Game design as marketing: How game mechanics create demand for virtual goods

Hamari, Juho; Lehdonvirta, Vili Article Game design as marketing: How game mechanics create demand for virtual goods International Journal of Business Science & Applied Management (IJBSAM) Provided in Cooperation with: International Journal of Business Science & Applied Management (IJBSAM) Suggested Citation: Hamari, Juho; Lehdonvirta, Vili (2010) : Game design as marketing: How game mechanics create demand for virtual goods, International Journal of Business Science & Applied Management (IJBSAM), ISSN 1753-0296, International Journal of Business Science & Applied Management, s.l., Vol. 5, Iss. 1, pp. 14-29 This Version is available at: https://hdl.handle.net/10419/190610 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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Journal of Business Science and Applied Management, Volume 5, Issue 1, 2010 Game design as marketing: How game mechanics create demand for virtual goods Juho Hamari Helsinki Institute for Information Technology HIIT P.O. Box 9800, FI-02015 TKK, Finland Tel: +358 408359563 Email: juho.ha[email protected] Vili Lehdonvirta Helsinki Institute for Information Technology HIIT P.O. Box 9800, FI-02015 TKK, Finland Tel: +358 503841530 Email: vili.lehdo[email protected] Abstract Selling virtual goods for real money is an increasingly popular revenue model for massivelymultiplayer online games (MMOs), social networking sites (SNSs) and other online hangouts. In this paper, we argue that the marketing of virtual goods currently falls short of what it could be. Game developers have long created compelling game designs, but having to market virtual goods to players is a relatively new situation to them. Professional marketers, on the other hand, tend to overlook the internal design of games and hangouts and focus on marketing the services as a whole. To begin bridging the gap, we propose that the design patterns and game mechanics commonly used in games and online hangouts should be viewed as a set of marketing techniques designed to sell virtual goods. Based on a review of a number of MMOs, we describe some of the most common patterns and game mechanics and show how their effects can be explained in terms of analogous techniques from marketing science. The results provide a new perspective to game design with interesting implications to developers. Moreover, they also suggest a radically new perspective to marketers of ordinary goods and services: viewing marketing as a form of game design. Keywords: online games, social networking, virtual world, virtual goods, business model, sustainability, captology Juho Hamari and Vili Lehdonvirta 15 1 INTRODUCTION Selling virtual goods has become a major new revenue model for consumer-oriented online services, social networking sites, massively-multiplayer online games (MMOs) and virtual worlds in particular. This is especially true in the East Asian market. In September 2005, 32% of titles surveyed by Nojima (2007) in Japan used virtual item sales as their main revenue model. In October 2006, the share had grown to 60%. The global volume of real-money trade of virtual goods was estimated at 2.1 billion USD per year in 2006 (Lehtiniemi & Lehdonvirta 2007). This dramatic rise of the virtual good model arguably merits increased attention from the disciplines of marketing and technology management. In practice, the so-called virtual good sales or microtransactions revenue model involves selling some form of virtual items, “avatars” or currencies to the users of an online service. Perhaps most frequently, the object sold for real money is a virtual currency, which is then exchanged for virtual items. The items can range from weapons and armour in online games to clothes in virtual worlds and simple two-dimensional graphical badges in social networking sites. The items are used as part of gameplay or to fulfil similar social and aesthetic functions as physical commodities are used for elsewhere in consumer culture (Lehdonvirta, Wilska & Johnsson 2009). In this paper, we consider the question of what leads consumers to purchase virtual goods. Previous studies on the topic mostly focus on the consumer, considering what motivations and decision processes lead individuals into purchasing virtual goods (Guo and Barnes 2007; Lehdonvirta 2005; Nojima 2007; Lehdonvirta, Wilska & Johnsson 2009). We adopt a different, complementary approach, focusing on how the rules and mechanics that developers build into their MMOs lead to virtual good purchases. Our theoretical perspective is based on marketing: we view game design as one aspect in the company’s marketing process that aims to create demand for virtual goods that can be sold for real money. This way, we are able to offer new explanations as to how certain designs and patterns create demand and to suggest designs that could still be explored further. Moreover, learning can happen in the other direction as well, from game design to marketing. Insights built into game designs, based on the collective experience of generations of game designers, can potentially teach traditional marketers new things about how people’s behaviour is shaped. In the second section of this paper, we discuss the virtual good sales revenue model in more detail and review related literature. We also provide a review of basic marketing literature that acts as a conceptual framework for the rest of the discussion. In the third section, we outline the research design of the empirical part of this paper. In sections 4 and 5, we present empirical analyses of design and game mechanics in a number of MMOs. In section 6 we summarise the results, and in the final section, present conclusions and discuss the implications and limitations of the study. 