Thursday, March 1, 2012

Western Video Games for ‘Pay as much as you want’

Octodad 2
Over the last years, the financial situation for traditional game developers in both the West and Japan hasn’t been looking too bright. Not only the economical crisis but also a change in player behavior has led to a shift of game play from console to social gaming either on PC systems or mobile devices. While the market in is growing due to  these new segments and user groups, traditional video game makers are facing the competition of several new (low) pricing models in the industry.

On the one side you have social gaming developers and publishers who are offering free-to-play games to uses while maximizing profits through in-game purchases or advertising, a system which proved to be very successful profit margin-wise. The only advantage traditional makers still have is the fact that social games can’t compete with the quality and complexity of major console or PC games. However, even this edge is crumbling as mobile devices become more and more complex and close the gap between traditional game hardware.

On the other side you have the world of independent videogames, who have flourished in the West over the last 2-3 years. These tiny studios, sometimes even one-man developers, have begun to populate the web and downloadable marketplaces of available consoles with some of the most beautiful, interesting and enjoyable titles around. They are not only competing with the bigger studios content wise, but have even started a small revolution in the economics of selling games with methods such as the PWYW (pay what you want) system.

Pay what you want – an alternative pricing model

PWYW is a pricing model, where many indie developers offer their games – mostly limited to a certain period of time – up for sale under a system where the player decides how much the game is worth to them, sometimes including zero. After deciding how much the game is worth to them the user simply pays the amount and downloads the game.

The advantage of such a system is very easy to see as it eliminates many disadvantages of conventional pricing:

1.     It lowers the barrier of entry for players, eliminating the common fear among gamers regarding whether a game is worth its price and the disappointment termed “buyer’s remorse” that results when the game does not meet expectations. This especially counts for independent games, where there is often a lack of information about the game and even developer. PWYW can tip someone over the edge to try the game, and if they do enjoy it the likelihood that the player will pay the full price for any future games from the same developer also increases.

2.     On the developer side using a PWYW system removes the cumbersome task of finding the “right” price, and enables them to enter a more personal relationship with their users. By offering free (high quality) games, developers can increase their fan base, connect to them, hopefully sell more merchandise, and get them to talk about the game, which basically equals free advertising while increasing the chance for people to contribute to the developer financially.

3.     Lastly, it opens up the moral side of gamers a bit. Through the use of a system that asks the user to set a price that makes sense to them, it can make them more likely to think about the brand and the actual development process that created the product they are enjoying. In this way it can give the users a very unique view into the development process behind the games they like.

In order to avoid users defaulting to a completely free download – even though the zero price point has not been proven to be the average as you may think – there are variations where a minimum price, or even a maximum price is set. In certain cases paying more even gives an advantage similar to the in-game purchase system with social games, through which you receive additional content, for example new levels or merchandise.

However, allowing customers the freedom of a Pay What You Want system cannot be expected to work with every kind of product or business model. On the contrary, it can only be successful in cases where normal pricing models fail to work. This especially applies to digital goods and video games, where the marketplace is highly competitive, the relationship between buyer and seller is very strong, the product is characterized by very low marginal costs and where the actual content detaches itself further away from the physical medium, which is an inevitable trend inside the video game sector which we have been witnessing over recent years.

This alone would not prove to be a problem since digital distribution helps to cut costs on the developer side, but the fact that most game development expenses are incurred during the content production process the increased chance of digitally available video games being pirated has led to huge losses for publishers still using traditional pricing models.

Most publishers try to solve this problem by pumping more and more money into advanced and complex copy protection systems. However, even with all of the resources and effort put into this endeavor no such system has proven to be uncrackable. Most indie developers are aware of this problem and try to get around by offering DRM free games and by relying on a rather supportive pricing system, the PWYW.

The idea behind PWYW has its roots in the "Gift Economies" of ancient times where goods and services were provided in exchange for something of equal value. Today in the indie game scene you now have this system where you basically ‘donate’ money to the developer. The amount spent can be described as the level of gratitude to the developer for providing a good game or the loyalty towards that developer or game series.

Some developers even see PWYW as a contribution to the general public. Some developers have came to the realization that video games are a cultural product which not all people in society can afford, so piracy can’t be avoided. Instead of fighting this, games on a PWYW basis give these players the possibility to play games which they might otherwise be wary of spending up to ¥5,000 to purchase, especially considering oftentimes these are games they have never heard of.

The advantage – highly profitable

So could indie developers be seen as fighters for a social wealth re-distribution system? This may be a stretch for some, but most companies also see the (capitalistic) advantage of the model. PWYW has already been proven to be financially successful even in a competitive environment, together with (or rather due to) providing help for the socially less well-off.

In 2007, when Radiohead made headlines across the world with the release of their album ‘In Rainbows’, it was not only the band and their music which started to gain such media attention, but also the fact that the band chose to go with a PWYW system. The system worked out very well for them, allowing the band to sell 1.2 million copies on the first day alone, and with an average contribution ranging from $2 to $8.  In total the album made an amount equaling more than the sales of three million full priced copies, meaning the PWYW sale was more successful than the normal release of their previous album.

