Microtransactions have become very common in the digital and mobile world, giving the opportunity to implement efficient and profitable systems. This guide tells you how to make a microtransaction business model, that is, a business model based on microtransactions, work best.
Microtransactions what they are: definition and context
Let’s start with the definition of microtransaction: this term refers to small digital payments (typically ranging from a few cents to a few dollars/euros) to make purchases of goods or services in the digital environment, such as in mobile apps and in gaming.
Is there a difference between microtransactions and micropayments?
Usually, we tend to use the terms microtransactions and micropayments as synonyms. In order to choose the right business model for you, however, you should know that while there is no substantial difference between these two concepts, in common parlance the former term is used for the specific context of mobile apps and video games and the latter to refer to any small economic transaction made in the digital sphere to purchase a good or service.
Where they originate: games and apps with in-app purchases and virtual content
As just pointed out, the business model based on microtransactions has spread particularly in the two specific areas of mobile apps and gaming, but micropayments can also be found in other digital sectors.
The basic functionality of mobile apps and online games is often free. With regard to mobile apps, microtransactions are commonly used to obtain additional content, features, and services. Within video games, small inexpensive transactions usually involve the purchase of additional content, customizations, or upgrades.
Microtransactions and video games: why they are central to the model
The video games industry is constantly changing, and microtransactions have played (and continue to play) a decisive role in this regard, since they can generate significant revenues for those who produce free-to-play, i.e., free games.
Free-to-play, live service and player base monetization.
The business model centered on microtransactions in video games involves players downloading and using a free-to-play game for free and then paying to purchase virtual items or additional features during play.
Nowadays, there are more and more so-called live service games on the market, that is, games that are updated frequently and at length over time with new content for players. The goal of producers of these types of games is to build player loyalty and entice them to continue playing, in the belief that the more time they spend on the game, the more they will spend on it to get new content and features.
Battle passes, skins, loot boxes and DLC: practical examples
There are several ways to earn money with microtransactions in video games.
Many such video games involve the purchase of battle passes or season passes: these are tiered progression systems that offer the possibility of earning exclusive rewards.
Skins are aesthetic items that change the appearance of a character in the game or an environment of it, without affecting performance.
Loot boxes are mysterious reward boxes that can be purchased within a game and provide players with random items. Obviously, players are encouraged to purchase more and more boxes until they find the item they want or need. This has created several ethical and legal issues, with some countries deciding to ban this practice against users under the age of 18.
DLC (Downloadable Content) refers to all those additional downloadable contents that offer an upgrade within the game: they can be new characters, new maps, new missions or other expansions.
How microtransactions work
Let’s briefly summarize how microtransactions work.
Initial access to the basic core functionality of a game or mobile app is usually free or, in any case, extremely cheap. Within these platforms, however, there is the possibility of purchasing virtual items or extra features with microtransactions that occur directly within the app or game itself, using digital payment methods.
Pricing logic, bundles, and psychological anchors
For the mechanism described earlier to work, there are several aspects to evaluate. First, the price of these microtransactions: it has to be determined based on several factors, starting with the perceived value of consumers and ending with their behavior and market demand.
Pricing strategies can also be varied: for example, companies can offer bundles (bundle pricing) or change prices in real time (dynamic pricing) to maximize their profits.
There is another decisive element to consider: a microtransaction business model leverages so-called psychological anchors to encourage consumers to make repeat purchases by tying precise stimuli to positive emotions and creating habits.
UX and offer timing: progression and personalization
The timing of the offer to complete the microtransaction is also crucial: the very progression of several video games is now designed to push players to pay to advance faster in the game, just as communications and offers are increasingly personalized thanks to data analytics on gaming and spending habits and tools such as production algorithms.
In this regard, never forget that safeguarding the user’s gaming experience is and remains an unwavering priority: the double advice for you, therefore, is to avoid the “pay-to-win” mechanism (pushing players to buy frequently to win) and to keep microtransactions optional, thus allowing users themselves to choose how much to spend.
Microtransactions and fees: technical aspects of payment
There are other more technical aspects to consider when it comes to accepting online payments.
Limitations of traditional circuits and operating models.
