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Being where we are and doing what we do, developers often come to me and ask for advice on pricing their In-App Purchase Store Items. And I believe this is a very important challenge for freemium games. On one side, if you price too high, people might not buy your digital products. On the other, if you price too low, you will not be earning as much as you can.
What’s your Target ARPU?
The first question I always try to ask myself is what will be a good target ARPU. What average revenue per user will be considered a success? There are a few ways to go at it:
- What do you think your game is worth to the average user? Is it worth 25 cents, 50 cents, $1, $5 – that’s a good indication of what you should be aiming for.
- What ARPU will allow you to spend money back on user acquisition? The cost of advertising when divided by the number of new users is often considered the customer acquisition cost (CAC). This cost ranges between $0.5 and $2 depending on the location of the user but if your game is social and viral the new users will bring more users and will reduce the effective CAC. If your ARPU is higher than your CAC, you can scale your game quickly.
- Who else is taking a cut in your revenue? You are probably giving 30% away to Apple and Google. If you find a way around that, please share it with us :-). Is there anyone else? Publisher? Service Provider? If you do, you might need to increase your ARPU to maintain operational margins.
Your Purchase Ratio
How many of your users will end up buying? This is your conversion ratio or purchase ratio. Most games get between 0.5% and 5% of your users to purchase. This depends on many factors but usually grows if your game is well recognized and if users play it for a long time.
Using the Target ARPU and Purchase Ratio as a Benchmark for Pricing
I’m going to explain this one with a few real-life examples from the developers working with us.
One developer came to me when his initial thought about monetizing his game was to sell an extra level pack for $1 and remove ads for another $1. Down the line, he said, I’ll make more level packs and will sell them for $1 as well. Let’s do the quick math on this one, assuming he will make 4 different level packs: The maximum amount he can earn from a user will be $5 but the average will probably be more like $2. Let’s call this one the Average Revenue Per Paying User (ARPPU). With an ARPPU of $2, even if his game is able to convert a whooping 2% of the users, the ARPU will reach only $0.04. If this developer would have tried to figure out his target ARPU – $0.04 is not the number he would have returned with – not in a million years.
Another example is from a developer who thought about selling a “Save Me” cheat in a platformer game. Cheats are very dangerous in F2P games, as they can become double edged swords. If you let users buy cheats too easily, the game will become too easy and users will lose interest in your game. His thought about selling the “Save Me” was to sell a pack of 25 for $1. My argument was that if someone buys a pack of 25 “Save Me”s, that will be the last thing he will buy in the game. The game will simply not be challenging enough with so much cheating power. If this is true, then the ARPPU is $1 and even with a maximal conversion ratio of 5% the ARPU will only be $0.05. This is not what his game is worth.
Pricing to Reach a Solid ARPPU
The solution to the pricing challenge actually depends on the actual game. You should start by calculating the Target ARPPU. If your want to reach a $0.5 ARPU and are expecting a 2% conversion ratio, your average paying user will need to pay $25 which means that some of them will pay as much as $50 (yes, that happens – get over it). Start by playing around with a few options, test them with users before launch and see what makes sense, while using the Target ARRPU as your benchmark. Here are a few things to keep in mind while you do that:
- Single Use Items and Energy mechanics help make the game more addictive and create a base for a stream of purchases
- Upgradable items that have levels can give users a sense of progress that leads to multiple purchases
- Balance the power of the items you are selling against the difficulty curve
- Make the user think about his options – never allow a user to get enough coins to buy everything
- Repeat #4 for paying users. As odd as it may seem, paying users will get bored if they can buy everything.
This article was originally posted and featured on the SOOMLA blog.