2 BACKGROUND 2.1 Virtual Good Sales As a Revenue Model Real-money trade of virtual goods first emerged in 1999 in the form of player-to-player trade in MMOs such as Ultima Online and EverQuest. Users would list their hard-earned game possessions on eBay and let other users bid for them (Lehdonvirta 2008). In recent years, the growth of the market has increasingly been driven by operators selling goods directly to their users. Instead of requiring users to pay a monthly subscription fee, operators allow users enter the service for free, with the expectation that some users will nevertheless spend money on virtual good microtransactions (Nojima 2007). For this reason, virtual good sales-based games like MapleStory are occasionally called “free-to-play” games. One example of a virtual world that follows the same model is Habbo. Second Life follows a similar but more complicated model, where users are the primary actors in virtual good production and sales. Successful subscription-based MMOs charge around $10-$15 per month from their users, while Liew (2008a) estimates that successful “free-to-play” operators earn around $1-2 in monthly ARPU (average revenue per user). The estimate is based on figures pertaining to Second Life, Club Penguin, Habbo and RuneScape. Korean-based MapleStory is estimated to have a monthly ARPU of $20 in the United States (Liew 2008b), while Hyatt (2008) estimates the average ARPU of “free-to-play” titles being around $5 per month. At first glance it would therefore seem that the subscription model is often the more attractive option, but if we consider other metrics such as registered users, active users, conversion rates and costs, the situation may change. Users that are willing to pay a subscription fee belong to a fairly limited segment of hardcore users, while “free-to-play” services have the potential to court much larger audiences. Int. Journal of Business Science and Applied Management / Business-and-Management.org 16 For these and other reasons, operators are increasingly applying the virtual good sales revenue model in virtual worlds, MMOs as well as other online services. Understanding how to create and maintain demand for virtual goods is therefore an increasingly pertinent question. How does a service entice users into virtual good spending? How can sales be sustained over time without saturating the demand? To begin answering these questions, in the following part we review relevant literature from MMO related studies. 2.2 Understanding Virtual Good Purchases In the academic literature pertaining to MMOs, the majority of works focus on fascinating legal and philosophical questions that virtual worlds and real-money trade of virtual goods give rise to (e.g. Fairfield 2005; Lastowka and Hunter 2004). Works that deal with virtual goods from a business perspective are relatively scarce. MacInnes (2004) and Lehdonvirta (2008) discuss different approaches that MMO and virtual world operators can take towards real-money trade of virtual goods on a strategic level, without going into detail about what creates demand for the virtual goods. Nojima (2007), Lehdonvirta (2005) and Guo and Barnes (2007) focus on the individual user, examining motivations and decision processes that lead into virtual good purchases. Nojima (2007) examines relationships between the revenue models and players’ motivations for play. The motivations are based on a model by Yee (2005). Nojima finds that players who buy items report higher levels of immersion in a game. One explanation offered is that it takes a certain amount of immersion before virtual objects begin to feel desirable enough to purchase. Using a similar approach, Lehdonvirta (2005) examines different motivations that players have for purchasing virtual goods: advancement in a status hierarchy, advantage in competitive settings, keeping up with co-players, experiencing new content, customisation, and self-expression, among others. According to Lehdonvirta, users’ attitudes towards virtual good purchases are linked to their general motivations for participating in the service and the activities they engage in. Guo and Barnes (2007) use a technology acceptance model in developing a preliminary model for virtual good purchase acceptance. Lehdonvirta (2009) approaches the question of why people buy virtual goods from the point of view of attributes pertaining to the goods themselves. Lehdonvirta categorises these attributes to functional, hedonic and social attributes. Lehdonvirta, Wilska and Johansson (2009) examine “virtual consumption” from a sociological perspective, documenting the way in which virtual goods are used as social markers to draw distinctions between “haves” and “have-nots” and to build and communicate self-identity to other members of the community. Table 1: Explanations offered for virtual good purchases in previous literature Work Perspective Explanations offered Lehdonvirta 2005 individual/psychological (various) Nojima 2007 individual/psychological high immersion Guo & Barnes 2007 individual/psychological psychometric model Oh & Ryu 2007 game design (various) Lehdonvirta 2009 virtual item attributes functional/hedonic/social Lehdonvirta, Wilska & Johansson 2009 community/sociological social distinctions, identity, self-expression The different approaches to understanding virtual good purchases in previous literature are summarised in Table 1. Most studies adopt the individual user as their unit of analysis, focusing on the individual’s motivations and decision processes that lead into virtual good purchases. In contrast, Oh and Ryu (2007) examine ways in which game design can successfully accommodate and enhance virtual item sales. Based on observations from two Korean online games, KartRider and Special Force, they present examples of how design and game mechanics built by developers can be used to create and sustain demand for virtual goods; a fact fairly obvious to gamers but little explored in literature. Oh and Ryu’s paper is a start in analysing these mechanics, but it lacks ties to any previous body of knowledge that could be used to put the observations in perspective. In the following part of this paper, we outline a perspective from marketing that can be used to examine efforts aimed at promoting virtual good sales. 