04 May 2015
There is no doubt that there is no turning back from Freemium – with 90% of all games revenue on the iOS App Store, and 98% on Google Play coming from freemium apps (Source: Distimo). However, with paying users accounting for only 2%-7% – game developers need to seek additional monetization solutions to monetize the non-paying users and increase revenue – yet without cannibalizing in app purchases (IAP).
Is it inevitable that ads will cannibalize in app purchases, OR should they, could they co-exist and if so – HOW?
Let’s start with putting a few obvious truths on the table:
- Game developers / publishers seek to make money off their games.
- The vast majority of users don’t make any in-app purchases – on average less than 5% of the users actually buy in app items and currency.
- Whales (which is the industry’s terminology for those “big-spenders”) tend to be a limited resource moving eventually from game to game – which makes it a bit hard to base an entire long-term business strategy on (Source: Google)
- Ad based solutions – when implemented with the user’s gaming experience in mind – have become an acceptable, (not to say welcomed) means for monetizing non-converting users (Source: HIS Technology).
Let’s take a look at the most important monetary success factors for a game developer:
- Revenue generation
- Positive user experience leading to higher engagement over time and increased user LTV (life-time-value)
- Long-term revenue generation
Question #1: is this an either/or situation (i.e do ads cannibalize in-app purchases), or can successful IAP revenues co-exist with implementing ad-based revenue generators?
That very much depends on how you go about it.
When ads are well integrated into gameplay, they offer the user true value and take the user’s own preferences into consideration. That way, game publishers expose users to the benefits of premium elements with little to no impact on the gaming experience. Users who become familiar with these premium items are more likely to look for them again – and therefore we see an increase in the chances of them becoming paying customers.
Question #2: What is the meaning of “ads being well implemented” and how to implement both ads and IAP in the most optimal manner?
When it comes to IAP and considering 95% of all IAP revenues come from 5% Whales – your mission would be to locate them, reel them in, monetize them and RETAIN! This has a lot to do with the structure of your in-game economy, the level benefits gained through purchases and their longevity (or lack thereof), the attractiveness of repeated purchase and the delicate balance between purchasing a competitive advantage – yet not paying your way to an easy win.
- User segmentation
Take a look at this user-type segmentation issued by EEDAR. Does this resemble your game’s user base?
Basically – as a developer, you have 2 main factors to consider:
- User monetization level (high-payers to low or non-payers)
- User engagement (from high and frequent, through random, to low or not at all)
As you can imagine – some of your users belong to both high-end groups (monetized and engaged), some to either and some to neither. You can sort your user-base to as many segments as you like, and take different approach towards each group. In the example below, a common practice would be to decrease the exposure to value exchange ads as the numbers grow, and to disable all ad formats at the ‘gold’ section:
- Plan your monetization strategy
Now that you have an analysis of how your users behave within your game – you need to apply a strategy that will achieve both maximum monetization and retention, while expanding your user-base. There is no single recipe that would work across all games and all genres, but let’s review a few possible scenarios.
One approach to ad-based monetization has somewhat of a purist view, meaning that paying users need not be ‘bothered’ with ads. Putting aside the fact that by no means should ads be ‘bothering’ anyone (paying or non-paying) – games with this approach would normally offer an ad-free version to heavy IAP users, ads driving towards more IAP to medium payers, and value-exchange ads offering different levels of rewards to low and non-paying users.
Another approach is based on somewhat of a “trial-and-error” method, learning the user’s preferences towards IAP and/or ads. For example a user that rejects ad engagement a couple of times could be offered to buy the non-ad premium version, whilst a user who rejects a paid option to obtain an in-game advantage, could be offered to get it through value-exchange ads.
A third, and rather recent approach, focuses on maximizing personalization of ad-based content, studying not only the type of content to offer each player and user profile, but also the individual preferences of the user as to the ‘when’ during gameplay to receive and engage with that content. This means that different users will -or will not- be served with ads at different key engagement moments during gameplay – to extend game sessions, improve gaming experience, and increase users’ LTV.
Recent researches show that contrary to common belief, not only do smartly placed in-game ads not harm IAP revenue, at times it even increases it, and here are a couple of reasons why:
- Once a user Is rewarded with an in-game item, benefit or advantage through engaging with an ad, he is now familiar and appreciative towards that item/advantage, and is likely to want to gain it again in his next sessions. Assuming it is an advantage of good value, a considerable % of players will be willing to pay for that advantage in their future game sessions.
- Publishers testify that when it comes to games in which players play against one another, if one player obtains an advantage through engaging with an ad (say going into a battle with a greater weapon), the player on the opponent side often times buys himself and advantage to be able to compete and win.
- Your Whales Are Gold – But So Is The Remaining 95% of Your User-Base!
Granted – your whales are gold! Attract them, offer them VIP service all the way, and do whatever it takes to retain them. But the remaining 95% of your user base has amazing monetization and engagement potentials too – such that cannot be belittled!
It’s all a matter of which solution you implement, and how deep of an engagement you seek with your users.
Be it big-spenders, mid-spenders or non-spenders – if you offer user-focused quality monetization solutions, tailored to meet your users at the right time – you will achieve both higher revenues from IAP as well as extraordinary monetization of your non-paying user base.
Innovative technologies enable you to not only monetize a significantly larger portion of users than ever before, but actually improve the users’ gameplay, getting them engaged in your game for longer sessions, and re-engaged time and time again. This obviously results in you benefiting from higher ARPU, an increased gameplay lifespan, and significantly higher life-time-value (LTV) per user.
To sum it up:
While there still are a few game developers that fear ads might cannibalize IAP (in-app purchase) revenues, the vast majority of developers and publishers are in agreement that higher revenues are generated when implementing both IAP and smartly placed ads – provided, however, that each is tailored to the user’s optimal engagement and retention potential.
In-game advertising should not be seen as an obstacle to great game play, in-fact, “When done right, advertising simply makes the game better…” (ArsTechnica).