Determining your IAP price points (hint: make it expensive)

Determining the best dollar price point of your IAPs is a crucial aspect to optimize your game’s revenue. In an ideal world, all price points should be AB tested. IAP price-points are a crucial aspect of your game’s success, and even seemingly small optimizations can have a meaningful impact. Whenever possible, you should aim to AB test all your IAP prices.

But in practice you can’t always do that. There is a cost to running AB tests. Either a UA/time cost (to get enough users for reliable results) or a design and implementation cost to set up and analyze the AB test (you might have a lot of different offers with different price points). Also, sometimes you will have an IAP offer for a specific period of time – say an IAP offer available during your Halloween event – and you simply can’t test the price before releasing it.

That’s why it’s good to have some rules of thumb when setting the price points of your IAP offers. In my experience one key principle has proved accurate when setting all prices – whether a dollar price point or hard currency. When you’re setting the prices in your game and you’re not sure if you should make it cheap or expensive, make it expensive.

The first thing to keep in mind is that being a big revenue contributor is not the same thing as being purchased a lot – in fact it’s usually the opposite that you can observe. There is a difference between having many users purchase an offer, and that offer being significant in terms of overall revenue.

There are some common patterns that illustrate that point. And the fact those patterns exist regardless of the game suggest they have to do with the price point themselves – not so much the content or value of that price point. When you look at IAPs from the point of view of how much they cost, you will see that most purchases occur at the lowest price point available in your game.

pricepoint_purchases.png

 

What’s interesting is when you see how many purchases are made at a given price point, and how much revenue comes from purchases made at that price point. For example, maybe 40% of your purchases occur at $1.99, but only 5% of your revenue comes from IAPs costing $1.99.

pricepoint_all

 

Why do most purchases occur at the lowest price available? Mobile games are an entertainment product. By definition they are superfluous and unnecessary. That means strict principles of rationality don’t really apply here. To a certain extent, if you follow a narrow definition of rationality, the only rational response when playing to a free-to-play mobile game is to not pay. I’m not writing this to suggest mobile customers are irrational (and wrong for spending). I’m framing things this way to emphasize the fact we as publishers and developers should not be evaluating the value and content of what we sell from a strictly rational and utilitarian perspective (which is tempting when we spend all day designing, balancing and calculating systems). We’re selling entertainment.

So, if you think 98-96% of your installs will never spend a dime in your game, then it makes sense that most of those who do spend on frivolous virtual items spend the smallest amount possible. That’s why carefully determining the lowest price point for your users can have a significant impact on your revenue. If your lowest price point is $4.99, then you are structurally making it impossible for any payer to spend less than that.

When setting the prices, you are making a balancing act between the percent of users buying at that price point, and the total revenue from purchases at that price point. Normally, when you lower the price, conversions increase. The thing is, in my experience, the increase in conversion never makes up for the loss in revenue. Let’s say you have a great offer priced at $4.99 and 2% of you DAU purchases it. If you were to reduce the price of the offer to $2.99, you would need 3.3% of your DAU to purchase it to make the same amount of revenue. And that’s an increase in conversion very hard to achieve. On the other hand, if you increase the price of your IAP from $0.99 to $1.99, it’s very unlikely your conversion will be cut in half – meaning your overall revenue will increase.

Mobile games are a form of entertainment, not a necessity good. There is an incompressible number of users who will never pay, no matter what you do. No matter how cheap or enticing your offer, you will never monetize the vast majority of your users. Furthermore, it’s not much more rational to purchase a virtual item $1.99 rather than $2.99. Price-point is not the main motivator for your customers to spend in your game. A standard cost-benefit calculation is not the main driving force behind purchases in mobile games. So if a user is willing to spend in your game, an increase in price-point will not dramatically decrease his/her desire to buy the offer.

That’s why going low is almost never the right move. On one hand, you won’t get much more reluctant users to make a purchase. On the other hand you are making it possible for those engaged users who are willing to spend in your game to spend less.

Another compelling argument to make things expensive is to look at your payers, and the price points they are spending at. A large portion of customers will only make one purchase. So you might be looking at a situation where 45% of paying users only contribute to 5% of your title’s total revenue. On the other hand, chances are the top 10% of your payers account for over 70% of your total revenue. So, a very small percentage of your customers (who already compose a very small percentage of your install base) account for a very important part of your game’s success.

