How can an online game company optimally price its games in the global marketplace? Three Berkeley School of Information students used behavioral economics, economic strategy, user research, and a deep understanding of player psychology to develop a comprehensive strategic plan — winning the contest’s $15,000 grand prize.
Second-year MIMS students Alexander Jones, Aditya Mishra, and Stephanie Snipes were victorious in the recent Kabam Collider Challenge; the competition was sponsored by UC Berkeley’s Sutardja Center for Entrepreneurship and Technology in partnership with Kabam, a leading creator of mobile games, including Star Wars: Uprising, Marvel: Contest of Champions, and Fast & Furious: Legacy.
Ten teams of Berkeley students spent the fall semester digging deep into economic strategy and the online gaming community and developing competing proposals. Four teams were invited to present their proposals to a panel of Kabam executives; following the final presentations, the I School team were awarded the grand prize.
Kabam co-founder and I School alumna Holly Liu (MIMS ’03) was happy to continue the Kabam–UC Berkeley connection. “It is fitting for Kabam to continue to deepen our partnership as a top mobile gaming company with top students from UC Berkeley,” said Liu. “I could not be more excited!”
As Kabam expands into international markets, pricing is a challenge. How do you penetrate new markets where people don’t have the same purchasing power? In India and China, for example, a $5 in-app purchase may be a much bigger percentage of the user’s annual income.
The Apple iOS app store and the Google Play store for Android apps both forbid dynamic pricing. For publishers like Kabam who publish games globally, Apple has created a price tier structure aimed to prevent pricing arbitrage between different currencies. However, this structure does not take into account the relative purchasing power of gamers in different markets. Kabam develops and publishes games on mobile devices using a “freemium” model. Gamers then have the option of purchasing “in-game” currency that can be used to buy various items (energy, heroes, troops, etc).
Competitors were asked to submit proposals with a method for setting prices in different local markets and implementing those prices in-game. Proposals should maximize total revenue, both by converting more players to paying customers and by increasing the average revenue per customer. And proposals should include techniques for segmenting the market, to capture low-end customers without cannibalizing more affluent markets.
The I School team’s prize-winning approach included three main elements:
- Devising an algorithm to determine the best price in each country or region;
- Targeting promotions effectively using behavioral economic principles; and
- Adjusting the game play and user interactions to maximize player retention.
Creating a Dynamic Pricing Index
Dynamic in-app discounts are allowed by both Google and Apple, so that’s the best approach for setting regionally appropriate prices. But how can Kabam determine the appropriate discount?
“The idea is to price your games’ in-app purchases in such away that people from different geographies can afford to pay,” explained team member Aditya Mishra, “so that it pinches them in the same way that a person in America feels it.”
One useful approach is to use what’s called the “Big Mac” index. “McDonald’s has been pricing their Big Macs in different countries for years, so they have have found prices that reflect fairly accurately the relative purchasing power of each region they are in,” said Mishra. So the team started by taking Big Mac prices as a benchmark.
Next, they analyzed global prices set by other companies in the gaming industry for full games or in-app purchases. They used Steam’s API to pull in prices for 300 game titles across 7 countries. “The price markdowns set by Steam in some countries such as Mexico closely matched the Big Mac index,” observed Mishra.
After setting initial price benchmarks, the team proposed that Kabam run its own experiments to model the demand-elasticity curve for its games in each distinct market. That would be more of a long-term solution.
At the final presentations, Kabam executives seemed excited by the possibilities of this approach; one of the executives suggested that their experiments could model the demand curve at much smaller scale than just the country level — perhaps as fine-grained as at the neighborhood level.
But pricing is only Step One. Sooner or later, Kabam’s competitors will see what they are doing and will lower their prices to match. So competing solely on price isn’t a long-term strategy, the team believes. In the long run, you have to compete on your games’ quality and how well you keep players engaged.
Use Targeted Promotions to Refine Dynamic Pricing
Once a baseline price is identified, how can a game target promotions to maximize their profits? The students proposed a strategy using insights from two I School courses, Info 232. Applied Behavioral Economics, taught by Steve Weber, and Info 234. Information Technology Economics, Strategy, and Policy, taught by John Chuang.