2.3 A Marketing Based Approach Traditional authorities in marketing emphasise that marketing is about identifying and meeting human and social needs (Kotler and Keller 2006; Drucker 1993). In the ideal case, marketing results in a customer who is willing to buy. Thus the aim is to understand the customer (Durcker 1993). On the Juho Hamari and Vili Lehdonvirta 17 other hand, marketing can also be seen as an activity that creates needs. This view is particularly pertinent in the context of MMOs, where designers create the rules and mechanics that determine to a large extent the activities and specific needs of the participants. In traditional marketing activities, products are offered in an already-existing market and customers are segmented mostly based on existing segmentation attributes, such as socio-demographic variables. When designing a virtual world, its rules and internal economy can be regarded as marketing activities concerned with creating the underlying needs and conditions for customers to become incentivised to buying virtual goods. The design and creation of virtual goods can then be regarded as separate design iterations that address the needs created in the previous stage (see e.g. Stabell & Fjeldstad 1998 and Porter 1980 on value configuration). This sets value creation through virtual goods somewhat apart from traditional marketing, as the value for the goods has to be first created through designing the context for the goods. Next we will present some examples of value creation from traditional marketing science that will be linked with game design patterns in the next section. Segmentation is one of the basic and central concepts of marketing. Its purpose is to identify and divide populations into strategically relevant homogeneous segments based on segmentation variables and customer needs. This enables companies to target their marketing efforts according to the defining attributes of the segment (Day 1981; Jonker et al. 2004; Kotler and Keller 2006). Segmentation in game design can be used in forming segments to which sell virtual goods to: for example, in-game classes and professions. Game design -derived player demographics have also been covered in literature (e.g. Bartle 1996; Bartle 2003; Yee 2007). Differentiation is another basic concept in marketing. The aim of product differentiation is to attain higher desirability, and therefore promote sales, by being distinguishable from rival products (Kotler and Keller 2006; Sharp and Dawes 2001). Differentiation can take place in relation to a multitude of product attributes, but it can be divided into two general subsets: vertical and horizontal differentiation. Vertical differentiation refers to the differentiation of product attributes that are comparable to rival products’ attributes. Horizontal differentiation refers to differentiation by offering a completely different set of attributes, as in a different product (Piana 2003; Vandenbosch and Weinberg 1995). Both of these dimensions will be further discussed in the context of game design. In product life cycle management, the concept of planned obsolescence is particularly pertinent. It can be divided into two subcategories: 1) contrived durability and 2) actual planned obsolescence (Orbach 2004). Contrived durability refers to the intentional shortening of a product’s lifetime in the production process, leading to quality deterioration. Planned obsolescence refers to an artificial shortening of a product’s useful lifetime by means of fashion cycles or technological developments (Kotler and Keller 2006). The purpose of these strategies is to encourage customers to make repeated purchases and to enables sales to be sustained over a long period of time (Bulow 1986; Choi 1994; Orbach 2004). These strategies are interesting in the context of virtual items, since they are digital products: whatever their durability, it is always rather artificial. Finally, various cognitive and psychological biases are frequently studied and exploited in marketing. Hsee et al. (2003) found that introducing points as a medium of exchange had a clear effect on people’s behaviour in a setting where no effect should have been observed under an assumption of rational choice. According to the study, the medium caused an illusion of advantage, certainty and linearity and led test subjects to change their preferences and select the options that were originally less desirable. Subjects were willing to pay more effort when points were used as a medium between the effort and the outcome, compared to a situation with no mediating factor. These results are interesting, because most MMO operators use a virtual currency as a medium of exchange between real money and virtual items. Virtual currency as a medium also enables other psychological pricing possibilities, such as odd-pricing. In summary, basic approaches in marketing include segmentation and differentiation on one hand, and a large variety of devices for enhancing the perceived desirability of purchases on the other hand. In the following sections, we examine how game mechanics and design patterns found in MMOs can be mapped to these marketing techniques. 