Regs & Subs: MMOG Business Balance

A comment on the last GameIS conference about the conversion ratio of users from Registering to Subscribing and paying, sent me thinking:

Naturally most subscription-based game services would like to maximize their revenues, traditionally originated from subscription or from virtual items sold to players.
But there is another type of revenue that multi-player games look at, that is obtained from the non-subscribed users, which are often the majority of the players, especially in browser-based games.
The users registered for the free portion of the service also provide a great value to the player community, that eventually translates to more subscriptions. In some cases, they also provide indirect income through ads.
This, however does not come in free. There are costs associated with such users that must be weighed against their value to the game revenues.

Below I will try to analyze some of the facets of this important balance.

Parameters and Dependencies

The number of subscriptions depends, among other things, on setting a reasonable price to the service, that balances the value that the users feel they get from the game. The number of registrations depends, among other things (such as marketing and exposure) on a minimal value that can be obtained (or thought to be obtained) simply by registering, but if THAT value is too high, you’d start losing on the subscription rate again as most players think: Why would I pay to get something just marginally better than the free service, if the free service is good enough?

Now as with all good balancing, let’s try to see if we can formulate our intuitions using some pseudo-math.

If S stands for the number of subscribers and R for the number of registered users, we can then define the following functions:

V(s), V(r) -Imaginary quantifiers for the value that the subscribers and registered users obtain from the game. Note that for most multi-player games, these functions are not linear but rather represent a growing marginal value: the 100th player is probably entering a more interesting game than the 10th player, and the the n+1 player obtains a greater value from the game than player n.
However, the rate of the increase lowers with the number of users: the 11th player improves the game to the 10 other players by much more than the extra value generated by the 10,000th player.

P(s), P(r) - The prices users are required to pay for the level of service. Regardless of initial intuition, P(r) is NOT zero because, for example, users view the mere issue of giving their subscription details as a price they have to pay. P(s) usually equals s*P(1), although sometimes veteran players receive discounts etc, which are usually negligible in the overall calculation.

These two parameter groups cover the user’s point of view. For the service provider’s point of view, let’s use:

C(s), C(r) - The operating costs per s subscribers and r registered users. The marginal cost C(s)’ can be different from C(r)’ if a subscriber is entitled to or is using a more expensive customer support.

R(s), R(r) would reflect the revenue value that the game provider can relate to from their point of view. Revenue from subscribers is usually monthly fee or average virtual-item purchase. Revenue from registered users is often commercials and also their added value to the community (user-to-user support; increased interest in the game and increased perceived value of the game).

Finally, let us also remember that (almost) every business has
F – Fixed costs that do not depend on the number of customers, services provided or products sold.
Now let’s see what we get:

The Profitable Solution

In order to become profitable, the following must happen to the business:
F+C(s)+C(r)< R(s)+R(r)

Let’s turn to look at other ideas that we can formulate:
In order for users to join the service we would expect:
V(s)’>P(s)’ and V(r)’>P(r)’ (The derivative sign ‘ reminds us that each user is to his own: he or she only cares about the value they receive at the time of joining, against the price they pay for joining.

This means, that One way to keep users coming is to increase the value they receive, and the other way is to decrease the price they have to pay.
Let’s take a look at the first registered user in the system: the value they receive is minimal – there is no community to play with. What could drive them to join? Perhaps curiosity, perhaps a promised prize reward. Unless your game has tons of interesting and surprising content, curiosity will only take the user so far, and once it’s gone they would expect to have their value generated by something else. This is also why not only the overall number of subscribers is important, but also how quickly they subscribe one after the other.
Once the game is further along, the value new players receive is increased “automatically” provided that the number of active players is increasing. once it starts to fall – the value received by new subscribers also falls.

Another way to improve this difference between Price and value is, of course, to decrease the price users are asked to pay for the game. This can be done by reducing the asked price for the service, but that option must be used carefully, because decreasing the price also sometimes decreases the preceived value. The better option in many of the cases is to lower the other barriers to joining into the game, for example by simplifying the registration form.

Balancing Regs and Subs

So, what can we say about the balancing of r and s?
Let’s fake an example:
A game has 10,000 players, of which 100 are subscribed.
Let’s assume C(s)’=C(r)’=Constant (so operating costs are F+C(s+r)
campaigning to increase the number of registered users r by 10% would then increase C(s+r) by almost 10%, which means that R(s)+R(r) must also increase in at least that much.
But since the increase in the number of users triggered an increase in the value the users obtain from the game,  V(s)’-P(s)’ increases, which encourages even more people to register and subscribe.

But how much value does player n adds to the game when he joins?  This certainly differs from game to game, but I think it’s only fair to assume that the answer is of the type d/n, with d as a value that represents the dependency of the multi-player game in the number of users. For games that contain a lot of single-player value, d is smaller and for games that depend a lot on the user number, d is larger.

Due to the decreasing nature of the marginal value of more users, and assuming the game on its own had some value even without players in it, let’s assume for now that the increase of 10% in the number of users spells a 5% increase in the value the game presents to users.

This means that for a 10% increase in the costs, we got a 5% increase in the value for users. This step probably involved promotional costs P:

If previously the formula was maintained:
F+C(s1)+C(r1)< R(s1)+R(r1)
then now we must make sure that the following one is maintained:
F+P+C(s2)+C(r2)< R(s2)+R(r2)
or, applying our assumptions for this case, we would want:
F+P+1.1*C(s1+r1)< R(s2)+R(r2)
We know that R(r2)=R(r1)*1.1*1.05 (1.1 is the factor for the number of users and 1.05 the factor for the game experience improvement).
Now, it is also likely to assume that we would enjoy similar conversion rates to those in the past (if not higher due to the increase in the value), so R(s2)=1.1*R(s1) and we get:

Was the promotion a good move? Only if:
Let’s use the number of users from the example, then roughly:

It is easy to see that if we keep registered users “fund themselves” (e.g. if the viewed commercials pay for the extra server and customer support costs), then we can plan any promotional step that is guaranteed (by applying the current conversion rate) to provide more income from users than the costs of the promotional campaign.
But what if customer support is expensive? this means that the registered users might actually have a NEGATIVE value to the system which the subscription costs will have to overcome. This will also make fewer campaigns viable, and risk the growth of the entire game. This is exactly why whenever possible, the game should be fool-proof and customer support should be provided by the community if possible.

Thus, simplifying the game helps in two fronts: It keeps the barriers to joining the game low, and it keeps the game’s ability to grow (which later on will drive itself) – possible.
This does not mean that complex multi-player games can’t exist – they can, if customer support can be easily delegated to the community, and if the game has a strong standalone value, that can support the game in its early days before the critical mass required to generate enough value for more users to join, is formed.

In the future, I might expand on this using several real-life case studies.

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3 Responses to “Regs & Subs: MMOG Business Balance”

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