy games, and Slots users’ incessant desire for in-game currency, make a solid in-app purchase strategy paramount. Sales, events, and purchase opportunities timed with key moments of emotional investment can drive significant profits for publishers.
There’s a Pebble on the Beach for Everyone
In gaming, there are a vast number of game types that attract distinct audiences. And these different consumer segments display very different usage patterns, which have direct implications on monetization strategies. As in life, where the richest relationships are borne from knowing oneself and his or her partner, game companies must also understand both. Only then can you get the most out of the relationship.
Apps are big business, and the biggest app business is games. In 2012, Flurry estimates revenue earned from apps will approach $10 billion, with games taking over 80% of the pie. The free-to-play business model (aka freemium), where consumers download and play the “core loop” of a game for free, but then pay for virtual goods and currency through micro-transactions, is the most prolific business model in the new era of digital distribution. When it comes to app consumption on iOS and Android smart devices, consumers spend over 40% of all their time using games.
The most successful companies in the new mobile economy, from Electronic Arts to Zynga and Mobage to Supercell, deeply understand consumer behavior differences by game genre. This level of understanding greatly informs a company’s app acquisition, retention and monetization strategies. In this report, Flurry examines the consumer behavior differences by app usage, retention and demographics for the top nine freemium game genres in mobile gaming. For this analysis, Flurry leveraged a sample of more than 300 million consumers using iOS and Android games each month. Please note that, for consistency, we include only free titles.
In the chart below, we lay out a “loyalty matrix” that plots the top nine freemium game categories by how often they’re used compared to how long consumers continue to use them over time. Specifically, we plot the 90-day retention rate of app categories on the x-axis against the frequency of use per week on the y-axis. We lay the “scatterplot” out in a Cartesian coordinate system with four quadrants.
Quadrant I represents a “sweet spot” for developers, whose games are used intensively by a set of highly retained users. Well-designed “appointment” mechanics drive frequency, as users are compelled to maintain and progress in their respective game. Social Turn-based games succeed in building an active, loyal user base by offering popular “evergreen” games played among friends. From a revenue perspective, while there exists significant potential to show advertising impressions to consumers who use so frequently, games in the Slots and Resource Management & Simulation (labeled as “Mgmt/Sim”) genres commonly monetize via in-app purchase. However, companies that maximize revenue in Quadrant I extract revenue from consumers willing to pay via in-app purchase, and then by showing ads to those who do not pay.
Quadrant II is characterized by the most intensive usage over a short customer lifecycle, and is occupied solely by the Strategy genre. This audience is demanding, game lifecycles are short and a game’s live services must be flawlessly executed. Successful Strategy game developers accelerate monetization by driving competition among players (“Player vs. Player”) and by encouraging fast game progress through premium currency spends. With frequency of use so high, users churn through content quickly. To maximize retention, developers must continuously release new content after the game’s initial launch.
Quadrant III also attracts a fickle gaming audience, but adds the challenge of having fewer opportunities per week to monetize the user. The well-documented success of the Card-Battle genre in Asia, and now Western markets, is even more impressive when considering the short time frame developers have to drive transactions. Targeted user acquisition is critical to avoid paying for large batches of users that will drop off quickly due to the “hardcore” nature of the content and game mechanics.
Quadrant IV features easy-to-play and highly repeatable games that can remain on a user’s “play list” for years. These evergreen titles may lack the depth required to generate sizeable in-app purchases, but do generate substantial advertising impressions over time. In addition to driving strong ad revenue, the large audience size of these games can be used to cross-promote a developer’s more narrowly focused, but better monetizing titles.
As the mobile app economy grows, the sophistication of its related advertising services will reach those found on the Internet today. Leveraging big data, the ability to target users based on demographics and personas, and then track the effectiveness of such targeting is just starting to take hold (Flurry has invested in this direction with its own services like Flurry AppCircle, an ad network, and Flurry Ad Analytics, an ad effectiveness solution). As developers and app marketing providers become more savvy, they can better acquire the kinds of users that will reliably play and pay in their apps. Below, using the same sample set of games, we look at the Age and Gender of users by genre.
A quick review shows that Quadrant I is largely comprised of middle-aged females that play games we know to have attractive retention and usage metrics.
Quadrant II shows that males are not extending into the same 40+ average age-range as female players. Casino / Poker games tend to attract older males the best.
Quadrant III is undoubtedly the hottest sector of the mobile gaming market, with young, male “core” gamers pausing their console gameplay sessions to increasingly play mobile games. These young men are difficult to corral, but can monetize at a rate that justifies the cost and effort of acquisition.
