Wednesday, September 12, 2012

Why microtransactions aren't razorblades

When you give something away so you can sell the customer something else, that give-away is called a "loss-leader."  When  discussing loss-leaders what is mentioned most often is razors and razor blades.  Razors are effectively given away so the razor blade company can sell you the blades.  More recently, we've seen the same model in ink-jet printers where the printer is sold near cost or even potentially at a loss to lock you into buying the same company's ink cartridges.

This has been so successful in razor blades and ink cartridges, you might think its an argument for the micro-transaction model in games.  But its not.

The thing about a razor is that it is worthless unless you keep buying razor blades at regular intervals.  Furthermore, those blades are quite expensive compared to their manufacturing costs.  There is a lot of pure profit in the razor blade price and you pay it because, basically, you have to.

The same thing is true of that printer.  Anyone who has gone out to buy new ink for one knows that it isn't cheap.  And the printer company tries its best to force you to buy new cartridges, these days a significant part of the technology of such a printer is dedicated to making cartridges "burn out" when they are empty so you can't refill them.  Refills hurt the sales of expensive new cartridges and would drive the price down if it was a common occurrence.

Another example of a loss-leader today is the cell-phone.  It is sold to you at a loss to drive subscription to high profit margin phone services.  Thats why they lock you in for two years of service-- that ensures their profit.  If you try to cancel early, you have to pay back the part of the phone cost that was subsidized.  if you want another phone, you have to wait til the expected profit was made on this one.

The big thing to notice in all of these is that they all are lock-ins.  If you don't spend the money on the renewables, you lose the value of the freebie.  They are also all regular periodic sales.  In effect, they are disguised service subscriptions.  You pay for your shaving service by buying new blades.  You pay for your printer service by buying new cartridges.  (The phone deal is actually not disguised, but you get the idea.)  And that service is not cheap.

The inventors of the Microtransaction model missed this very important point.  The micro-transaction model for games gives away value in the hopes that people will want to buy "accessories" but it does not lock them into buying those accessories.  Furthermore, those accessories, since they arent necessary for the core experience, actually have to be priced very low in order to sell any at all.

And this is why Zynga is tanking and Schick has been in business for almost 100 years.


LordKaT said...

Been trying to explain this exact same phenomenon on our show, This Week in Games, for a while now. Nobody at GamesIndustry will listen to us :(

CyberQat said...

"And he said, Verily I say unto you, No prophet is accepted in his own country." Luke 4-24

A lot of wisdom in that one sentence. Journalistic analysis is dead. The modern media tells whatever story they think their readers want to read, whether it is truth or fiction.

Rest assured that those of us who speak truth against the myths will be recognized in hind-sight.