02/10/2014 01:19:24 Free Membership Login

How does Zynga make money? Their business model and revenues

Zynga has made over $450-$600 million in sales in 2010. So how do they do it?

Zynga’s business model is based on getting people addicted to its games and then getting them to both enlist others to join and/or buy virtual goods, both of which help players get further along in those games.

Sounds simple, but getting people addicted to a game, to enlist other players, and to buy virtual goods aren’t so easy to implement, based as they are on tapping into people’s psychology.

Business Insider quotes A. J. Patrick Liszkiewicz’s explanation for Zynga’s success (at least in relation to Farmville) as follows:

“The secret to Farmville’s popularity is neither gameplay nor aesthetics. Farmville is popular because in entangles users in a web of social obligations. When users log into Facebook, they are reminded that their neighbors have sent them gifts, posted bonuses on their walls, and helped with each others’ farms. In turn, they are obligated to return the courtesies. As the French sociologist Marcel Mauss tells us, gifts are never free: they bind the giver and receiver in a loop of reciprocity. It is rude to refuse a gift, and ruder still to not return the kindness. We play Farmville, then, because we are trying to be good to one another. We play Farmville because we are polite, cultivated people.”

Again, however, just as it’s relatively easy to look at a successful movie or book and explain why it’s so successful… it’s much harder to duplicate that success. Otherwise, 8 out of 10 movies and books would be blockbusters… instead of 8 out of 10 being losers or mediocre successes at best!

Even so, we can recognize at least one of the main psychological triggers at work in Zynga’s games – i.e. reciprocity – and weave that into the way WE do business. In fact, many Internet marketers already make heavy use of the principle of reciprocity – the human desire to reciprocate a favor – by providing freebies of various kinds. By offering free ebooks, videos, audio interviews and other gifts, we appeal to our prospects’ tendency to want to reciprocate the favor by signing up to our list or buy our products or services.

Brian Reynolds, chief game designer for Zynga, shed a little light on how to get people to buy the farm online during his talk at the Design Innovate Communicate Entertain Summit in Las Vegas.To start with, Reynolds threw out some bare bones data:

  • Social games cost between $100,000 to $300,000 to make.
  • Between 3% and 5% of people who play social games pay money for virtual goods in the game or sign up for advertising “offers” that generate cash for the developer.
  • Farmville is played by about 31 million people every day.

Now let’s suppose that, given these ballpark figures, that each person who plays a social game generates, on average, a penny a day. Multiply that penny by the number of days in a year, 365, and you get an average of $3.65 generated per year per person.

If you are Farmville, you multiply that by the number of people who play your game on a daily basis:

  • $3.65 x 31 million people = $113 million a year

Not bad for a game that perhaps cost $300,000, maximum, to make. Of course, That doesn’t include the salaries for a team of about 40 designers and programmers to continuously update and maintain the game (tack on $4 million to the annual budget).

Reynolds did not disclose how many pennies per day Farmville generates. But if it’s a penny, one could conclude that it’s a $100 million-a-year game. Perhaps that’s why some have valued Zynga as a $3-billion company.

The following section is reprinted from the What Games Are blog, with permission.

Nobody knows exactly how much profit Zynga makes from their games. There is only guesswork, analysis of second hand information, anecdotal stories, correlations from other companies and data points around the web. The general consensus seems to be that the answer is: A Lot.

The most common executive-summary pieces of knowledge or social games go something like this:

  • The average game makes $0.25 per MAU per month in revenue
  • Another way of saying that is that the average game makes $0.03 per DAU per day
  • Somewhere between 1% and 3% of users pay in any given month
  • Somewhere around 20% of users of a game will pay once over the course of their lifetime of play
  • A small (0.1% or less) percentage of users will become heavy users (the unfortunately named whales)
  • Whales will spend a lot (> $100)
  • Players will spend as much on intangibles (gifts, objects of status, virtual Christmas trees) as on tangibles (gameplay benefits).
  • ARPU is low (lots of players never pay at all) but sustainable over the long term, unlike retail

This means that a social game needs something to sell. In CityVille’s case, that something is game cash.

