Monetizing software applications: Lessons from the games industry

Please note: As always, this is an opinion piece based on my current reading and industry understanding. It therefore contains no peer reviewed references and does not claim to be academic research in any way.

Just jotting down a few rough thoughts on the similarities of pricing strategies for games and productivity or non-entertainment based software applications. I am writing my dissertation based on this, and I am hoping that this will help me formulate my rationale better. I find having to express these thoughts in a one pager bullet list such as the below helps me focusmore. I also think it's actually an interesting subject and thought I'd share the rough ideas here from time to time.

Pricing Software

What lessons can be learned from montetization strategies in the games industry for pricing non-entertainment based applications? 

Evolution of application context

I believe both games and non-entertainment applications (NE-Apps) have undergone a similar evolution with the advent of the publically accessible internet. Both have moved through comparable stages:

1. Single Player/User, local installation, no connection, single user experience, but results may be shared outside of the application (e.g. sharing highscore screenshots or emailing office documents)
   
   
   • Games: Classic 8Bit and 16Bit era games
   • NE-Apps: Classic productivity suits (Office)
2. Multi Player/User, local installation, local connection, usage as well as results are share
   
   
   • Games: IPX LAN games such as Doom
   • NE-Apps: Workgroup collaboration on productivity apps
3. Massively Multiplayer/User, local installation, WAN connection, usage as well as results are shared
   
   
   
   • Games: MMORGPs such as Ultima Online, World of Warcraft, EverQuest
   • NE-Apps: DropBox filesharing and other cloud connected installed client based apps
4. Massively Multiplayer/User, purely cloud installation, WAN connection, usage as well as results are shared
   
   
   • Games: Facebook games such as Farmville, browser games
   • NE-Apps: Salesforce CRM, Google Apps, Social Media communication tools such as Twitter

Evolution of licensing / pricing

At the same time, monetization strategies have changed for both sectors. In broad terms these can be classfied as follows:

1. Single license purchase with once off payment, unlimited usage
2. Per user license with once off payment unlimited usage
3. Per user license with recurring payments (subscription), usage based on license
4. Pay as you go license with payments based on usage pattern
5. Free to use, but payment for features when they are used

Games are currently maturing to the fifth stage of the above, while NE-Apps are still focussing on stage four in their majority. Many successful games have embraced the "free to play" approach and montetize based on virtual item sales. The majority of NE-Apps have yet to make the jump to this model.

Arguments against Free-To-Use

NE-Apps arguments used against the free-to-play model may include:

• Subscription pricing is easier to predict
• Subscription pricing creates lock-in
• Free to use appears to lower barriers to exit
• Traditional Revenue management may look at free-to-use as a loophole for customers that would have paid otherwise

These arguments could have been made by the games industry, too. Infact, even many games industry actors have a hard time overcoming these fears today.

Counter arguments  for Free-To-Use

Those that do embrace stage 5 however have proven that they can make it work to their advantage. This is especially true for most of the social network based games such as Farmville or Free-To-Play MMORPGs such as Runes of Magic.

Arguments for free-to-play therefore frequently include:

• The social part of the experience is important, and free-to-play creates a much bigger usergroup
• Marginal price for one more user is near zero, so it may as well be "too cheap to meter"
• Subscription prices create too high a barrier to entry
• Users create lock-in by investing time and effort into an application rather than just money. Sunk costs are an accounting term used with a view to money spent. Sunk cost however rarely factor in the actual emotional investment into an application. Change management shows how important such emotional investment is though.
• Revenue management actually proves to be much more effective by setting near infinite price points when combining free-to-play with a virtual item / consumption model. Users will pay which ever much they need to to achieve their goal. The barrier to entry based on price is zero, so no revenue below the price point is lost

Future outlook

It will be interesting to see how the NE-App sector can make use of the trail that has been beaten by the games sector. I believe that just as with the games sector, it will require either a major player in the industry to set precedence, or it will require a critical mass of independent procuders to hollow out the market from below until the damn breaks.

Either way, I believe stage 5 is on the horizon, and it may well prove the number one pricing trend of 2011.