Few people can have escaped the massive success of Fortnite: Battle Royale. Launched in late 2017, the game had 250 million players by March 2019. In 2018 Fortnite made more money than any other game in history: $2.4 billion. While creativity and technology are essential to the success of a video game, economic decisions can also play a key role. One of those decisions is choosing the right way to price.
In some markets firms must follow the market price, but video games are not like that; creating a new, popular game gives you the power to choose your own price. However, if you increase your price too much you won’t sell many games, so finding the price that will make the most profit is not straightforward.
One obvious starting point is the price of competing games. The typical price of video games such as Call of Duty is about £50, with games aimed at younger players such as Minecraft selling for about £20. In contrast, Epic Games gives Fortnite away for free and only makes money through in-game purchases: a different outfit for your characters, a new dance move, or a better looking pickaxe. Why would the makers of Fortnite have chosen to give the game away for free? What are the advantages and disadvantages and how does it affect the design of the game?
One feature of the video game market is that there are significant switching costs reducing competition. Switching costs occur when a customer prefers to keep on buying from the same firm rather than switch to competitors who may offer better or cheaper products. These costs are particularly important for services like banking or utilities where it takes time and effort to switch suppliers. Switching costs mean that it is in the interests of firms to offer low initial prices to attract new customers, then increase prices later. How does this apply to video games? Players are attracted by a cheap or free new game, get hooked, and then are willing to pay more in order to keep on playing or enhance the experience.
Another striking feature of games like Fortnite is the importance of network effects. Network effects arise when customers are more likely to buy a good if lots of other people are using it too. For example, there is no point being on WhatsApp if no one else you know is on it. In Fortnite, gamers play together in large teams of friends. This means that Fortnite potentially profits from a new player even if that particular player never actually pays a penny themselves. These network effects also give Fortnite a reason to lower the price towards zero, but only if it can make enough money in another way.
Fortnite’s solution to this problem is to offer in-game purchases. Offering these purchases allows Fortnite to extract large amounts of money from some players, without excluding other players. 69% of players have made in-game purchases with an average spend of about £65 – but 31% have paid nothing at all.
What sort in-game purchases does Fortnite offer? One key to the game’s success seems to be that it does not allow players to buy items that increase the chance of winning as that would make the game less interesting. Instead Fortnite sells a huge range of different “skins” that change every possible aspect of your character’s appearance. Another interesting feature is that, unlike most video games, Fortnite does not offer players any choice over the appearance of their initial character. For example, the gender and race of the character are randomly assigned. It would cost Fortnite nothing to offer this improvement. From an economic point of view, the random allocation only makes sense as a way for Fortnite to encourage more purchases of skins.
Economic and design decisions like this have made Fortnite the most profitable free-to-play video game of all time. Readers who know much more about Fortnite than the author will surely be able come up with many more examples of how this success has come about and how the pricing structure and game design successfully work together.
Further Reading
- ‘Fortnite’ is free to play but makes billions anyway
- Disney discovers peak pricing
- Tesla’s damaged goods problem
- How Fortnite shows the changing economics of video games
Your task
- We know that 69% of Fortnite players have made in-game purchases with an average spend of £65, but 31% have paid nothing at all. What is the average spend of all players?
- Suppose that Fortnite charged £20 to buy the game instead of giving it away for free and just charging for in-game purchases? What would happen to the total amount of money they make if the total number of players fell by 10%? Or by 50%? Or by other amounts? Assume initially that the average spend on in-game purchases stays the same. What would happen if the average spend changed?
- Try to estimate how big “switching costs” might be for a video game like Fortnite. If you are a game player, how much are you willing to pay to try a new game that you don’t know much about? How much are you willing to pay to be allowed to keep on playing a game once you have been enjoying it for a few weeks? The difference is your switching cost. Ask your friends what they think too and find the average switching cost.
- Now try to estimate “network effects”. If you are a game player, how much would you be willing to pay for a game like Fortnite if no one else was playing it? What if all your friends were playing it? The difference is the value of network effects to you. Ask your friends the same question and find the average value of network effects.
- Choose a different video game that is not given away for free. Imagine you were designing a free version. What in-game purchases could you introduce to still make money? How much would you charge for them? Do you think you would make more or less money compared to charging for the game?
Dr Kate Doornik is responsible for organising economics teaching at St John’s. She teaches first and second year core microeconomics and macroeconomics courses. Her research uses microeconomic theory, especially game theory, to study how contracts work – and particularly what happens when they don’t work well.