Strategy

Talk of an impending consumer spending recession and its likely impact on games has been widespread for a few months now, and every new data point only seems to further confirm that the belt-tightening is already underway for many of the industry’s most important target demographics.

The tenor of the conversations around this worrying topic have started to shift accordingly, from the theoretical – is a spending decline going to happen? – to the strategic – how can companies best prepare themselves to weather the storm?

There’s no one ideal strategy for handling a widespread downturn. Some companies are more exposed than others, either because their consumers are in the groups most likely to cut spending, or because the business itself is already skirting close to the financial cliffs in some terms.

One key effect of a downturn is that it amplifies the cost of failure and jacks up the risk profiles of every venture: a wrong turn that was survivable in good times can sink a company in lean years.

Other companies, however, are more insulated from these effects, like those with strong recurring revenues from loyal player communities, for example, or those addressing underserved niche markets.

The strategy that will successfully guide a company through an economic storm therefore needs to be tailored to the company, to its products, and to its audience – not to mention to its investors, whose stomach for risk and willingness to fund projects through a rough period must be carefully and coldly assessed.

Despite that need for diverse and flexible approaches, there are of course some ideas that come up time and time again in such discussion.

Image credit: Epic Games

One of them is the notion that free-to-play games will be better insulated from recession effects than premium games.

This idea seems borne out in data that shows spending dropping off most steeply in younger cohorts, who continue to engage with F2P titles while pulling back from spending on the premium games preferred by their older peers.

There’s concrete logic behind this assertion. If consumers are tightening their belts, they’ll be looking for the most cost-effective entertainment options, and it can’t just be all doomscrolling, all the time (at least, for all our sanity, let’s hope it can’t).

F2P games with generous free tiers are hard to argue with as a value proposition in those terms.

That’s true at any time, of course, but it’s an even more powerful effect in hard economic times, when the psychological barrier to paying a large amount up front for a game (whose quality or longevity you can’t know for sure at the point of purchase) becomes even tougher to overcome.

In this climate, a game that takes a generous approach to F2P and lets a lot of people play and enjoy themselves to a significant degree, while giving them options to pay for various extra features or content, has a proposition that’s significantly easier for belt-tightening consumers to get on board with.

This isn’t to say that all F2P games will thrive in that environment, of course; the flipside is that games which are too aggressive or tight-fisted in their monetisation strategies will be even more severely punished than usual by players who are engaging with those games precisely because they’re trying to economise.

There’s another aspect to F2P games that also seems well-suited to the economy we’re now entering – although it seems to have become a little bit of a taboo in some circles.

Only a few years ago, there were lots of articles and interviews doing the rounds where people candidly talked about the importance of chasing “whales” – big spenders who drop hundreds or thousands of dollars in F2P titles.

Image credit: Digital Extremes

Many games built their business models around those players, happy for the vast majority of players to pay little or nothing as long as some small fraction of them converted into high-rolling whales.

Those discussions are all but gone from public view (and even at the time, smarter commentators in the space made it clear that they were uncomfortable with the “whale” label, even if not with the concept itself).

People realised that talking about players dropping such large amounts of cash on F2P games just wasn’t a good look, I guess; but even if the public lionising of such strategies disappeared, the strategies themselves certainly didn’t.

I suspect that whale-chasing will be one of the strategies many companies explore as they seek to survive this recession. That may seem counter-intuitive – in a tough economic climate, lowering prices and offering better value is the obvious move, whereas trying to get people to drop massive amounts of money on frivolous items in games sounds a bit insane.

However, the shape of the economic changes we’re seeing right now isn’t evenly distributed. The recession is primarily impacting the lower end of the market; big spenders are still very much spending big.

“Many games [were] happy for the vast majority of players to pay little or nothing as long as some small fraction of them converted into high-rolling whales”

This isn’t restricted to games by any means; as lower-income groups batten down the hatches, an increasingly large percentage of consumer spending in most developed economies is coming from a relatively small pool of high income households. Luxury goods companies are forecasting solid growth in the coming years even as commodity retailers’ forecasts decline.

It’s not as simple as just slapping a higher price tag on things and expecting high spenders to whip out their credit cards, of course.

Appealing to higher end consumers requires strategic thinking. How do you make something in your game feel luxury and high-status to consumers who value those things?

Items that let players show off their high status – rather than just letting them short-cut investments of time or effort in the game – are a key way to do this, and F2P games have an in-built advantage with that kind of item.

Since they let most of their players in for free, the high-spending players have a large audience of low-spending players to whom they can “flex” their purchased, high-status items. As more and more low-income people turn to free games as a cost-effective form of entertainment, that opportunity will only grow.

By comparison, premium games can’t really do the same thing – some of them try to, but it’s generally a disastrous idea, because the psychology just doesn’t work the same way.

Players who have paid up front for a game aren’t in that game to be flexed on by higher-spending whales, whereas non-paying players in F2P games more or less accept this as part of the price of entry (albeit that there are still lines in the sand, especially with pay-to-win type items).

Introducing business models that let some players spend potentially thousands of dollars (especially on gacha style mechanisms) to flex on other players risks collapsing basic purchase revenues in a paid-for game – even at best it would be an absolute bonfire of player goodwill.

To be clear, the ethics of this approach have always been an absolute tarpit, and tough economic times will only make that worse.

There’s a whole body of research into people’s spending habits with high-status items and brands which makes it clear that the consumers most likely to be drawn into high spending patterns on these items are very often those who can least afford it.

“As more and more low-income people turn to free games as a cost-effective form of entertainment, that opportunity will only grow”

Discussion of whale-oriented mechanisms faded from view largely because the volume of stories about people who were vulnerable to these kinds of strategies – especially children, but also people who simply struggled with impulse control and inability to delay gratification – getting into serious financial trouble as a result became impossible to ignore. The parallels to problems like gambling addiction are uncomfortable and not easily dismissed.

Nonetheless, the potential of this strategy to insulate companies from recession effects mean that it will be on the table in many discussions, and I suspect the stories of whale spending will creep back into industry discourses in the coming years.

It will be important not to draw the wrong conclusions from those narratives. The fact that a small number of players are spending thousands of dollars on F2P items and currencies has sometimes been interpreted as a sign that pricing for standard games is “leaving money on the table”, when in fact it indicates exactly the opposite.

Wealthy people (or people making poor financial choices) spending big in these games to flex on legions of free or low-spending players is not a suggestion that there’s a whole untapped market of people with a burning desire to spend more on videogames.

On the contrary, it’s a recession indicator – and no coincidence that it will be back on the menu in an era of recession.

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