Generating Revenue: How Casual and Interactive Games for Kids Can Make Money

By Pierre Le Lann (French)

This wiki describes the most common revenue models for marketing children’s online games. It identifies the advantages and disadvantages of each model, the kind of games that works best and the type of partners required.

Advertising

Advertising may include banners outside the game, sponsorship, or game-integrated product placement. What makes this distinct from the other models, is that it draws its revenues from businesses, (that is brands and advertisers) not the gamers themselves.

Advantages to Advertising

Unlike the subscription and micro-transaction models, which only monetize a fraction of the user base, advertising monetizes all gamers, including the 90% to 95% who like the game but are not prepared to pay to play.

Overall, it’s simpler to generate revenue with this model than with the others because it does not entail the long learning curve required to convert players into subscribers (or payers). In addition, the variable revenues and costs – such as bandwidth costs and commissions to advertising networks – increase at about the same pace.

Game Projects financed by the Bell Fund are very likely to benefit from substantial traffic from the broadcaster. With substantial traffic, it is relatively easy to interest a game portal to add the game to its site network or use the broadcaster’s sales force. This means the game can generate revenue relatively quickly.

Disadvantages to Advertising

To be viable, this model requires two essential elements: a sales force to sell the inventory to advertisers, and significant, constant traffic to interest those advertisers, with an absolute minimum of 100,000 unique visitors per month in Canada, and far more in markets such as the US.

Given current CPMs (cost per thousand hovering around $5-$8 in early 2009), a game has to generate millions of page views to start earning significant revenues.

In recent years, advertisers have seriously reduced online ads directed at under-12-year-olds for fear of media reprisals. The current economic situation, which is affecting advertising expenditures in all categories, is not helping.

Products that work best with this model

  • Games with lots of repeat play that have the capacity to generate plenty of page views and unique visitors (such as arcade games)
  • Games that feature well-known TV-series characters (with the attendant risk that traffic will decline drastically if these characters lose their popularity)
  • Games that are part of a big game portal, or those that have the support of a TV broadcaster such as Total Drama Island

Required or recommended partners

  • TV broadcasters or game portals (such as Miniclip, Zylom). These partners have significant traffic and an integrated advertising sales force.
  • Advertising sales rep firms that sell the inventory on your site for a commission. There are several specialized children’s rep firms, such as Gorilla Nation or Gofish/Betawave. It’s possible to geographically filter the game and limit the agreement with these firms to certain territories, especially in the case of a preferred relationship with a Canadian broadcaster.

Subscriptions

Subscriptions are often billed to the parents monthly, semi-annually or annually to allow full access to game functions and content. The most common monthly subscriptions for children’s products are around $5.95, with a few exceptions ranging between $2.95 and $9.95. Semi-annual and annual subscriptions vary significantly from company to company.

Advantages to Subscriptions

A subscription provides relatively stable, predictable revenue. Because the subscription is recurring, parents only need to be convinced to use their credit card once (unlike micro-transactions). Once they are signed up, a number of parents do not bother or do not take the time to unsubscribe even when their child is not active any more. This inertia effect increases the lifetime revenues generated from a subscriber.

Once the fixed costs are covered – beyond the break-even number of subscribers – the profit margins are quite high.

Some parents especially like the absence of advertising and are prepared to pay for this. Children like this “all you can eat” model because they have access to the whole game and don’t have to make repeated requests to their parents.

Selling the game directly online allows the results to be constantly analyzed to improve the game and boost the conversion rate over time.

Disadvantages to Subscriptions

Children don’t have credit cards, so either we have to convince the parents or we have to encourage the children to nag them.

Even though portals like Runescape and Club Penguin have shown that the subscription model can be very lucrative, they are the exceptions. It’s much harder to convince parents to spend $5.95 a month on a subscription than to buy a game for $40 in the store. Parents are not likely to agree to subscribe to more than one game at a time.

To justify a recurring subscription, it is absolutely essential to continually update the game and add new content. This means that the game becomes a business unit in itself, with revenues and ongoing fixed costs (development of new game modules) and variable costs (bandwidth, customer service).

The annual operating cost of this kind of game can easily equal the initial development budget, so profitability depends essentially on the trial-user-to-subscriber conversion rate.

Products that work best with this model

Required or recommended partners

  • Traffic sources (portals, TV broadcasters)
  • Payment companies that can process recurring credit card transactions
  • Online payment and prepaid card companies (Paypal, Pay by Cash, etc.)

Micro-Transactions

This revenue model consists of billing the users – children or parents – but for much smaller amounts, from a few cents to a few dollars, for the use of specific elements. These elements vary in form but most are virtual objects, powers or specific functions, or access to game sessions or certain parts of a game. Users are generally billed for the purchase of a certain amount of virtual money that the children can use as they play the game.

Advantages to Micro-Transactions

Micro-transactions monetize a bigger player base, especially those whose parents are not comfortable with the idea of recurring payments on their credit cards and those who like to alternate between several games.

This model provides a better balance between variable costs and revenues, because the most active players who use the most resources (bandwidth, new quests, new objects, etc.) are also the most prepared to pay for additional content or functions.

With prepaid cards that can be purchased in stores, such as the Ultimate Game Card, this model gets around one of the major obstacles: the fact that children do not have credit cards. The prepaid cards can also be used to buy monthly game subscriptions but they are better suited to micro-transactions. This model works well for children who have an allowance and are allowed to choose how they spend it.