Quadrant IV shows younger females adopting games that feature more involved gameplay than those played by the middle-aged female crowd. While the youngest users enjoy the quick solo experience of the Endless genre, the late twenties / early thirties crowd are diving deeper into game mechanics and making it a social experience.
As mobile gaming rapidly matures, it is becoming increasingly difficult for new and small developers to succeed. The game quality bar has risen dramatically, user acquisition costs continue to climb and organic installs via app store discovery and featuring are harder to come by. One great equalizer for developers is the ability to collect and harness the power of data. In fact, game developers tend to be the “power users” of analytics, using sophisticated metrics to track user progress, tune gameplay and maximize monetization (a large part of Flurry Analytics' use base is game developers). In an industry that has historically been considered more artistic and subjective, connected devices and the ability to rapidly iterate on already shipped titles has ushered in an age of science and measurement. In short, data has enabled the “gamification” of the mobile industry.
The iOS and Android app economy continues to grow, with freemium games leading all app revenue models, now accounting for more than 65% of app revenue.
In its most recent analysis on freemium games, Flurry revealed that the amount of time and money consumers spend varies significantly by age. Younger consumers spend a lot more time, but older consumers spend a lot more money. In this post, we shift our focus to understand how freemium consumer behavior varies between men and women. We’ll compare differences in time spent, money spent, transaction volume and average price per transaction.
And since the world of marketing and advertising traditionally looks at consumer behavior by “demo” (i.e., the market broken down by demographics of age and sex), we likewise present all of our findings by demo. By Flurry’s calculation, the freemium audience represents among the largest and most attractive concentrations of educated and affluent consumers in consumer technology today. From conversations Flurry is having with the industry, brands and advertising agencies continue to show increasing interest in accessing this audience.
This study uses data from a sample of iOS and Android freemium games with over 20 million users across more than 1.4 billion sessions gathered from Flurry Analytics, which tracks over 110,000 apps across the major smartphone platforms. The amount of money spent was tallied by summing the total transactions multiplied by their respective price points. Time spent was observed by tracking the total minutes spent playing these games. Let’s start by looking at time spent. Please note that figures presented in charts have been rounded up to nearest whole percentages.
The chart above shows a graphical cross-tabbed view of time spent by age versus sex. Adding up all the percentages across each column totals 100%. Blue columns represent males and pink columns represent females. The amount of time spent by males and females is broken down by age group, from youngest to oldest, left to right. The total split of time spent is presented in the legend, with men edging out women 53% to 47%.
What we take away from this chart is that time spent in freemium games on mobile is relatively evenly split among males and females, with 18 -34 males (coincidentally considered the best target for hardcore games) representing the largest group about a third of all players. 18 – 34 year old girls come in accounting for 27% of time spent. In total, freemium gamers tend to be younger, with 83% of them under 34 years old.
Switching our attention to money spent in freemium games, males lead in money spent by a greater degree, accounting for 58% of total money spent. Across each age group, men lead women in spending, with the greatest difference occurring in the 25 – 34 year old age group. For freemium games, spending is concentrated between the ages of 25 - 54, with men in this age range representing nearly half (45%) of spending and women representing another third (32%).
After finding that men and women spend similar amounts of time playing freemium games, but that men out-spend women 58% vs. 42%, we further drilled down to understanding this difference. Breaking out the number of transactions by demo, we see the similar clustering of transactions into the 25 – 54 year old span of users, but see that transactions are more evenly completed by both men and women. In this age range, men drive 40% of transactions and women drive 35%. This is quite a bit different than total money spent by this age group, which came in at 45% male versus 32% female.
Calculating and presenting the data by amount paid per transaction, we find our answer. Men spend an average of 31% more per transaction, or $15.60 versus $11.90. In fact, male spending dominates female spending across each age group by a relatively consistent margin. In the “sweet spot” of revenue generation, 25 – 34 year olds, representing a whopping 49% of total revenue, men out-spend women by 37% per transaction.
Flurry believes that, aside from the raw appeal of a game, the ability to measure and act on this kind of data will make the biggest difference to the success or failure of freemium game companies. Zynga, who is poised to have one of the most successful IPO’s in history, recently described itself as “an analytics company masquerading as a games company.” Segmenting and targeting an app audience will reveal where to spend precious company resources to attract, retain and monetize the most valuable consumers.
