Free digital services are like free lunches: not as free as they seem. For such mainstream providers of online freebies as Facebook (FB) and Google (GOOG), the well-known trade-off offers your eyeballs to advertisers—along with with your acceptance of privacy compromises—in lieu of a payment. Others, like Pandora (P), Spotify, and many gaming sites have opted instead for a freemium model that provides basic services without charge but demands that you fork over real money for the good stuff.
Human nature leaves users vulnerable to services that offer freebies up to a point, then begin demanding payment. It turns out that we are irrationally attached to goods and services we’re already using. Alex Mayyasi lays out the theory in a recent post on Priceonomics:
Why does the mere fact of ownership seem to make an object more valuable to its possessor? Because people exhibit loss aversion: They generally react more strongly to losses than gains. So, for example, a taxpayer will lose more satisfaction from a $100 tax hike than he or she would gain from a $100 tax benefit. For this reason, people generally prefer the status quo (we dwell more on the potential negatives of a change even if it is balanced out by equal or slightly better positives). And while buyers may think about relative price points, sellers focus more on what is lost by selling a possession.
This works best with freemium services whose paid product begins to seem like a necessary upgrade, rather than a different service altogether—extra storage on Dropbox, for instance, or ad-free music on Pandora. But video-game companies may be the savviest at exploiting these dynamics. Ramin Shokrizade, an economist who helps developers make money from games, describes a number of clever strategies in a piece for the gaming site, Gamasutra. Shokrizade dubs these techniques “coercive monetization.” In layman’s terms they are known as “tricking people.”
The game here is basically to make payment necessary while doing it so quietly that people don’t even notice. Virtual currencies, for instance, make it easy for people to forget that they’re spending real money. But the really clever stuff comes by tweaking the rules of the games themselves. Most people prefer games of skill over “money games,” in which success is determined by how much money one spends on better equipment, writes Shokrizade. But developers can acclimate someone to a game of skill before slowly turning it into a money game:
If the shift from skill game to money game is done in a subtle enough manner, the brain of the consumer has a hard time realizing that the rules of the game have changed. If done artfully, the consumer will increasingly spend under the assumption that they are still playing a skill game and “just need a bit of help.” This ends up also being a form of discriminatory pricing as the costs just keep going up until the consumer realizes they are playing a money game.
Shokrizade singles out Candy Crush Saga, the top-grossing game in the iPhone (AAPL) and Google Play (GOOG) stores, for its successful use of this strategy. The game’s early levels are easy and addictive; more advanced levels practically require a paid boost. But the cleverest technique, in his mind, exploits exactly the dynamic laid out in Mayyasi’s Pricenomics post. First, you allow a user to earn rewards by playing well. Then you threaten to take them away unless she pays to keep them. Here’s his example from a game called Puzzles and Dragons.
The player is given a number of “eggs” as rewards, the contents of which have to be held in inventory. If your small inventory space is exceeded, again those eggs are taken from you unless you spend to increase your inventory space. Brilliant!
There is some debate about whether such tactics are ethical. Shokrizade distances himself from the techniques he describes, saying he doesn’t use them himself. He also points out that they become less effective as their targets get older. That makes people between the age of 18 and 25 a perfect target. “It seems unlikely that anyone in this age range, having been anointed with adulthood, is going to appeal to a credit card company for relief by saying they are still developmentally immature. Thus this group is a vulnerable population with no legal protection, making them the ideal target audience for these methods,” he writes. “Not coincidentally, this age range of consumer is also highly desired by credit card companies.”