When you look at the spending patterns of your customers based on how much they spend, 2 trends emerge. Your biggest spenders spend more frequently. But they are also making purchases at higher price points. I like to look at customers per LTV percentiles because it’s always relevant in the context of your game. Also, if you divide customers along the lines of their absolute LTV, then your results will be biased. No user with an LTV of less than $9.99 will have made a purchase at a $19.99 price point.

So when you look at the average and median transaction price of your users depending on their LTV bracket, you should see something similar to the graph below.

price_points_per_ltv_bracket.png

 

This is another strong indication there is no benefit to going low. Your customers who contribute the most to your revenue are also the ones transacting at the higher price points. A good monetization strategy is not only about getting your customers to purchase frequently. It’s at least as much about getting your customers to purchase at a high price point. That’s why targeting your IAP offers and price point based on each user’s LTV and spend history makes sense. But if you can’t do that, then you should make sure you are not hurting yourself by monetizing your best customers less. And that means not lowering your price points to cater to a wider userbase (which is less prone to spending).

 

Pricing your starter packs and conversion offers

When considering pricing and monetization strategy, starter packs and offers aimed at converting users have a special importance (here conversion refers to the first purchase). The previous discussion on price points applies the same way for starter packs and early game offer, but there are some additional considerations to keep in mind.

The first thing to keep in mind is that starter packs and conversion offers are not important because of the revenue they generate. The first purchase is particularly important because it’s the one that turns a non-payer into a customer.

In any live game, the first transactions only account for a small fraction of the title’s revenue. What matters most for the sustained monetization of a game are repeat payments. Usually, about only 10% of a title’s revenue comes from the first purchases of a user. Repeat purchases (purchases that follow the first purchase) are what matters for revenue. Relatively speaking first purchases account for a slightly higher percent of total transactions, but here again repeat purchases are what matter most.

first_purchase

 

The above graph is meant to emphasize the fact that when you are considering the pricing of your starter pack and early offers, overall revenue should not be your main focus. Having users convert as early as possible should be one of the main priorities of your monetization strategy.

Unlike repeat purchases, first purchases are usually more scripted. By scripted, I mean they occur in a controlled environment, at a planned moment. First purchases usually occur in a “hand crafted” situation. Conversions result more from intentional, contextual and very granular design. A common way to introduce the starter pack is to put your users on rail, make sure all your users have the same experience up to that point, and then present them with an offer that is relevant, appealing and makes sense in that specific situation. Because of that, unlike repeat purchases, first purchases don’t necessarily occur at the lowest price point. When you look at the distribution of your first purchases per price point, you won’t see exactly the same thing you see when you look at all purchases. The price point of the first purchase usually reflects the price of the starter pack and early offers.

conversion_price_point

 

You should consider early offers from the point of view of the % of installs they convert. But you shouldn’t sacrifice everything for a short-term increase in conversion. First having too low a price point can have a negative impact on your LTV if early payers spend too little or if your customers don’t redeposit because the starter pack was too good. Second, displaying low prices very early might adversely affect your userbase’s price anchoring. If the first offer your users see is 1000 gems for $0.99, that will make the default 100 gems for $1.99 look unappealing for a long period of time. Your attempts to improve short-term conversion might damage your mid to long-term conversion.

Because of that, for both the first purchase and subsequent purchase, your first rule of thumb should be to make things expensive. When you go low, you are getting more people to spend who would not have spent otherwise. But in a sense, you are artificially increasing your payer base on that one transaction. Those payers will have a lower spending potential than your standard paying users. To illustrate that, it’s interesting to look at the redeposit rate of your customers based on the price point of their first purchase. By that I mean, what percent of players whose first purchase costs $1.99 go on to make a second purchase. What’s that percentage for users whose first purchase costed $9.99, $19.99, etc? What you’re most likely to see is that the lower the price of the first purchase, the lower the percentage of users redepositing.

conversion_price_point_and_redeposit

 

Even though the revenue coming from the first purchase is not what matters the most, the first purchase will anchor user expectations and potentially future spending patterns. You might get more users converting short term, but you are artificially increasing your conversion numbers. You are getting customers with a much lower spending potential than your engaged customers. And you are also compromising your ability to monetize your average customers. Artificially increasing conversion rate by lowering the price point of your starter pack is likely to be a short-term move that won’t yield a good ROI long-term.

So, if there were only one price point you could AB test, it should be your starter pack. But again, as a rule of thumb, start by pricing all your IAPs high. You will rarely gain in the tradeoff between conversion and transaction price.

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