“If you want to be more successful in a game, you either have to play all day every day, or you need to purchase some sort of boost, via an in-app purchase,” explained Alexander Jones. “For instance, in Marvel: Contest of Champions, a Kabam game, you can buy crystals that give you a chance to win better champions.” To maximize profits, Kabam must first identify the players at a high risk of churn — that is, a high risk of leaving the game — who haven't yet made a purchase, and convert them from a free player to a paid player.
One approach would be to offer them a free 24-hour trial of a champion at the next level; once the free trial is over, the player is more likely to pay for the upgrade. “This leverages the behavioral economic principle called the Endowment Effect, which states that it’s harder for people to give up something once they feel they have ownership over it,” said Jones. It also leverages the Reciprocity Principle: when you get a gift, you’re more likely to contribute back to giver in the future. “Charities do this all the time,” said Jones; “they'll send you a dollar in the mail, and studies have proven that you’re a lot more likely to give to them in the future.”
Once the 24-hour trial period is over and the player is feeling good about playing with the new champion, the champion is taken away — but the player is offered a choice of discounted value packs. And the player sees that they would get an appreciable discount on each value pack. “This takes advantage of Choice Architecture; specifically, what is called anchoring,” says Jones. The middle choice is the anchor in this example, and it’s also a so-called decoy. The lowest choice has the least chance of winning the champion, but it’s the cheapest. The middle choice is a little more than twice the cost of the cheapest one, and the highest choice is just a little more expensive than the middle choice, but offers a much better value.
“You see this pricing strategy at the movie theater when you buy popcorn,” said Jones. “You're really trying to nudge people to get either the large option or the small.” In this strategy, the lowest option targets people with low willingness or ability to pay, while the large option captures those who can pay a little more and are willing to.
It’s important to frame the option as a loss — the potential loss of the champion that they have just been playing with, Jones explained. This leverages what prospect theory calls loss aversion; psychology shows that people are more likely to take a risk when they’re faced with a potential loss.
Long-Term Strategies to Differentiate
What really set The I School students’ solution apart from the other teams’ was their holistic approach; they tried to look at the solution from every possible angle. Despite having only minimal previous experience with online gaming, they threw themselves into the game to learn as much as they could about how the games work. They spent more thirty hours of game play themselves, and also immersed themselves in the online forums to understand the players’ community and experiences. The team also studied Kabam’s overall road map for future development and direction, to make sure that their recommendations were aligned with Kabam’s executive vision and direction.
Team member Stephanie Snipes approached the challenge using her user research experience. Snipes was especially drawn to the role of alliances, where players band together to fight quests together. Alliances can include players from around the world.
The team suggested that Kabam strengthen the player community through increased emphasis on alliances and resource sharing. “It seemed that alliances were not as strong a community as they could be,” explained Stephanie Snipes. “This seems like a way to strengthen the community overall and make people feel more engaged with the game.”
The team also recommended a focus on player retention. When it looks like a player is about to drop a game, how can Kabam keep them as a customer? One option is to recommend similar games by Kabam that might be a good fit, based on the player’s overall playing style. The game can also offer something like a signing bonus or a severance package: a head-start to incentivize the player to try it the new game.
The I School Advantage
The Kabam Collider Challenge is one in a string of recent victories by I School students in a variety of hackathons and other contests. We asked the team why I School students keep winning these prizes. What is it about the I School that prepares its students so well?
“The multi-disciplinary approach,” answered Alexander Jones without hesitation. “From Day One we’re taught to look at things from a holistic perspective.” Aditya Mishra agreed. “We were thinking beyond just one area, and we could deep-dive into all the different segments.”
The team was grateful for the insights and mentoring of I School faculty: in particular Steve Weber’s behavioral economics course, John Chuang’s insight into both economic strategy and behavioral economics, and Coye Cheshire’s insights into the gaming community.
Stephanie Snipes also credited the variety of skills and backgrounds among the students and School’s culture of collaboration. “Our classmates and their openness to help us was really important,” she said. “It was amazing to see people’s dedication to take time to help us.”
Snipes especially thanked classmates Brian Carlo, who spent hours helping them streamline their final presentation, and Sindhuja Jeyabal, who offered feedback on their economic approach. “That was really valuable to us,” said Snipes.
Jones agreed. “Our classmates are incredible, for sure.”