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XMG's Ray Sharma on the ratios of freemium: one million installs and 50k players

XMG's Ray Sharma on the ratios of freemium: one million installs and 50k players
Ray Sharma is CEO of XMG Studio, a mobile developer based on Toronto, Canada.

Virtual goods are taking over the pocket gaming experience.

Here at XMG, approximately two-thirds of our revenue now comes from virtual goods, up from only 10 percent a year ago. For the app industry as a whole, virtual goods easily represent half or more of the multi billion dollar annual industry revenues.

The reason is simple - selling virtual goods means that a small enthusiastic user base can carry a game's economics.

We can choose, for example, to try to sell a game broadly for a dollar. Alternately, we can offer the initial download for free, capture a million installs, from which 50,000 become enthusiastic users who love the game and will pay for virtual goods.

Based on our experience, one million free downloads and 50,000 engaged users can drive modest sales in the hundreds of thousands dollars. Things get even more interesting when users engage over a number of months and pay several dollars each month.

From the mouths of babes

It's easy to understand the appeal of virtual goods. My eight-year-old son Tristan asks me to spend $2 on a virtual light saber for his Xbox avatar. He says it makes more sense than buying a real light-saber toy for more than $20.

"Dad," he tells me, "My Xbox light saber will never get old or broken, and I can't lose it. It's way better than getting the real thing!"

Virtual goods is truly a phenomena best appreciated by the Internet generation. I may not be inclined to buy my wife a Facebook Starbucks for a dollar but my kids surely have no problem doing so.

Open for all

Indeed, virtual goods are the logical outcome of the democratisation of app development.

Removing barriers to sales have resulted in new gaming models where the enthusiastic carry the economics of the entire system.

Zynga is the poster child of this virtual goods industry. Zero to $200 million in revenue faster than any technology company in history thanks to folks buying virtual helpers for their online social game experience. Zynga exemplifies making a mass market out of virtual goods.

Power of compulsion

All this contradicts the notion a game developer can't make money from free. Revenues from our Drag Racer game doubled after implementing in-game credits. It captured second place in the 2010 bestappever awards for racing game of the year. (EA was #3!)
Inspector Gadget sales soared when we moved it to freemium in February. It saw a million installs in four days and was #1 in the App Stores of 17 countries.

The game is simple. You guide Gadget through increasingly challenging platforms to jump on while avoiding the objects and traps that Dr. Claw sets up for you.

It comes loaded with unlockable features including 10 of the best Inspector Gadget TV episodes of all time, Dr. Claw's mysterious face, a ringtone, sound board, concept art, power ups, and upgrades.

Our revenue from the game jumped tenfold and all of the incremental sales were from its virtual goods.

Building a sector

Most of top grossing apps in the Apple App Store and on Facebook are free. Yet in Canada at time of this writing 9 of top 10 grossing apps in App Store are free, with their revenue being generated via virtual goods.

At the Apple App Store, Tap Zoo and Tap Pet Hotel were #1 and #2,while Zynga Poker was #4.

The most popular follow-on purchase at the free game Tap Zoo was a Vial of Stars for 99 cents, followed by Pouch of Stars for $1.99. At the Tap Pet Hotel it was a Vial of Treats for 99 cents. The Zynga Poker app is in a different snack-bracket, and its top in-game purchase was 600,000 chips for $4.99. Clearly it's a high rollers game.

Over at Facebook, the top apps were Cityville and Farmville, both free to play but you can lay out 200 coins for features such as limited edition cupid corn.

The freemium model is here to stay, and for good reason.
You can read more about XMG here and follow it on Twitter here.

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