Article: Monday, 30 October 2017
The advent of digital distribution has afforded video game publishers new ways of selling their products. But so far, little was known about whether and how different businesses models impact the time and money consumers spend on a video game. A study by Joost Rietveld of Rotterdam School of Management, Erasmus University (RSM) now reveals that game publishers can increase their revenues as well as the time consumers spend on a game by asking consumers to pay before they play, instead of offering their games as a freemium product. The study also shows that offering a greater variety of extra downloadable content results in more purchases.
Over the past few years it has been a trend among video game publishers to sell their games through the so-called ‘freemium’ business model, says Rietveld. This is when publishers offer a barebones version of their game for free, such as the first part of the game’s story, or the basic version of a character, and revenue is generated by selling additional content.
Of course, this approach is based on the expectation that by lowering the barriers to adoption, consumers spend more time to get hooked on the game, and will eventually be more willing to pay for downloadable extras such as additional game levels, or fancy new clothing for the video game’s main character.
To find out if consumers prefer the freemium model over the traditional ‘premium’ model, where consumers pay before they play, Rietveld conducted an experiment in which 246 participants were randomly assigned to one of two versions of the same game. After seeing a teaser and some of the game’s artwork, half of the participants were presented with the premium version of the game, while the other half were presented the freemium version.
When asked how much money they would spend on the game, participants who were shown the freemium version indicated that they were willing to pay roughly 85 percent less for the game than participants who were shown the premium version of the same game. Participants in the premium group were also willing to spend significantly more money on downloadable content for the game, the researcher found.
The same principle applied to the time participants stated they would spend on the game: on average, players were willing to spend around 75 percent less time on the freemium game.
A second experiment with the same game revealed that offering a greater variety of downloadable content invites consumers to make more purchases and also spend more money on downloadable content, than when less variety is offered. By offering diverse packages at multiple price points, video game publishers essentially guarantee there is something for every type of consumer and leave no money on the table.
These conclusions, that were also validated in a study on real market data from digital distribution platform Steam, can be explained by several mechanisms, says Rietveld. First, economic theory has proven that consumers are more willing to spend time and money on what they have already invested in. Freemium games come at no cost and this research shows that the ‘sunk-cost’ effect, formulated by Nobel prize-winning economist Richard Thaler, seems equally applicable to digital video games.
Similarly, the study’s conclusions echo the notion that consumers typically experience increasingly less benefit from consuming more of the same product. For games, this means that consumers derive the most value from playing the first part of a game. While playing through the game, the perceived value of additional content goes down. By design, the freemium business model charges consumers after they have already enjoyed portions of the game, when appreciation is decreasing. This leads to fewer purchases and lower revenues, the study shows.
A clear implication of the research is that video game publishers can increase the revenues generated from their games by charging consumers before they can play, but also by breaking up their products into smaller chunks of downloadable extras. The freemium business model essentially undercuts the game’s earning potential, he concludes.
University College London (UCL)
Rietveld J. Creating and capturing value from freemium business models: A demand-side perspective. Strategic Entrepreneurship Journal (P). 2017;1–23.
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