In turn, advertising agencies and brands increasingly want to reach this new mass-market audience, who now spends more time in apps than browsing the web, and is primarily concentrated in freemium games. The ability to describe this audience by demo will make the difference between whether or not Madison Avenue can work with game developers. And since only 3% of consumers spend on freemium games, companies that monetize the other 97% of the audience, non-payers, will additionally succeed.
Flurry believes that the industry is at an exciting juncture, in terms of mass-market viability, real consumer spending and the ability to segment and target audiences. We know one thing for certain: companies follow consumers because consumers have money. And consumers are now in mobile apps, especially freemium games.
Freemium games on iOS and Android continue to dominate the app economy, now accounting for over 65% of all revenue generated among the Top 100 grossing apps in the App Store alone. In a series of recent pieces on free-to-play mobile games, we’ve shared insights about the relevance of this business model, consumer spending by price point and what kinds of items consumers purchase.
In this report, we focus on the audience who plays these games. Specifically, we study differences between those who play and those who spend money in mobile freemium games. This study uses data from a sample of iOS and Android freemium games with over 20 million users across more than 1.4 billion sessions gathered from Flurry Analytics, which tracks over 110,000 apps across the major smartphone platforms. Let’s take a look at the results.
In the chart, we compare the relative distributions of time and money spent by age group. Starting on the left-hand-side, the green bars represent which age groups spend the most time playing freemium games. We see that ages 18 – 24 account for the most minutes spent, 32%, followed by ages 25 – 34 who represent 29% of usage. Ages 13 – 17, 35 – 54 and 55+ then account for the rest of usage time at 22%, 14% and 3%, respectively. The average age of the consumer, based on time spent, is 26.6 years old.
Next to the green bars, in blue, we show the amount of money these same consumers spend on in-app-purchases within the same set of games. The top spending group is 25 – 34 years old, accounting for 49% of total dollars spent, next followed by 35 – 54 year olds at 28%. By contrast, the most dedicated users of these games in terms of time, the 18 – 24 year olds, rank only third in terms of money spent, generating 16% of IAP revenue. 13 – 17 year olds, a popular target audience of these games, account for only 5% of revenue. Finally, the 55+ age group delivers 2% of revenue. The average age of consumers who spend money in these games is 32.2 years old.
Broadly, we observe that heavy users of freemium games are younger, while spenders in freemium games are older. The half that uses these games most, 13 – 24 year olds (55% of time spent), deliver only 21% of the revenue. And the half that spends heavily, 25 – 34 year olds (49% of money spent), represent just 29% of usage. We believe much of this has to do with play patterns, disposable income and relative available time.
In social games, consumers can advance in the game through “the grind,” the core set of gameplay activities that allows the user to level up, earn in-game currency and progress. But to progress via “the grind” takes time and patience. For consumers that have more time (or less money), they can afford (or must be) more patient. Younger gamers, presumably high school and college-aged, likely have more time but less money. So the grind is something they're willing or must commit to, in order to progress. And with more total available time throughout their days, they can play more frequently. Simply put, they become your loyal users, but it’s harder to extract money from them.
On the other hand, 24 – 35 year olds presumably have more disposal income, but less time, due to work and family demands. This combination makes them less tolerant to engaging in “the grind,” but also better positioned to buy their way out of it. They play less often, but make quicker progress by simply spending. Further, when we expand the age range to 24 – 54, this older group generates nearly four-fifths of all revenue in freemium games. In short, your whales may be older than you think.
Our conclusion: Gen Y plays, but Gen X pays.
Last month, we published two posts about iOS and Android freemium game revenue. The first showed that, over the first half of 2011, game revenue in the App Store shifted dramatically from premium to freemium, with 65% of all revenue generated among the top 100 games now coming freemium games. In fact, at the time of writing this blog post, all of the top 5 titles in the App Store top grossing category were freemium games, and 22 of the top grossing 25 were games. The second post revealed that consumers spend an average of $14 per transaction when making in-app purchases in freemium games.
With in-app purchases in freemium games driving the bulk of revenue generation in the iOS and Android app economy, Flurry devotes this post to what consumers actually spend their real dollars on. With over a year’s worth of data, Flurry categorized over 57 million purchase transactions across a set of freemium iOS and Android games that averaged over 2 million daily active users.
As in the world of retail goods, the two main categories available for purchase in freemium games are durable and consumable goods. In freemium games, we define durable goods as items that provide a permanent gameplay benefit. Examples include buying armor to increase defense in a role-playing game, or buying a building in a city simulation to increase city revenue. By contrast, a consumable item is something that is depleted when used. Examples include a set of grenades in a war game, or fertilizer that helps crops grow faster in a farming simulation. Finally, we define personalization items as those that are durable but do not add any gameplay benefit (i.e., purely decorative).
