“Consumer Surplus” is a term I learned when I studied microeconomics. It’s the consumer’s version of “profit”. It refers to the additional value that a consumer gets from a transaction, beyond the money that they spend. That additional value – value that a theoretically-ideal consumer would have happily paid more money to receive – is said to be “left on the table”, from the perspective of the seller.
There are well-known and widely-practiced techniques for capturing consumer surplus. Discounts, sales and rebates allow you to get at least some money from consumers who otherwise wouldn’t buy your product at full price. Deluxe editions and expansion packs are a way to get additional money from people willing to pay a little extra.
These are reasonably “fair”. As a consumer, you at least retain your freedom of choice – do you take the time and effort to get a discount? Do you pay more and get extras? Either way you’re likely to retain a nice chunk of your consumer surplus.
But what happens if we take this too far…
I’m a game developer, so allow me to talk about games. Specifically about so-called “free-to-play” games.
I won’t talk about how most F2P games are like Skinner boxes. It is all too obvious – and despicable – that many of these games are carefully tuned to be addictive and exploitative in much the same way gambling is.
Let’s talk about the economics of why F2P games exist: to capture as close to 100% of the consumer surplus as possible.
Normally, when pricing a product, you are limited to just a few price points. And, aside from the few consumers willing to pay exactly those amounts, there will always be consumers getting extra value beyond what they paid for.
But free-to-play games have achieved the holy-grail of product pricing: infinitely granular price discrimination. This is where you can charge each and every customer the exact maximum amount they are willing to pay.
If you look at just the demand curve in the above graph, you have the “whales” on the far-left, funnelling in truly absurd amounts of money. And on the right you have a long-tail of users – who probably aren’t paying a thing – but who will occasionally click on an advertisement by accident.
With careful tuning, you can capture every last bit of the consumer surplus, and turn it into profit for yourself. Yay! Money, money, money! An economist’s wet dream!
I am not an economist. And gamers are not theoretically-ideal consumers.
What do you think is in that consumer surplus?
Love of your product. The feeling of ownership. The appreciation a player feels towards you, because you have given them value beyond what they initially paid for.
It’s the simple pleasure a player receives from not having to shove 99 cents of in-app-purchase into a game every time they want to enjoy a dollar’s worth of fun.
(Now seems like a good time to mention that my game, Stick Ninjas, will not be a “free-to-play” game.)
In a market saturated with free-to-play games, a gamer faces the painful dilemma that each game is either going to be terrible, or is going to extract as much money from them as possible.
A gamer no longer has the happy possibility of finding a super-compelling game and having it be a personal entertainment windfall. Instead that gamer becomes a windfall for the developer.
Furthermore, gamers understand, or at least intuit, that developers are incentivised to price games as close to the demand curve as possible. This is a very fine line to tread, and nobody is perfect (much to the chagrin of economists). The slightest error in purchasing judgement on the gamer’s part – or pricing mistake or manipulation on the developer’s part – and any remaining sliver of consumer surplus gets wiped out. The gamer gets ripped off.
It is unsurprising that savvy gamers want to see the free-to-play model go and die in a fire. They hate it, and rightly so.
Contrast this with models that gamers love.
The pay-what-you-want model – most notably implemented by the Humble Bundle – is almost the exact opposite. It allows the consumer to choose how much surplus they want to retain, while opening up the long-tail for developers to make a profit in.
The ever-popular Steam sales similarly allow more consumers to have more consumer surplus, while allowing developers to make more money at the same time.
Even a tiered pricing model – like the one implemented by Introversion for Prison Architect, based on Kickstarter – is welcomed by players. Even though its purpose is to capture some of the consumer surplus up at the left side of the graph – getting more money from enthusiastic players, it still leaves plenty of value left over for players to enjoy. And it’s wholly optional.
A lot could probably be said about Apple’s role in all of this (their App Store being Ground Zero of the F2P explosion): The ranking system that has forced the base price down to zero, the technical mechanisms that encourage this kind of pricing model, the lack of features to support other models (e.g.: upgrade pricing, sales, bundles, etc) and the DRM-enforced monopoly Apple holds that prevents others from implementing those features.
And a lot really should be said about Microsoft’s foolish endeavour to drag their platform down the same path with Windows 8 (Casey Muratori makes a good start).
One could also explore how this technically-enabled infinite-price-discrimination is creeping beyond gaming into other areas and making consumers miserable (or turning them to piracy).
But this essay is getting long enough, so I’ll leave those topics for another day. (Although I welcome any insights you’d like to share in the comments.)
If you’d like to continue with another article in a similar vein, “How to Defeat Kolrami” by (be warned) Steve Pavlina is worth reading.
Bonus Material 2 – a numeric explanation of the demand curve and consumer surplus:
Take consumer N. In this example he is willing to pay, at most, $8 for your game. Consumer N-1 will pay more; consumer N+1 will pay less. Put them all in a line and you get the demand curve.
Because you are selling software, each additional copy costs you $0 to produce (allowing us to skip the supply curve). So let’s say you set a fixed price of $5.
Consumer N buys your software for $5 and enjoys his $8 worth of fun. You have made a profit of $5, and N has a consumer surplus of $3. You both come out ahead.
Now you make a free-to-play game. Through cunning metrics and design, you manage to charge N a total of $8 throughout his time with the game. You make $8 profit. N has a consumer surplus of $0.
N still gets his $8 worth of fun. But now he hates your guts.