3 DATA AND METHODS This empirical part of the paper is based on an exploratory study of how existing MMOs, especially massively-multiplayer online role-playing games (MMORPGs), are currently creating and sustaining demand for virtual goods through their design and game mechanics. These design patterns and game mechanics are then compared with concepts and techniques outlined in the previous section to examine how design can be linked with marketing science. Int. Journal of Business Science and Applied Management / Business-and-Management.org 18 Table 2: Games, virtual worlds and other online hangouts referenced in the study Title Publisher Cyworld SK Telecom, Korea Entropia Universe MindArk, Sweden EverQuest Sony Online Entertainment, U.S. Habbo Sulake, Finland IMVU IMVU, U.S. KartRider Nexon, Korea MapleStory Nexon, Korea Puzzle Pirates Three Rings, U.S. Special Force Neowiz, Korea Travian Travian Games, Germany World of Warcraft Blizzard, U.S. ZT Online Giant Interactive, China The virtual good platforms referenced in the study are listed in Table 2. Most of the titles are performance-oriented games as opposed to socialising-oriented hangouts, which is somewhat visible in the scoping of our study. Many of the game elements analysed below are connected to performanceoriented game rules. A few of the above titles do not actually use the virtual good sales revenue model. They can nevertheless be equally informative cases, because demand for virtual goods exists and varies regardless of whether the operator harnesses it as a revenue stream or whether the demand is simply part of the internal mechanics of the game. We studied each title through first-hand use experience and/or related literature and online materials. The data was collected during 2007-2008. We then analysed our observations with assistance from MMO design literature (Bartle 2003; Pardew et al. 2004; Alexander 2003, 2005) to identify generalisable design patterns and game mechanics that contribute towards creating or sustaining demand for virtual goods. In the following sections, we report the findings, examples from our observations and references to literature that were used as sources. The selection of titles discussed in this study is based on their popularity, relative variety in mechanics and availability of information. This information-oriented sampling, as opposed to random sampling, is appropriate for exploratory studies and situations where depth of information is valued over breadth (Flyvbjerg 2006). No claim is made as to how representative the identified patterns are of virtual worlds and MMOs in general; only that such patterns have been used by designers in several cases. The actual identification and abstraction of relevant design patterns and game mechanics from the cases is necessarily a somewhat subjective step, although grounded in design and marketing literature. 4 SEGMENTATION AND DIFFERENTIATION – CREATING NEEDS ON MULTIPLE DIMENSIONS While segmentation itself does not make products more desirable to customers, it enables identification of strategically relevant customer groups and enables differentiation of products to address the needs of customer segments, resulting in more desirable products (Day 1981; Jonker et al. 2004; Kotler & Keller 2006). This section focuses on how MMO design can generate and enforce user segments and create targeted offerings for them. Companies offer different products according to customers’ usage rate and status, which are behavioural segmentation variables (Kotler and Keller 2006). For example, an amateur might require lesser products than a professional. This enables companies to sell new products as a customer’s skill or interest increases. In the real world, an amateur might directly buy the high-end products and thus bypass the entry-level products. Alternatively, a consumer might settle for the entry-level products and leave higher quality products on the shelves. 4.1 Stratified content Usage rate and status in MMOs is typically reflected in stratified content (Figure 1). The most common example of this is found in MMORPGs, where a player’s avatar starts from level one and gradually through gameplay progresses through the game content and gains levels, rising in status. This mechanism can be used to segment players vertically and then differentiated items can be targeted accordingly. Juho Hamari and Vili Lehdonvirta 19 Figure 1: Content stratification based on avatar levels In practice, while most users progress through stratified content, the segments might not be as clear cut. Users go through the content with differing time investments and thus it might be reasoned to offer even more differentiated items in smaller increments as players are differently price sensitive and have varying amounts of time at their disposal. The levels represent a game design -derived segmentation, whereas differentiation within these level tiers (black blocks in Figure 2) addresses users’ real-world behavioural segmentation attributes. For example, in World of Warcraft there are items of several quality rankings inside each level tier (Figure 2), which can be seen as addressing subsegments within each tier that invest differing amounts of time in the game. The degree of vertical differentiation is determined by the operator according to its business strategy. Figure 2: Differentiation within levels Int. Journal of Business Science and Applied Management / Business-and-Management.org 20 4.2 Status restrictions Programming status restrictions into items is one way of enforcing the differentiation of items. This way, the operator forces players to obtain new items iteratively if they wish to maintain the same relative performance or status. This mechanism could be compared to regulations in karate belts, which can officially be worn only when the karateka has achieved the appropriate status. A karateka iteratively progresses through the different skill