The chart shows that over two-thirds of all items purchased in iOS and Android freemium games are consumable, goods that users deplete. Measured another way, approximately half of all real dollars spent within all apps are for game items consumers don’t keep. Based on our data, the most popular virtual purchase, consumable or otherwise, is for “premium” in-game currency. Premium currency can be spent in a number of ways to accelerate progression in a given game, including converting it into “grind” currency, the primary currency that consumers accrue and use through normal gameplay (a.k.a. the “grind”). Premium currency, which also allows consumers to purchase special items that cannot typically be acquired with regular “grind” currency, is said to “alleviate the grind” (i.e., allow a user to advance faster in a game). Games that are designed with consumable items in mind tend to monetize very well. For developers, this offers the best ROI on game development resources.
Next, durable items represent 30% of all in-app purchases in freemium games. From a game design standpoint, it's important to have a good selection of durable items in a game as it offers important variety to the consumer with respect to the core gameplay, such as erecting buildings in a city. Buying increasingly better performing durable items gives players a sense of progress, which can be important for engagement. Additionally, offering bigger, better durable items allows users to set goals, or even change their gameplay strategy, in order to save up for, and make, bigger purchases.
As a side-note, the ratio between consumable and durable should vary depending on how critical these items are to the core gameplay experience. For example, a city-building game could lean more toward durables (e.g., buildings), since user progression is measured by creating a larger city, which is made up of individual buildings. In contrast, a farming game could lean more towards consumables (e.g., seeds and fertilizer), where the game is about growing, harvesting and selling crops in order to earn grind currency.
Finally, personalization items represent only 2% of purchases. Since these items don’t affect gameplay, consumers purchase them infrequently. Also, consumers don’t tend to decorate, and then re-decorate, in most games. For example, think about how often you change your Facebook or Linked In profile picture. The rule should be that if a game is not largely about personalization, then add just enough of these items to allow players to create their own unique gameplay look and feel.
With Flurry estimating that total U.S. iOS and Android game revenue will surpass $1 billion in 2011, game developers should understand what consumers spend the majority of their money on. As a business model, freemium games are here to stay. While the consumer is indeed purchasing virtual items that are most often consumable, what’s most important to understand is the psychology behind these games. In freemium games, consumers are experiencing compelling, immersive entertainment. They feel gratified when they progress, accomplish goals, create a unique world, and in some cases, show off to their friends. In exchange for this gratification, they are willing to spend real money, and lots of it.
[Editor's Note: Jeferson is Flurry's GM of Games, who works with iOS and Android game developers to build more profitable games]
Digital distribution of games is disrupting the retail portable game category. At the heart of this disruption is the proliferation of iOS and Android devices, which is doubling as a powerful portable gaming platform and challenging Nintendo DS and Sony PSP for gamer mindshare. In previous reports (2008 - 2009, 2009 - 2010), Flurry measured that iOS’s and Android’s revenue share of the U.S. portable game software category exploded to 34% in 2010 from just 1% in 2008.
Over this same time period, we calculated that Nintendo’s U.S. portable game revenue share contracted to 57% from 75%. All the while, Nintendo chief executive, Satoru Iwata, has remained outspoken, calling smartphone games worthless and warning the gaming industry of boring consumers. In contrast, Wedbush Morgan Securities veteran video game analyst, Michael Pachter, stated in April 2011 that “Nintendo will have to share the market with Apple and Android” because “the onslaught of $1 games is going to continue.” By Flurry’s calculations, the onslaught is now coming in at a crushing $14 per transaction and from within the Trojan horse of freemium (a.k.a. free-to-play) games.
Here we dissect transaction sizes within iOS and Android freemium games, the current juggernaut of smartphone game business models. This report builds on analysis released earlier this month, when Flurry revealed that games drive 75% of revenue generated among the top 100 grossing iOS apps, of which 65% were generated from freemium games. In the chart below, we look at how 3.5 million consumers spent their money across top iOS and Android freemium games.
The left-hand column shows the distribution of transaction sizes within freemium games: in other words, how many times consumers spent anywhere from $0.99 to sometimes over $100 per transaction. Each purchase equates to a virtual good or currency in the game a consumer is playing. We organize the data into three price buckets: under $10; from $10 - $20; and over $20. You’ll see 71% of all transactions are for amounts under $10, 16% are for spends between $10 to $20 and 13% are for amounts greater than $20. The average amount spent per transaction is $14.
