building expertise

I recently entered the Indy gaming market, a crowded market if ever there was one. I liken being an Indy game designer / programmer to being a first cut author, except without an entire publishing industry looking for hot talent. Imagine being an author and getting your first book put on Amazon for download, or included in an online store along with millions of other titles, many of which have name brand recognition, thousands or millions of dollars in marketing spend backing them, or a lower price point (free). Your book is new, it touches universal themes, the writing is solid, and the characters alive. Still, it is useless unless people see it and buy it. How is such an author to make enough to feed the family?

Similar to the author I describe, Indy game shops face a steep uphill battle to make a game profitable. In this post, I will walk you through the basic economics of game distribution, price points, revenue models, and the business side of game design. In future articles, I will expound on low or no-cost marketing initiatives, distribution methods, and design for cost and quality.

Revenue Models for Independent Game Shops

There are a variety of revenue models to pick from, all of which can make your game profitable. Each method has different pros and cons, and are generally not mutually exclusive with other methods. If you can reasonably include one of these methods with your game, then include it, even if other revenue streams are already integrated. I like to look at each model from the perspective of the question “How many (unique) users do I need to have before a game is likely to make a million dollars?”

Revenue Model: Advertising

Probably the most widely used today for small independent games, advertising is when you use an ad network of some form and include it in your game. You can run ads during load screens, between levels, at start up, and really any time you want to. The most well known ad network today is Mochi ads, which adds additional benefits to the game design team by distributing the game for you.

Benefits:

1. Ads are very easy to add and can boost your bottom line.
2. Ad networks may help distribute your game to many game portals (generally for flash only)

Downsides:

1. Some users are turned off by ads. If you throw in too many, you may lose customers.
2. It can be hard to charge for a game up front, and then force users to sit through ads. Some games have been burned by this recently, but it may come to be more accepted by the gaming populace over time.
3. Ads pay very little.

How does it pay?

Assuming you hope to make some cash from your game, lets see how ads work for payoff. Similar to ad supported web sites, you need a lot of traffic to generate any significant revenue, so your per-ad payout is going to be low. You can find published rates for CPM anywhere from $.05 per 1000 ads shown to roughly $1 per 1000 ads, though in actual experience you are unlikely to see a rate this high for any extended period. Across all games, the general consensus for average rate  is around $0.30 per 1000 impressions. This assumes a decent but not incredible game. This means you will need more then a billion players to break the $1 million mark on your game. That’s a lot of players. I have heard that using Mochi nets a game an average of 1 million plays, so a decent game can generate around a thousand dollars from advertising. One important thing to keep in mind is as the quality and popularity of your game increase, the expected CPM increases, and the value of each player increases accordingly. There are some games which can be supported purely on this model, but generally only the top 10 or 20 games in a year.

Revenue Model: Direct Sales

Direct sales ask a gamer to shell out up front for your game. Some recent successful examples of this method are Machinarium, which retails for $20 a copy. This nets you much higher revenue per player, but it is a lot harder to get a single player.

Benefits:

1. Higher upfront payout per customer
2. potential to generate a lot of revenue quickly

Downsides:

1. Generally requires high quality game play and play length to attract customers.
2. Distribution channels are more challenging. Options include through your own website, Steam, Amazon, or for some games XBox Live or PlayStation Network.
3. Requires a more extensive marketing effort to get the word out.
4. This model can be significantly harmed by piracy, as seen with other indy games with a 90-95% piracy rate.

Common around this strategy is packaging a Demo which is free to play and gives the player a good feel for the game. This means you actually need to sell two products to your customers – first a demo which they play and enjoy, and second the game itself. It is easy to leverage ad networks or other models with the demo to improve distribution and revenue from non-buyers.

How Does it pay?

This kind of sales can pay off very quickly if the game sells even decently. Assuming the $20 price point, you will hit your $1 million mark after only 50,000 game purchases. You can hit it faster if your demo is ad supported and does well. The main challenge with this strategy is in gaining distribution through third party channels, marketing the game, and convincing players to purchase instead of pirate your game.

Revenue Model: Micro Transactions

Micro transactions have been used for some time by game companies, even longer then most people realize. Micro transactions consist of selling pieces of your game to players over time, so their up front cost is lower or even zero. Players can be sold a variety of products including the game itself and expansions (the earliest form), additional game content such as expert levels or new areas, player items, fashion accessories for avatars, or virtually any game feature you can imagine.

Benefits

1. Players can consume your game with lower up front risk due to lower cost. This increases total players
2. There is typically a higher ceiling for player expenditure then with direct sales. A direct sale gives a max of $20 of revenue per player, but every time you add a new virtual good to the game, players increase their revenue potential.

Downsides

1. The game must be designed to support these transactions. If not, they will generally not sell well. This can be difficult, since you must provide value to both non-paying and paying customers without unbalancing the play ascpects too greatly.
2. Traditionally, it is difficult to successfully sell players items when not in a multi-player environment.
3. Some players are turned off by the idea of spending any money on in game items. This is known as the ‘penny gap’ where some players refuse to pay for anything no matter the cost.
4. If you use multiplayer, which is common in this model, ongoing server costs will dampen profits, and a large percentage (80-95%) of players will be non-paying customers.

How Does it Pay?

Studies have shown that paying players in these kinds of games are price insensitive, so you can charge sometimes significant amounts for certain items. Additionally, players which spend one time are also likely to continue to spend over the life of their gameplay, averaging around $30 per paying player. Unfortunately, many of these games have poor purchase rates, hovering between 1 and 5% of players being paying players. Thus, if we assume that you get 4% of players paying $30, it takes around 800,000 players to hit a million dollar revenue. Keep in mind that this is revenue, not profit. Since by nature this model assumes online play, you have additional costs for servers and support, which will detract from your bottom line. It is possible through good game design to change these numbers so a higher percentage of players are paying customers, and they pay more for the content, though that is another discussion entirely.

Revenue Model: Licensing

Licensing can be a rewarding model. You sell your game up front for big bucks directly to a game portal, distributor, or other third party, and make money regardless of how well the game does.

Benefits

1. Make money regardless of game popularity
2. It is possible to license to multiple 3rd parties depending on the terms of the agreement.
3. You may be able to use this model in conjunction with advertising depending on terms of the agreement.

Downsides

1. You lose some control over your game – publishers may request changes or additional features.
2. You are unlikely to be able to use certain other revenue models such as in game or up front sales.
3. Most license agreements are relatively low revenue.

How Does it Pay?

This model pays well if you have fewer views, and poorly if you have many. It is highly unlikely you will hit a million dollars with this model unless you make many high quality games. In general, licensing deals run from $100 to $10,000 at the very high end. This is not a lot when you consider salary costs for team members. The saving grace of this model is when you sell it multiple times and also distribute with an advertising model, or have a game which you don’t believe will make a lot in advertising.

Conclusion

Overall, there are a variety of revenue models to choose from. Most of these models rely heavily on the game design, and vice versa. It is wise to select a revenue model during the early design phase of a game in order to ensure the maximum revenue potential is achieved. Adding features to support one or another model at the end of thr project is likely to degrade overall game playability and under-perform from a revenue perspective.

All but one  of these methods share one thing in common: They don’t do well unless you have a lot of players. Players are mostly willing to pay for good entertainment, though you have to present a clear value model for them to make a decision. Competition is fierce for attention, so making a high quality game is still the best way to make a buck.