Understanding Game Economies: Insights on Free-to-Play Models

Free-to-play (F2P) games have revolutionized the gaming landscape, and this article delves into the reasons behind their success and how you can implement strategies to enhance game performance. We will also unpack what F2P games entail and the metrics used to evaluate them. Even seasoned developers may find new perspectives and metaphors to add to their toolkit.

Here’s a glimpse of what’s to come:

The significance of retention as a primary metric for long-term viability
An introduction to the Live Games Trinity—a model advocating for consistent content updates, live events, and strategic merchandising
The concept of economic voltage in F2P games and techniques to enhance revenue generation
Analysis of the power law distribution in relation to player engagement and spending, including previously undisclosed data from my experience in game development

This article is the third in a series discussing game economies. The first part explored the evolution of game economics, transitioning from arcade machines to a model where live game services account for over half of the industry's revenue. The second part examined the rise of digital collectibles influenced by non-fungible tokens (NFTs) and their implications for gaming.

From Underdog to Industry Leader

Over the past decade, many developers dismissed F2P games as legitimate gaming experiences. Critics argued that games should be standalone experiences without real-money interactions (presumably forgetting the history of arcade gaming). While narrative-driven games have their place, the data indicates a clear preference for the F2P model. Currently, it accounts for 78% of the gaming industry's revenue, with projections suggesting it could reach 95% by 2025.

The Mechanics Behind F2P Success

Early skeptics overlooked several advantages of the F2P model:

Accessibility: F2P games allow anyone to join and later contribute financially once they find enjoyment in the game, significantly widening the audience. Even non-paying players can enrich the community.
Community Engagement: Players often view games as hobbies, leading to increased involvement and spending on customization.
Alignment with Service Models: Players benefit from a consistent flow of entertainment and content, incentivizing developers to keep providing it.
Monetization Efficiency: Typically, the more players engage, the more they are willing to spend, leading to higher revenue potential.

Introducing the Live Games Trinity

Instead of viewing live games as static products with infrequent updates, consider them as ongoing programs akin to a TV series, complete with a regular schedule.

This approach nurtures community engagement by offering activities, narratives, and cooperative or competitive events. It creates a cycle of social interaction and revenue generation, where resources can be reinvested into new content.

I will elaborate on how to implement the Live Games Trinity to enhance F2P games shortly, but first, let's explore the financial and economic principles that underpin these games.

Key Financial Metrics

Focusing on internal game operations, the following metrics are essential:

Retention: This indicates how long users remain engaged, often referred to as “dX” retention, where X represents the number of days since registration. For example, d30 retention at 10% means 10% of players are still active on day 30.
Engagement: This can be measured through metrics like average session length and the average number of sessions per day, providing an overview of daily playtime.
Conversion Rate: The percentage of players who transition to paying customers.
Daily Active Users (DAU): The average number of players engaging with the game daily.
Average Revenue Per Daily Active User (ARPDAU): This is calculated by dividing total daily revenue by the number of players, which can vary widely between different games.
Lifetime Value (LTV): The average revenue generated by an individual player over their lifetime.

Prioritizing Retention and Engagement

If retention declines early, monetization efforts will fail. Players typically do not return after long absences. While retention is crucial, engagement determines the revenue potential.

Focusing on revenue too soon can lead to suboptimal outcomes, mathematically referred to as optimizing a local maxima. The ultimate goal is achieving a "global maxima" for your game.

This principle is straightforward: businesses operate within a system of constraints, and monetization ceases if players are no longer present.

The Value of Attention

While time isn't directly convertible to money, attention certainly is. Most games are designed to transform player engagement into revenue. Even premium games, which charge upfront fees, benefit from downloadable content (DLC) and sequels driven by initial player engagement.

For instance, data from a previous game I managed shows varying session counts among different customer tiers:

It's evident that the top 10% of paying players logged nearly 60 sessions daily. This raises a question: do paying players engage more, or are engaged players more likely to spend? Research indicates that people tend to engage more after making a purchase, but my experience suggests that high engagement is a prerequisite for significant spending, not merely a consequence.

Economic Voltage Metaphor

In physics, voltage represents the force that drives electrons through a circuit. Similarly, games possess their own form of voltage, manifested through gameplay loops. The Live Games Trinity is essential for generating this voltage.

Players encounter monetization opportunities—whether purchasing currency, upgrading characters, or watching ads—creating the economic voltage of the game. This concept aligns with the economic notion of money velocity, but I prefer "voltage" as it encapsulates the pressures and incentives to transact during gameplay.

Like electrical voltage, this economic voltage varies over time. Many games exhibit a typical pattern:

In this scenario, players:

Monetize early
Continue to contribute to revenue at declining rates until they are no longer engaged

The daily ARPDAU reflects the cumulative economic voltage of all players at any given time. Once a player exits, their economic voltage ceases, ending their revenue contribution unless they engage with new offerings.

Sustainable games typically maintain long retention and generate greater economic voltage throughout a player's journey.

Understanding Power Law Distributions

When discussing LTV and ARPDAU, many developers overlook the importance of understanding individual player journeys. Focusing solely on averages can be misleading.

Free-to-play games often demonstrate a power law distribution, where a small number of players contribute disproportionately to overall revenue.

