[Editor’s note: Vijay Chittoor is CEO of Mertado, a startup that offers real-world merchandise within social games. He was previously director of product management at Kosmix, and worked as a consultant for McKinsey.]
By all estimates, U.S. social gaming revenues are growing robustly and are expected to reach $1.25 billion by 2011. However, individual game developers still monetize an average of only one to three percent of their audience through virtual goods.
As a result, alternative monetization techniques have been developed for non-paying users — primarily advertisements and promotions linked to virtual currency (including offers, surveys, cross-promoting other apps, etc.). But these have historically come at the expense of reduced user engagement.
All of these traditional methods involve clicking on an ad or an offer to go to a third party website or app, taking users away from the game experience. The best offers have a conversion rate of around five percent, i.e. 95 percent of offer clicks take users away from the game without adding to revenues.
How can game developers enhance their monetization beyond direct payments without losing their users? A few recent solutions have started bridging the gap between game engagement and monetization. These solutions not only keep the user within the game, but also add to engagement by speaking the language of the game:
- Branded virtual goods: McDonald’s recently sponsored Farmville’s first branded farm, which users could simply click to earn virtual currency. This provided instant gratification for the user, great branding for McDonald’s and, most importantly, a great new way for Farmville to engage and monetize its user base. A report by Viximo shows that branded virtual goods are currently a small fraction of game revenues, but projects the number will grow to $150 million in 2013. Not only do branded virtual goods attract 10 times the click-through rates of non-branded goods, they are also proven to increase brand awareness and purchase intent. Companies like Virtual Greats, Viximo and Playspan are starting to distribute these branded virtual goods inside games. I see a couple of different forms of branded virtual goods today:
1. Branded goods linked to real-world items: Some marketers are looking to drive sales through virtual goods, and to do so they often link the virtual good to the purchase of a real world item. In another deal, 7-Eleven partnered with Zynga to offer branded virtual goods that get unlocked after users make a purchase at a retail location. Another example is Old Navy’s recent Black Friday integration with Crowdstar’s It-Girl.
2. Branded goods linked to brand awareness: Other marketers are not looking for increased brand awareness instead of sales, and in this case, the branded good is not directly linked to any purchase. An example is the McDonald’s farm mentioned above, or Volvo’s campaign around the use of virtual goods to create a “naughty” branding for the newly launched S60.
- Videos: Branded video content, distributed through offerings like RockYou’s Deal of the Day, is another form of brand advertising that can be particularly effective in monetizing games. The key idea behind these is to deliver the ad message though a video that can be embedded within the game, instead of taking users to a landing page outside the game.
- Contests within a game: While one way of increasing monetization is to get more users to become direct paying customers, an attractive alternative is to get the current set of paying customers to engage and spend more. BringIt’s platform for running contests within a game aims to do precisely that, acting as an additional currency sink inside the game. The entire contest experience is delivered in-game, and the contests can even act as a hook to bring users back to the game.
It’s clear that this trend toward monetizing games without taking the user away from the experience will eventually be paramount in successful social game monetization strategies.
There are also a few newer, more experimental monetization techniques. At Mertado, we recently launched an Embedded Shopping unit that offers a new way for game developers to monetize through e-commerce inside the game. Game users are presented with an offer to earn virtual currency or goods if they purchase the deal of the day inside the game; before they buy, they can view a video about the deal, read product details and complete the transaction, all within the game.
The merchandise inside the embedded shops can be customized to the game to some extent; for instance, if your game is themed around baking, the merchandise selection may include products like a cupcake maker, or if the game appeals to a fashion conscious audience, the merchandise can revolve around apparel and accessories. Post purchase, the embedded shops can also suggest ideas for users to spend their freshly earned currency within the game.
In the future, I expect that we will see even more methods of monetization that add to the engagement within the game:
- Bundling of real and virtual goods: Role-playing games and virtual worlds mirror many aspects of the real world, and that provides a great opportunity for marketing products that are contextually relevant to the game. In the future, I expect that we will see integrations where bundles of real and virtual goods are sold together to users: e.g., buy a real Wine Cooler to earn a virtual one in your game.
- Adding game context to offers: Today’s offer walls display the same offers to everyone. What if offers got unlocked only for players who have reached a certain level of game-play? For gamers this would be a great way to get recognition for higher levels of engagement. For brands and marketers, this would be a great way of connecting with a highly engaged audience and adding to the brand’s story.
- Users as brand ambassadors: Through the use of branded virtual goods, gamers would be in a position to act as brand ambassadors within their circle of friends. Games can reap rich rewards in engagement and monetization by enabling these interactions.
All of these methods will continue to make it easier for developers to create amazing gaming experiences that also monetize very well. By adding these new options for monetization, developers can potentially expect to double the percentage of monetizing users.
A lot of this analysis has focused on the U.S. market, and I am curious to see how these trends play out internationally. China is one of the biggest virtual goods markets, and it’s interesting to compare advertising spend in China to the amount of money spent on virtual goods. China’s online advertising market is estimated to be $3.7 billion, which is smaller than its virtual goods market at $5 billion. This is in stark contrast to the United States, where the virtual goods market is much smaller than the online advertising market size of $25.8 billion.
Because of this difference, direct methods of monetizing gaming users might continue to prevail in markets like China over methods that rely on brand advertising or direct response for real goods/services. I would be very interested to hear readers’ opinions on whether some of the new monetization trends emerging in the U.S. will become relevant in China and other international markets.