How to Design an Annuity
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This article builds on my previous article about the evolution of IAP monetization. It gives more background information and context on annuities, and then goes through a basic set of considerations for annuity design. By the end of this article, you will have learned enough to design an annuity for an IAP-oriented game.
An annuity is a purchase of currencies or goods that is delivered over time (the “annuity payments”). The actual purchase is a lump sum, paid at the beginning of the annuity.
Here’s now an annuity is defined in http://www.gamasutra.com/blogs/IsaacKnowles/20160512/272484/Want_to_Increase_Your_FreetoPlay_Game_Revenue__Retention_Experiment_With_Virtual_Currency_Annuities.php
An annuity is just a sequence of payments that a person receives in exchange for an initial investment. Interest payments by a bank into a savings account are a common kind of annuity. Insurance companies usually offer another type of annuity where you pay a large sum now (say $100,000), and then receive a guaranteed amount – say $5,000 a year – for the rest of your life.
Annuities tend to split the population between more impulsive players and those players who value the currency items being sold, but can wait to receive them (in exchange for a discounted price). In short, annuities appeal to “planners” who are affluent and have good impulse control (these people often become “grinders” otherwise due to their ability to suppress their impulsive buying decisions).
They are, in essence, a form of price discrimination similar to coupons. Customer will put forth time and effort in order to get a lower price.
Customers who are very responsive to price changes — that is, customers with a very elastic demand — are likely to take time to find coupons that effectively lower the good’s price. On the other hand, customers less responsive to price changes because of their less elastic demand aren’t as likely to take the time to find coupons.
When you use coupons, you start by establishing a single price for the good. The price is then lower for customers possessing a coupon. So, customers not using a coupon pay the price P, while customers using the coupon pay the price P – C, where C represents the coupon’s value.
Annuities in games also have a very strong retention component. Much like daily login rewards, the presence of an annuity tends to encourage players to log in on a regular basis. And, of course, once the player is in the habit of playing daily, the player is much more likely to be a long-term player.
The “Gold Pass” in Creative Mobile’s Nitro Nation is an excellent example of an annuity.
Figure 1 The Gold Pass Delivers 30 Gold a Day for 30 Days
It’s a very straightforward design: it simply delivers 30 coins for 30 days. But there are two subtle points to note:
- It’s delivering a smaller amount than the cheapest “one-shot” bundle. 30 coins, as opposed to 100 coins. If you need 100 coins, the annuity will deliver them in 4 days.
- It’s a fabulous deal. It delivers 900 coins for $2.99. Compare this to the one-shot pricing of $4.99 for 250 coins—it costs less and delivers a lot more.
These two bullet points are interesting, and offer some hints about how to design annuities. Roughly: deliver a small amount of coins each day, but offer a fabulous exchange rate compared to the standard payment wall (so the player is getting a great bargain).
In the remainder of this article, we’ll expand on that and go deep into the design of annuities.
The basic structure of your annuity is driven by game design, gameplay considerations, and stylistic preferences.
Here are the basic design considerations we usually tell people to think through when they are adding annuities to their game.
- Duration. How long will the annuity last? The usual durations are:
- Forever. These are high-priced retention-oriented annuities. While it depends how much currency is delivered, these are usually purchased mid-life-cycle by whales.
- 28 days. This is the duration we usually recommend.
- 14 days. This is the shortest duration that usually makes sense. Annuities that are shorter than 10 days have a diminished training and retention effect.
- Confirmation. Will the player have to click on something to claim their annuity? We strongly recommend this for training effect purposes. Note that some games go so far as to force the player to go to the coin store to “pick up” their annuity. While this practice has some value (as a training effect), it can also add friction and frustration to the experience.
- The Not-Logged-In Experience. The annuity is granting the player something every day. If the player doesn’t log in, what happens? Does the player still get the reward? Or do they have to play? We recommend that the rewards accumulate. When players are paying for an annuity, there is the potential for consumer backlash if the player doesn’t receive the annuity payments.
