Two-Part Tariff, meet MMOGs

While at the GameOn Finance event in Toronto, I found myself in an interesting conversation about ways to maximize the revenue generated by MMOGs. I found it difficult to fully express my thinking on the matter at the time, so during my flight home I wrote this post. Consider it a sneak previous into my upcoming IGDA Leadership Forum lecture on MBA Lessons applied to the game industry. 🙂

One of the concepts I learned in business school was the “two-part tariff,” which is best explained through a simple example that we’re all familiar with: a nightclub. Most nightclubs generate the majority of their revenue from the sale of liquor. Why then do some of them also choose to charge a cover fee? Doesn’t that turn away potential customers? Well, part of the reason is simply to “keep out the riffraff,” but bouncers at the door can (and generally do) already reject anyone who looks like they won’t be a valued customer. Part of the reason is to project an aura of quality and/or exclusivity, but again, a velvet rope and an obstinate bouncer can already accomplish that as well.

Two kinds of customers

The third major reason for a cover charge at a nightclub is revenue maximization, pure and simple. Here’s the underlying rationale: nightclubs basically have two kinds of customers. One kind buys a lot of drinks (the especially valued customer buy a lot of the most expensive drinks.) The other kind buys one drink and nurses it all night, or even — heaven forbid — just a glass of water. Both kinds of customers are attracted to the nightclub because it offers music, attractive people to dance with, etc. Both kinds of customers clearly value the experience. But only one kind of customer will be profitable for the nightclub. Sound familiar?

So the nightclub does a very simple calculation. It asks, “what is the experience of being here worth to most people — or more accurately, just enough people that I can easily fill the place each night.” That estimate of worth becomes the cover charge. It extracts at least some revenue from the people who want to enjoy the nightclub but have no intention of paying if they don’t have to. The other customers — the ones who are likely to buy a ton of drinks — are not dissuaded by the cover charge because they already know going in that this is going to be an expensive experience for them. What’s five or ten more bucks at the gate?

Entry/Subscription fees and microtransactions are not mutually exclusive

It seems unfortunate to me that despite the existence of this very classic pricing example, many game developers seem to think that microtransactions and entry/subscription fees are mutually exclusive. But I’d argue that our industry’s equivalent of the “popular nightclub” — aka an MMOG with high production values and either A) strong IP and/or B) tremendous buzz — can take advantage of both. The thought process is the same for nightclubs and MMOGs: “how many people do I need to attract to make this an exciting environment for everyone to be in, and how much can I get away with charging as entry/subscription fee while still reaching that number?” Of course, that doesn’t mean you need to charge right from the get-go; there’s always the possibility of a free month’s trial (or something like that) to help build critical mass.

Maybe the subscription fee is $9.99 a month. Maybe it’s just $1.99 a month. The amount depends on the MMOG. And for many MMOGs, it’s clear that the amount is “zero.” There’s simply too much competition for customers in this space, and the competition is only going to get hotter over time. But for those MMOGs that can potentially justify a non-zero tariff, the truly important thing to remember is this: you can always drop price. Raising it is MUCH harder. If your experiment with a two-part tariff fails, eliminate the tariff. You might have lost a little momentum building towards critical mass, but odds are the delay won’t prove to be a critical error as long as the tariff itself wasn’t insultingly high to begin with.

Will it offend players? Not if handled correctly

The major objection to my argument seems to be that “people who pay a subscription fee will be offended if some players can pay to get an advantage.” It’s not clear to me that this is true, but let’s take for granted that it is. There is still a whole host of things you can sell that do not convey any sort of strategic benefit in game. Call them “status items” and “gifts.” A really cool-looking outfit, or virtual flowers. Or perhaps even an in-world home.

Now, it may be that an existing MMOG (like World of Warcraft) may not be able to institute microtransactions after the fact, because it has been around long enough that players have developed an expectation for “how the world works.” But a new MMOG faces no such preconceived notions. And if said “new MMOG” happens to be, as I mentioned, a likely equivalent of the “popular new nightclub in town,” the developers of that MMOG absolutely should consider a two-part tarriff revenue model.