A Tale of Two Currencies

CityVille, like many online games, has two virtual currencies. There are actually five different number quantities that the player earns (reputation, goods, experience points, coins and cash) but only the last two are currencies. Reputation and experience go toward accumulating social and game levels, while goods are for resupplying existing buildings. Game coins and game cash, on the other hand, are used to buy stuff.

So why have two currencies and not one? The simple answer is that a dual system allows Zynga to separate high revenue actions from low revenue actions more easily, so that one can spiral with inflation while leaving the other untouched.

In many early massive multiplayer games, inflation was a noticeable problem for game economies. What tended to happen in games with only one currency is that they either served the early part of the game, or the late part, but not both.

Suppose a game allowed a player to buy magic swords for 100 gold pieces. To an early-stage player that could either be really expensive or relatively good value, depending on how difficult or easy it was to earn 100 gold pieces. The problem is that the late-stage player already has been using those gold earning opportunities for weeks or months, which means that if 100 gold pieces is hard to earn then he is satisfied. If it’s easy to earn, however, he is falling down in gold.

So what?

So if gold is hard to earn, this creates a disincentive for new players to join, because it will take a long time for them to get anywhere. Conversely, if gold is easy to earn, then the early-stage player is happy, but the late-stage player has nothing to really aim for. So they will hit their maximum mastery quickly and then leave through boredom.

The solution, adopted by many games, is to have two currencies.

CityVille sets it thus: You have an easily-earned currency (coins) that you collect from most actions, and hard-to-earn currency (cash) for high value transactions.

coins

You get coins for harvesting crops, collecting taxes from buildings, trading with your train, and some bonus actions. Coins are plentiful, and you use them to buy buildings, plant new crops and other day-to-day activities. They are perfect as a resource for the early-stage player to worry about, but by the time you reach level 10 or so the typical player will not worry about so much about coins any more.

cash

Cash, on the other hand, is almost impossible to find. The game only awards you one point of cash every time you gain enough experience points to earn a level. This means that the denominations of cash are very small (you spend it in ones and twos) and you spend it quite carefully.

Many of the transactions associated with cash involve using it as a way to shortcut key tasks. In the example image above, I need to either ask two of my friends to send chocolate, or spend two of my hard-earned cash, to complete a mission. To ask for that chocolate, however, involves a publishing action on my Facebook wall.

What cash is essentially offering is trade-offs. Cash is an option that you can use to avoid social embarrassment or to skip forward in time. It is not generally used to purchase objects (although there are a few exceptions). Cash buys you progress, not stuff.

The other thing about cash is that the manner in which you earn it obscure. Because the cash only increases when you gain a level, it is easy to miss. It appears, on the surface at least, that the only real way to accumulate cash is to get out your credit card.

Payment and Pricing

There are three general routes to payment. The first is this button:

Earning

Simple to understand, the Add Coins & Cash button takes the player to this dialog:

Purchase

Notice that Zynga are actually offering both coins and cash for sale. Cash is clearly the more prominent of the two, but it’s interesting given how easy it is to accumulate coins in the game. Perhaps it works, there’s no information to tell.

Also notice that the pricing is based on packs of cash, not an exchange. It is also US-style, where they add taxes on at the point of sale rather than including it in the price, as the EU does with VAT. Subbing 12% off the value of each (which is what the tax appears to be), what Zynga are actually charging for cash is:

  • 15 cash for $2
  • 40 cash for $5
  • 75 cash for $9
  • 170 cash for $19
  • 465 cash for $49
  • 1000 cash for $99

The top transaction values cash at $0.13 a piece. The bottom transaction values it at just under $0.10 however, with the rest forming a sliding scale clearly showing that more dollars spent is more advantageous.

In all likelihood, very few players actually buy that $99 pack. Pricing psychology often works in such a way that a very highly priced item helps to set the tone for the value of all other items (in consumers’ minds), leading them to choose the mid-range item. It is likely that the $2 pack is not the most popular for the same reason. It seems poor value, even though in reality it’s only marginally less so. Most players will likely transact at the $9 price, because that seems to be a good range.

The surprising thing about the pricing here is that there is no $999 pack offering 12,500 cash. It would probably get only a microscopic number of transactions, but it might move more average customers from $9 to $19.

some sources:
whatgamesare

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