However, besides the enormous promotional effect created by the PWYW system – an asset which should not be underestimated considering the effectiveness of viral marketing and social media – a study revealed, that PWYW can provide even more earnings by adding a slight twist to the common plan by telling customers that half their voluntary payments would go to charity.

In short the findings of the study revealed that most people were willing to pay much more money – due to the belief they were doing something for the greater good – when PWYW was linked to charity donations than they usually would with only a free-to-pay system. In the later case product makers were not always able to cover costs, but with a system linked to charity they could even make profits, specifically due to increased sales numbers.

This proves that many customers are not soley thinking ‘I just want to get stuff for free’, and that by successfully connecting to your fans you increase the chance that they will feel urged to support you financially.

However, one important fact discovered was that – as mentioned above – an advantage can only be yielded if transactions and distribution costs for digital goods can be minimized, i.e. through merchant sales systems, and if the process of purchasing the product is simple. For video games the ideal situation basically means downloading the game should only be ‘one click’ away. A complex user registration or the use of secondary download clients often drives away potential sales.
On top of this, the last key element essential for potential success through a PWYW system lies in the effectiveness of word of mouth exposure.

Sales and the communal support of (free) video games in the West

The effect mentioned above is also being used by many of the well-known inide video game makers in the West. The most famous example is the The Humble Indie Bundle, which is a special package of games from various featured developers, created by Wolfire Studios boss Jeff Rosen.

However, the first notable case of a video game developer using a PWYW system was 2D Boy. After one year of modest traditional fixed-price sales of World of Goo, after only one week of converting to a PWYW system the title sold 57,000 copies with revenues of around $100,000. Even though many people only paid one cent, many people paid around $10-$11 for the game. Moreover the promotional effect led to more sales on other platforms such as Steam or Wii for either reduced or full price.

At the time I am writing this article, the sale of the 10th Humble Bundle just finished, with over 80,000 sold copies of 3 games created over the course of the event, with revenues of more than $450,000 and a highest single contribution of over $2,000.
The special point about the Humble Bundle is that it is not only a simple PWYW system, but the user can actually choose how to divide their contribution between the developers, a child's play charity fund and a ‘humble tip’ (money which is used to cover the costs of bandwidth and development of future bundles).

Since the Humble Bundle first came on the scene, the system they pioneered has inspired various clones, such as the Indie Royal, a place where people can purchase indie game bundles on a PWYW system on a regular biweekly basis, or the new indie gala which takes the aid system described above to a new level.

The Pay What You Want system also has another offshoot in the West: Funding.

Funding takes the support system of PWYW a step even further, into or even before the actual development of the video game. It often works in steps where players can contribute to the development through a donation a certain amount, for example $5, $25, $100, $500, or $1000. In exchange, depending on the level of contribution the player not only receives the full version of the game after development is completed but also an additional reward reflecting how much they have donated.

While these rewards are set by the developer and there is therefore a lot of deviation in options, the player is free to choose how much he’d like to get involved in the development or which rewards he would like to receive.

These rewards can range from limited/exclusive physical merchandise like T-Shirts, statues, original game settings, costumes[1]or oil paintings, to getting a mention in the game’s credits or even the ability to co-create certain content for use inside the game, i.e. naming characters or deciding about the story elements. There are even cases where any fan who donates past the maximum amount is flown from anywhere in the world to have an all expense paid dinner with the development team!

Generally speaking there are no limits to how much a player can contribute to a game’s creation if there are worthwhile support systems in place. It very much depends on the amount every player is willing to contribute. And let’s be honest, who doesn’t want to see their name show up in the credits of one of their favorite games?

In the West the most notable crowd funding sites are Kickstarter, 8-Bit Funding and Indie Gogo, with Kickstarter being the most successful and 8-Bit Funding still struggling to find its place.

But even Japan has jumped aboard the PWYW and funding train. While video games are still not available on Campfire, the video game distribution website PLAYISM has recently begun to offer a pay what you want system for their indie games, such as popular western title TRAUMA.

A strategy for the future!/?

The large question mark looming over the PWYW and funding movement is whether it is viable over the long term, and whether it can produce enough income to cover all development related costs.

Since the system has already found imitations among different developers it has become much less newsworthy, a vital point that helped lead to enormous success when these business models first hit the scene. As a result it is likely that other developers and organizations are currently planning similar deals for their future titles.

If a PWYW system is implemented in a clever and unique fashion it can become the base for a strong marketing strategy by drawing attention to otherwise unknown developers and titles. It can reach players minds and revive the sales of older games. However, with the number of small studios still increasing and the current trend of setting up funding and PWYW systems become more popular it is becoming ever harder to catch consumer’s attention amid this new busy market. So the ship may have already sailed, although it is still too early to tell.

However, it is easily conceivable that developers and publishers not only in the West but also Japan can leverage the positive effects of PWYW by including slight variations into the system, for example setting up different minimum prices for different days or all time donation / funding systems with special advantages. And I am very sure that the indie game industry will come up with another irresistible offering very soon.

[1] During the last Kickstarter project of the in the West popular Octodad series, donators could pledge a custom tailored costume of Octodad, the hero of the indie game from developer Young Horses. (see picture above)