Osma over at fishpool.com has recently written an outstanding article on finding the ‘sweet spot’ in the free-to-play, pay-for-stuff market.  Writing with expertise gained for his 5 years of experience with Habbo, Osma brings to light some interesting details regarding exactly what players will pay for in the free to play market.

I don’t want to steal any of his thunder, but would rather post some selected highlights.  To read the entire story go and visit fishpool.com.

And now for those juicy highlights:

Providing a basis for the article and why he’s chosen to publish this knowledge:

I’m sharing this with the world because while it’s been an interesting ride to build an online social game with an end-user business model, breaking pretty much every conventional rule in the process (”games have to have objectives”, “there is no profit in micropayments“, and so on), it’s still better for our business if people understand why it works. If this allows a competitor to fix a problem in their product and get off the ground, so be it – there’s plenty of growth to go around here, and failures don’t help anyone.

Looking at two assumptions behind the flexible pricing model:

…the number of customers grows as the cost of goods drops, and second, that the maximum consumption is unrelated to the minimum. There is no average customer who would spend more than half of others, and less than half of the rest.

Applying these principles to the free-to-play, microtransaction marketplace:

Cheap purchase price attracts more customers out of the existing free users, and transactional item-based sales allows repeat purchases of theoretically unlimited amount. Those who are willing to buy more will do so, up to some practical maximum of consumable goods and discretionary spending.

Using the sales of chocolate bars as an example, Osma argues the point effectively:

…how many chocolate bars of standard quality would you expect to sell for $1? How about for $2? More or less than half? How about for $10 for the exact same package? I’d wager chocolate bars sell at least 10x better at the price of $1 than at the price of $10 each, and the increase of customer base more than covers the lower per-unit revenue.

Factoring in packaging and marketing costs to the chocolate bar producer, Osma is quick to point out the obvious differences in a physical, consumable bar of chocolate, and digital entertainment:

…of course there is a minimum profitable price for a bar of chocolate that does not become near-$0 even at very high volumes, unlike purely digital products, so increasing chocolate-sales revenue by dropping prices does not necessarily increase profits, and I’m completely ignoring the effects of packaging and marketing on the perceived value of items. For digital sales, where packaging is more flexible and material costs are effectively non-existent, we still have to consider not-unsubstantial fixed development costs, a certain amount of costs associated to servers and bandwidth, some transaction-related pricing friction, and so forth, but certainly the minimum value (and price) of one unit of digital sales can be driven much lower than a bar of chocolate.

Again, to view the article in full, including some VERY interesting pricing graphs, please go visit fishpool.org.