Micropayments are used in situations where traditional payment methods, such as credit cards, are impractical due to too high fees.
Micropayment platforms work in several ways. One involves vendors or service providers having an account taken with a third-party micropayment provider that collects and distributes payments. Through a digital wallet managed by the provider, payments are held until a threshold is reached and then disbursed to the beneficiary. Facilitating payments requires consumers to open an account with the same provider.
Another mode involves the implementation of a prepaid system: a user opens an account with a micropayment processor and deposits a medium/high amount of money there. In case the provider is also used by the platform on which the user makes small purchases, the amount in is debited from the user’s account with the provider.
Benefits and risks of the microtransaction business model
A microtransaction business model has several advantages, but it also has some controversies. Let’s start with the former.
Pro: recurring revenue, continuous updates, low barrier to entry
A business model centered on microtransactions has the great advantage of ensuring recurring revenues, since users regularly make many small repeat purchases.
The practice of providing continuous updates and improvements to the experience ensures greater user engagement. Not only that, offering a product for free or, at any rate, for a very cheap amount attracts the interest of more users.
Controversies: pay-to-win, unwanted purchases, perceived unfairness
Most of the controversies related to the microtransaction business model are ethical in nature.
We have already emphasized the need to avoid the practice of “pay-to-win“: too often, in games or apps of this type, those who spend can enjoy far too substantial benefits that can frustrate those who, instead, decide to play without purchasing additional items or features.
Unwanted purchases are another major problem: in the past, several large video game companies have been ordered to reimburse players for unclear and, in some cases, “manipulative” purchasing arrangements. It is absolutely necessary, therefore, to provide accurate information that cannot be misunderstood.
More generally, you must always keep in mind that it is necessary to use microtransactions with caution because excessive or unclear use can lead people to believe that the company is taking advantage of users. Especially with younger audiences, who may not fully realize the money spent, it is critical, therefore, to avoid excessive monetization.
Examples of micropayment models outside gaming
So far we have focused specifically on micropayments found in video games, but you should keep in mind that there are examples of micropayment models in other areas as well: micropayments, in fact, are also used to facilitate the immediate distribution of digital rights on the web or to make online tipping easier. Not only that: they are also useful for those who need to coordinate connected devices through the Internet of Things (IoT).
Best practices for a sustainable business- and user-side model
In this guide on the microtransaction business model, we also decided to include some best practices that can help you set up a sustainable model on both the business and user side.
Let’s start with some technical aspects: remember that the strength of a microtransaction-focused business model also lies in the fact that the main product is offered for free or for a pittance to users.
The second piece of advice is to incorporate within it virtual goods that actually represent an improvement in the user experience and, more generally, that offer a concrete benefit. Not only that, the gratification for the user who proceeds to purchase must be immediate.
Also implement within the platform an intuitive and secure in-app purchase system for users and offer several payment options. Clarity on pricing-we reiterate again-is crucial, as is clarity on how to refund. Very important, too, is to provide spending limits to protect users and implement parental control mode for minors.
Monetization ethics: balancing fun, value and revenue
In order to make a microtransaction business model sustainable-you will be clear by now-it is essential to implement the right strategy on an ethical level as well. In more concrete terms, you need to balance user enjoyment, perceived value, and revenue as best you can, avoiding pay-to-win and excessive monetization, and, most importantly, listening to consumer feedback.
Remember: even small fees are important. As Benjamin Franklin said, after all,
“a small loss can sink a big ship.”
Metrics to monitor
Before we say goodbye, there is one more valuable piece of information you need to know: it’s about the key metrics you need to monitor to understand whether your microtransaction-based business model is really working.
First of all, you need to keep an eye on the conversion rate, so you know how many users actually proceed to purchase compared to the total number of them and understand whether your offers are attractive.
Average spend per paying user (ARPU) also lets you know how much each paying user spends on purchases on average and gives you valuable insight into the spending habits of the users you target.
Other interesting metrics include customer acquisition cost (CAC), Lifetime Value (LTV) and retention rate, as well as abandonment rate, of course.
Finally, regarding microtransactions specifically, there is a very important aspect to consider: you definitely need to monitor the take rate, so you can understand the impact of payment fees on your average receipt.
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