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Hodgson Blog

Microtransactions – The Business Model of the Future

Mar 17, 2011 by Steve Mallory

Ever been given a deal that claimed “Free to sign up!”, only to realize a couple of months later that you actually ended up spending a total of $100 on various optional features? If you have, then welcome to the future of internet business. It’s amazing how psychologically effective it is to claim “free to sign up—no obligations” before filling up your business model with a million little ways to monetize. Nothing embodies this better than the world of MMOs (Massively Multiplayer Online games), one of the most notable and addictive fads of the internet generation.

We’ve all heard of World of Warcraft . . . (Ahem, yes, you have! Stop pretending! I’m sure at least oneof your family members or friends has been playing it ad nauseam.) This game has one of the largest followings in the history of computer gaming (12 million subscribers as of October 2010) and is based on a simple, straightforward and apparently very effective business model: steep monthly fees for those interested, end of story.

Now imagine this: a friend tells you that there’s a new game out there, and it’s better than World of Warcraft, AND it’s free to sign up. Perhaps you’re not really into online games, but you give it a try anyway thinking, “It’s FREE, after all.” Then you realize that there are myriad little features, perks, abilities, items, skills, locations, services, etc. that you really want, but they all carry a modest price tag. So, after much debate, deliberation and attempts at self-control, it inevitably starts: $1.99 here, $4.99 there, $1.99 again, $9.99 for the holiday exclusive content, and so forth. By the time you’re done with these microtransactions, you realize the company has just sold you a product you initially valued at $0, but which gradually proved its worth to you in small (dare I say “barely noticeable?”) increments. It certainly doesn’t help that you are often purchasing these features and perks with an intermediary currency (points, credits, or something to that effect) that masks the real $ value of your in-game spending.

This business model can apply, of course, to many account-based transactions in the real world (i.e. that place you inhabit when you’re not playing online games). Companies that offer free products / services are simply clever about getting their foot in the door, and they often follow through with constant incentives to purchase additional, dirt-cheap (but not free) features. Consumer psychology dictates that you’ll be much more likely to make twenty subsequent purchases of $2.99 over a month, than you’ll be to make one purchase for a flat fee of $60 (think of the ubiquitous Starbucks cup of coffee! Is it worth that much per month??). Throw in a system of buying bulk “store points” or credits that in turn are used to buy actual features, and you just may have convinced your customers to buy things they never really knew they wanted!

Microtransactions might sound like disingenuous salesmanship to some (true enough!) and a model abused by many charlatans out there in the online world, but they can also be the smart way (and sometimes the only way) to prove the true worth of your product to an audience of desensitized and ever-pickier consumers.

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