Let’s spend a moment on the $14 average, which may seem high to you at first blush. There are two reasons the average settles here. First, within the “under $10” bucket, most transactions cluster at the $9.99 level, followed by $4.99, and finally $0.99. In fact, in total, consumers spent $0.99 less than 2% of the time. Why then would so few consumers spend just $1 in freemium games when this price point is so popular among premium games (the pay-before-you-can-play model)? Because freemium games drive a different decision-making mindset for consumers. They simply are deciding whether or not to spend. Our data shows that around 3% of consumers will spend money in freemium games. A deep commitment to the game experience appears to influence their buying habits. The second reason the $14 average seems high is because the high-end of the spending spectrum is very high. Among all purchase price points, over 5% of all purchases are for amounts greater than $50, which rivals the amount paid at retail for top console and PC games.
Now, let’s look at the amount of total revenue generated per price bucket. Scanning this column, we see the amount of revenue generated per price bucket is flipped in comparison to the price points at which the bulk of transactions occur. On the low end, we’re “packing sardines;” that is, accumulating a lot of small transactions. While the under $10 bucket delivers about two-thirds of the transactions, it only accounts for about one third of the dollars. On the other end of the spectrum, at the “over $20” spend-level, we find the “whales.” In fact, further breaking down the “over $20” category, 30% of the total revenue is generated from transaction sizes of over $50. If you’re a game designer, your main take away is that very few transactions—and consumers who complete those transactions—make up the bulk of your revenue. Therefore, your “meta-game” should be about whale hunting.
By the end of 2011, Flurry estimates that total U.S. iOS and Android game revenue will surpass $1 billion. Digital distribution has already affected notable Media & Entertainment industries including film, newspaper, television, music and books. The video game industry is no exception, with portable gaming already feeling the impact. The key to any business playing in this space, whether incumbent or challenger, will be to understand and command consumer engagement, and turn that engagement into revenue events. The freemium business model on mobile, enabled by a device that is always with consumers, and always connected, is unlocking profound new ways to deliver value and extract revenue from consumers, and for far more than just $1 at a time.
To free, or not to free
Among the most common questions we get from game developers is whether the free-to-play (a.k.a. freemium) model makes sense for their next game. For teams that have always charged players up-front with a premium pricing model, the thought of distributing games for free makes them very uncomfortable. I made the switch myself when I joined a free-to-play social games startup as a Studio Director in 2009, so I’m well aware of both the anxiety and the opportunity.
To best answer this question, I decided we should do it the Flurry way: with hard data. To do so, we compared the revenue generated by pricing model, freemium vs. premium, among the top 100 grossing games in January and June of this year. Premium simply means charging for the download (e.g., $0.99). Freemium describes the free-to-play model, where the game is given away for free, and then the consumer can purchase virtual currency and/or virtual goods through in-app-purchases. Tracking over 90,000 apps with its analytics service, Flurry can measure the amount of revenue generated per ranked position in the App Store top grossing category. The chart below compares the proportion of revenue generated by each model.
Inspecting the chart, we see that free games already represented 39% of the games revenue generated by Apple’s App Store in January, but that number has since risen to 65% last month. The traction of the freemium business model is undeniable and growing fast. In fact, with games often occupying more than 75% of all top 100 grossing apps in the app store, it’s the single most dominating business model in the mobile apps industry today.
Unleashing the beast
In the old paid world of video games, success was measured by multiplying the number of units sold by the unit price, the traditional retail model. In the new world of digital games distribution, it’s all about how many players you can keep engaged with your free game, followed by how many compelling spending opportunities you can provide them.
When you make your game free and add in-app purchases, two powerful things can happen: first, more people will likely try your game since you’ve made the “ante” zero; and second, you will likely take more total money, since different players can now spend different amounts depending on their engagement and preferences. It’s not unheard of for individual players to spend into the tens of thousands in a game they like.
Flurry data shows that the number of people who spend money in a free game ranges from 0.5% to 6% depending on the quality of the game and its core mechanics. Although this means that more than 90% of players will not spend a single penny, it also means that players who love your game spend much more than the $0.99 you were considering charging for the app. And since you gave away the game for free, your “heavy spender” group can be sizable.
Free-to-play is here to stay. If you’re a game studio, you simply need to understand how to take advantage of this game-changing opportunity. In future posts, I’ll cover strategies and tactics you can employ to make this powerful model work best for you.