The cost of producing virtual objects is very low. Once the break-even point is reached – that is, when revenues cover operating costs – the profit margins are quite high.

Selling directly online makes it possible to constantly analyze results and improve the game and conversion rate over time.

Disadvantages to Micro-Transactions

With the micro-transaction model, it is even more important to constantly add new objects, powers, and functions in order to stimulate interest and purchases, so this kind of game demands continual reinvestment.

Creating the right “gameplay” and “game balance” to maximize revenue is a difficult art to master. Enough elements and functions must be available for free to offer a sufficiently stimulating game experience to those players who are sampling for free to make them want to buy their first virtual objects. It is a fairly complex process to achieve the gameplay and psychological satisfaction/frustration/desire balance that makes a sampling player a paying participant.

This model requires a good investment capacity, especially to assume the cost of hosting, bandwidth, community management, etc., particularly if the game becomes very popular but the right formula has not yet been found to convert the sampling players into paying participants.

Unlike subscriptions, this model requires the act of purchasing to be triggered repeatedly, so it is important to establish the idea of virtual money, in an account the user draws on and re-credits from time to time. Virtual money also reduces the impression of spending real dollars, especially if the dollar conversion ratio is not obvious.

Products that work best with this model

  • Massively multiplayer online games or MMOGs, such as Magi-Nation
  • Virtual worlds, such as Habbo, Gaia
  • Games for children and teenagers, especially age 10 and up, such as Maple Story

Required or recommended partners

  • Traffic sources (portals, TV broadcasters)
  • Payment companies that can process micro-transactions
  • Online payment and prepaid card companies

Downloadable Games

The market for downloadable games is in full expansion. These are usually games that can be played solo or on local networks, but that are mainly downloaded through major game portals such as Pogo, Wildtangent, Big Fish, etc. These games are often marketed by publishers who have marketing expertise [How to Drive Traffic by Marketing Digital Media Content] and established relations with the portals. Although the CD-ROM market has experienced a significant decline in the last 8 years, the most popular games are also available in CD-ROM format and are sold in retail stores. Prices range between $9.95 and $19.95.

Advantages to Downloadable Games

Downloadable games do not need any updates or any additional content or functions, so the investment is basically limited to the production budget and finding a publisher. Having a highly successful game (over 100,000 units sold, for example) opens the door to getting additional publisher contracts.

Downloadable games often have limited budgets and fairly simple gameplay. The vast majority are solo games, so they are far easier to produce than massively multiplayer online games.

Unlike the retail end of the business, it’s still possible to break into the market and become a game publisher. It’s the quality of the game itself that determines the portals’ interest, and they are generally fairly open to newcomers. But becoming a publisher demands an investment to build the distribution network and develop relationships with all the game portals, which are the Wal-Marts of the industry. This investment might make sense if you’re planning to produce several titles.

Disadvantages to Downloadable Games

Even though the vast majority of titles – especially the most successful ones – are unbranded, this is unfortunately less true for children’s titles, for which a strong TV brand is still important.

The conversion rate is low, especially for children’s titles. At best 1% of trials lead to purchases.

This is a hit industry where a few titles are extremely profitable and the others generate modest revenues. Selection of the publisher and the relationship with major game portals are crucial.

The risk is much more limited than for an MMOG but the developer’s share of the revenues billed to users is more limited as well. The developer of a self-financed game can expect to receive between 25% and 35% of the sale price of the game.

Products that work best with this model

Required or recommended partners

  • Publishers (such as Popcap, Iwin, Playfirst) should be involved as early in the process as possible, since they can provide valuable advice on how to structure a game to maximize sales.
  • Game portals, if you want to approach them yourself.
  • The downloadable game industry is relatively structured. The best way to get into it is through Casual Connect conferences and the Casual Gaming Association Linked in group.

Retail Tie-In with Merchandise

In recent years, a growing number of hybrid products have appeared, usually combining a toy and an online game (Webkinz, for example). Most of the revenues come from retail sales.

Advantages to Retail Tie-In

Parents are far more comfortable with the idea of buying a physical object in a toy store than an online subscription or virtual objects. Sales of online games for children are minuscule compared to in-store toy sales.

Store distribution, especially through major chains like Wal-Mart or Target, develops consumer awareness quickly.

Disadvantages to Retail Tie-In

A manufacturing-type partner like Hasbro or Mattel is a must. Creating toys or physical products for children, financing and managing production and delivery of inventory, and especially maintaining relationships with retail chains is a skill than cannot be learned on the fly.

The cost of making the toy and the margins taken by the distribution partners and retailers leave very little room to make the initial game investment profitable or provide funds to reinvest in the game.

The financial risk is very high. If the product does not sell in the first weeks or months after its launch, the retailers return it, which could signal the death of the product and the game. It is very hard to get a second chance.

If the product has some moderate success, the company is obliged to continue to operate the game for the people who bought the product in the store (Webkins have a lifespan of one year, for example), probably at a loss.

Products that work best with this model

Required or recommended partners

  • Toy company or manufacturer
  • Possibly another type of partner with its own retail stores

More and more companies are combining several of these models. There’s a major advantage in diversifying revenue sources and monetization methods. It should be remembered, however, that each of these models influences the game design, the user’s experience and the marketing communications. You will build a different game experience depending on whether you want to sell a subscription to a parent, a virtual object to a child or a product placement to an advertiser. Pursuing several of these business models at once makes the game design and the market positioning far more complex.

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