The implications of this distribution include:

Averages can obscure significant variations among players' spending habits.
There is no upper limit on potential LTV; mathematically, it can be infinite.
A small subset of players often generates a large share of total revenue.

Here's actual spending data from one of my games:

In this case, the top 20% of players accounted for 75% of revenue, with 24% coming from the top 1%.

Reevaluating Whale Hunting

Some mistakenly conclude that F2P models revolve around "whale hunting," a term I avoid due to its derogatory connotation. Here are more constructive insights:

Non-paying players are valuable: They contribute to the community and enhance the experience for paying players. Losing them can disrupt the community dynamics.
Long-term engagement is crucial: Mechanics that promote sustained involvement are vital for a game's longevity, fostering a sense of community among players.
Avoid capping spending potential: Instead, focus on creating a rich catalog of items that players can purchase, as this will increase LTV and facilitate user acquisition.

The Role of Scarcity

The foundation of a successful F2P economy is scarcity:

> Scarcity describes the fundamental economic issue of limited resources versus unlimited wants.

Scarcity enhances the gaming experience by providing players with a sense of achievement when acquiring rare rewards or experiences. This concept also plays a pivotal role in generating economic voltage within the Live Games Trinity.

In F2P games, scarcity can manifest in various forms:

Highly sought-after items, rewards, and currencies
Exclusive experiences
Access to advanced game areas or storylines
Recognition as a top player
Membership in elite teams or guilds
Unique player customization options

Categories of Virtual Items

In F2P games, virtual items generally fall into two categories:

Currencies: Function similarly to real-world currencies, serving as a store of value and means of exchange. They can be acquired through real-money purchases or earned in-game.
Items: Encompasses everything else, typically offering benefits to players.

Attributes of Game Items

Key characteristics that define game items include:

Utility: Items provide practical benefits, such as increased player power or access to exclusive areas.
Affinity: Some items are valued for aesthetic or social reasons, regardless of their utility. Players may prefer items that resonate with their personal style or character attachment.
Scarcity: Items often come with limited availability, either through progression requirements or set drop rates.
Value: A function of supply and demand that determines what players are willing to exchange for items.

Other important properties impacting utility and scarcity include:

Path to Acquisition: How items are obtained can range from challenging quests to common starter items.
Transferability: The rules governing whether items can be traded between players significantly influence the game's economy.
Cooldown and Charges: These dictate how often and how many times items can be utilized, affecting their strategic value.
Duration and Progression Requirements: Items may expire after a set time or require players to reach certain levels before use.

Enhancing Economic Voltage Through Events

Returning to the Live Games Trinity, let’s focus on the significance of events. They can significantly boost player engagement and revenue, often increasing ARPDAU by 2-3 times.

Events introduce scarcity in various ways, including:

Unique storylines that provide fresh content
Distinct game interactions
Special items that are more accessible during events
Adjusted item power levels
Specific item or character requirements

Capitalizing on Engagement Through Merchandising

While events drive engagement, it's crucial to create monetization opportunities to sustain ongoing content development and future events. Strategies may include:

Event currencies that reward participation with valuable items
New content tied to storylines or character updates
Limited-time offers that enhance the event experience
Personalized offers based on players' behaviors and preferences
Alternative currencies for specific activities
Opportunities for non-paying players to engage through ads
Systems that reward loyal players with special perks

Currency Types and Inflation Management

Lastly, it’s essential to discuss inflation in F2P games. Effective merchandising requires a well-structured system of currencies and items to promote engagement and prevent devaluation.

Most F2P games operate within inflationary economies, where currencies and items are plentiful. This necessitates controlled exchanges between players to maintain value.

A dual-currency system is common, differentiating between "soft" earnable currencies for mundane purchases and "hard" currencies for premium items. Event currencies, tied to limited-time events, offer inherent scarcity and help reset the economy.

Successful games often incorporate numerous currency types to drive specific behaviors, including:

Social currencies for inviting friends
Guild currencies for cooperative play
Inventory-limit currencies to control inflation
Energy currencies to limit repeated actions
Feature-specific currencies for various gameplay styles
Salvage currencies for item disposal
VIP currencies for benefits tied to real-money purchases

Moreover, many perceived game mechanics (such as levels and scores) can function as currencies themselves.

Sustaining Content Creation

The Live Games Trinity facilitates sustainable growth through regular content updates and events, generating ongoing revenue. By establishing a seamless content creation process, developers can maintain player engagement and foster a thriving game economy.

Further Exploration

The Live Games Trinity is an extensive topic, and I plan to revisit it in a future article, diving deeper into methods for creating sustainable games. If you’re managing a live game, consider how to drive engagement, leverage scarcity, and enhance player retention. These efforts, paired with a commitment to continuous improvement, will yield loyal customers and increased profitability.

If this article piqued your interest, you may also enjoy:

Game Economics, Part 1: The Attention Economy - An overview of the historical evolution of the gaming market.
Virtual Items and the Creator Economy - Insights into the growth of games with item economies.
Types of Currency in Mobile Free-to-Play - A comprehensive analysis of currency systems in F2P games.
The Only Growth Metric That Matters - A discussion on the critical importance of retention.