- Deliverables. Is the annuity just for virtual currency? Or are there items involved as well. The pros and cons of this are complex: lots of deliverables make it harder to message the contents of the annuity, and make it harder for the player to understand the value the annuity. In addition, if an item isn’t a generally useful item, including it might have the unintended outcome of discouraging annuity purchase. We usually recommend keeping things simple at the start—a virtual currency based annuity is the safe and easy choice here.
- Delivery Schedules. Does the annuity deliver different payments every day? Is it a progressive payment matrix? We strongly recommend simple payment schedules, with the same amount of currency every day.
- Discount Level. The currency in an annuity is substantially discounted from the price that the player would pay in the standard coin store. We recommend that the price of a single unit of currency be between ⅓ and ⅕ of the most discounted price available in a standard coin store.
- Stackability. Stackability involves the ability to buy multiple annuities at once, or having multiple annuities valid at a single time. We do not recommend this practice unless players are constantly made aware of which annuities they have and how long they will last before expiring. Otherwise, you increase the likelihood of customer service issues.
- Availability. This design consideration involves whether or not the annuity is always available. As stated above, annuities mainly appeal to “planners” who have strong impulse control. One way to make the annuity more compelling is to make it intermittently available, on a randomized schedule. We recommend making the annuity available on a randomized schedule, with frequency of appearance decreasing over time.
In order for an annuity to be effective, it must simultaneously deliver enough value to be a compelling offer without significantly cannibalizing other purchases that might occur.
This means that once you’ve decided on a basic annuity design, you need to tune it using data. Note that because these are mostly data and gameplay questions, and the decisions underlying them were taken prior to adding an annuity, we do not have specific recommendations for them.
That said, here are six very important questions to ask yourself as you decide how many coins to include in an annuity:
- What is the Value of a Significant, but not Exorbitant Bonus in the Game? One of the markers of value is a bonus that occurs in the game, which appears to be significant to the player. For example, in a dungeon quest game, there might be a small, almost insignificant bonus for slaying a run-of-the-mill orc, but slaying the “boss” of a level might be a significant bonus. In general, when designing annuities, we want the amount of be visibly significant (but not too big; the point of an annuity is that it differentiates planners by leveraging their ability to wait patiently).
- What is the Daily Login Bonus Size / Schedule? What does the player get as a daily login bonus? Generally speaking, you can’t sell the player an annuity unless it’s significantly bigger than the login bonus.
- Average upgrade or purchase cost? In general, how much do people spend on an individual medium-value item. To avoid cannibalization, you should cap the daily value of the annuity below this amount.
- Difficulty of Obtaining Currency? Another factor in determining the annuity amount is how much currency people typically earn in a day. Generally, if the annuity amount is easy to get via “grinding”, you will have a hard time charging for it.
- Changes in the Cost of Goods as the Player Progresses? If annuities make payouts in terms of a currency, then the value of that currency must seem to have a consistent (or even increasing) value over time. If instead the value of currency falls as the player progresses through the game (e.g. because the cost of items rise as the player progresses), then the annuity will appear much less attractive.
- Does the Game Have Monthly and Lifetime Spending Caps? Typically, games with a strong “durables” focus, or a strong “downloadable content” focus have a cap on how much money you can spend in the game. If there is such a cap, an annuity can give you a short-term revenue boost (when players buy it) but wind up cannibalizing lifetime revenue.
The interesting thing about these questions is that they’re all logical, all fairly basic, and yet, taken as a whole, come very close to determining how much currency you should offer in your annuity.
Game monetization is becoming increasingly sophisticated. It’s no longer enough to offer various coin packs—you need to think about how the game is run, you need to think about different types of players, and you need to have a variety of highly differentiated offers that appeal to different types of players.
Annuities are an emerging best practice in free-to-play gaming. In this article, we gave background context, and how to think about them, and then described how to design an annuity that matches your game. The goal was simple: to take the guesswork out of annuity design (or, at least, to minimize it).
Think of this article as “Annuity Design 101”. By this point, you should have a very clear idea of how to add an annuity to your game. In a future article, we’ll cover more advanced aspects and psychological design considerations. But, like almost everything else, annuity design obeys an “80/20” rule – if you get started with the above design considerations, you’ll go far.