stages and has to purchase a new belt on every stage. Status restrictions in items also bear a resemblance to contrived durability, as the restrictions are designed into the products themselves. On the other hand, it also has similarities to planned obsolescence, as the players’ progression in the game gradually renders old items useless. Vertical status restrictions have been implemented in at least two ways: 1) an item cannot be used if the avatar’s level is too high (e.g., ZT Online), and 2) an item cannot be used if the avatar’s level is too low (e.g., World of Warcraft). This way, the avatar has a sliding window of usable items at a given time depending on the avatar’s level, thus iteratively directing buying behaviour. According to Davis (2007), in ZT Online players essentially have to renew their inventory every five levels. Status restrictions are also implemented horizontally, e.g., via avatar type restrictions, offering goods that are only usable by a certain avatar type. Online hangouts such as Cyworld and Habbo lack explicit level systems, but similar item tiers could perhaps be designed around more socially oriented measures. For example, in many services participants either implicitly or explicitly compete for fame. In MapleStory, there are explicit lists of “most famous” players. 4.3 Increasingly challenging content Content that gradually turns more challenging is a design pattern that has many of the same implications as status restricted items, discussed above. The difference is that the measures implemented are directed towards the game environment, avatar, and rules. When the game content becomes increasingly difficult, it requires the user to obtain better items to maintain the same relative level of performance or status, as old items gradually become useless. Thus the operator is able to differentiate items in terms of quality and item effectiveness in differing content difficulty. This is a very common game design pattern and is implemented in almost every MMO, but rarely as a marketing device to support virtual good sales. In other types of services, the concept of “game content” is more ambiguous. In socially-oriented online hangouts, gameplay could be understood as the user-to-user interactions aimed at establishing social distinctions and hierarchies. For example, in IMVU, participants rate each other “cool”, “smart”, “fun”, “hot” or “lame”. The difficulty of the “competitive gameplay” thus depends on other users and their behaviour. Introducing explicit measures in this way might further help the operator in identifying segments and selling items accordingly. 4.4 Horizontal gameplay While the mechanics discussed above enabled vertical segmentation and differentiation, horizontal segmentation is an equally important marketing device. In MMOs, horizontal segmentation is achieved via multiple content or gameplay dimensions (e.g., performance-oriented, socialising, trading), which can be used in designing differentiated virtual goods that are mutually non-rivalrous and not explicitly comparable. The dimensions can be further divided into smaller horizontal modes of play. For example, performance-oriented content might require the user to have several types of items to address varying needs derived from content; social status of an avatar could be rated on multiple scales (e.g., IMVU, see black blocks in Figure 3). Such dimensions must have meaningful content, however; otherwise they risk being seen as blatant profiteering. For example, a simple form of horizontal differentiation is offering many types of avatar clothing (e.g. shirts, trousers, vests), which are not mutually rivalrous. These can then be seen inside a larger horizontal dimension covering gameplay concerned with avatar clothing in general. For example, in Maplestory, it might not be well reasoned to add more clothing categories for the avatar itself, but the addition of pets creates another meaningful context for offering more (pet)clothes for sale. Juho Hamari and Vili Lehdonvirta 21 Figure 3: Horizontal dimensions of content In Figure 2 and Figure 3, the dimensions are simple examples from actual implementations. In practice, the design of vertical and horizontal dimensions is specific to each MMO: there are no fixed sets of dimensions. There are no explicit limits on how many nested dimensions can be designed, but it considerations of usability, compelling gameplay and business strategy that set practical limits. 4.5 Avatar types While segmentation and differentiation can be achieved through game design patters presented above, a further overarching way of creating segmentation is avatar types. Most performance-oriented MMOs have avatar “classes”, which determine avatars’ core competencies, items they can use, and their play style in the gameworld. In more socialising-oriented MMOs, appearance-related avatar attributes such as gender, hair colour, and style might be more relevant avatar-defining attributes. In terms of Figure 3 above, avatar types can be said to create avatar-specific gameplay dimensions. Additionally, avatar types are implemented to further create nested segments inside larger segmentation blocks. For example, for slaying monsters in a MMORPG, a hunter might require a bow, whereas a mage requires a magic wand. This way, avatar type is one of the determinants of differentiation of virtual goods. In essence, designing avatar types and attributes is equal to designing game-based behavioural and demographic segmentation factors. Whereas in traditional marketing, independent customer attributes are examined to segment customers into strategically relevant groups, the design of avatar attributes is actually a process of deciding and forming some of those factors beforehand. 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