Zynga has investors confused. This is because they are primarily engaged in the retail business model, but they really aren’t selling anything tangible. Zynga sells virtual goods that social gamers can use to further enhance their gaming experience. This is complimented by the sale of in-game ads that gamers are forced to watch in order to proceed on with the game they are playing.
Founded in 2007, this company has quickly risen to be a $1 billion per year money maker. Can the Zynga business model continue to be profitable, even though it is primarily selling digital currency that can only be used in its games like Farmville?
Zynga Has Found Unique Ways To Place Products
When you go to a movie theater to see a much anticipated film, you are being exposed to dozens of brands in the process. This practice is called “product placement” and it occurs when a brand image is used on the screen or mentioned by the actors. Just seeing the brand in a favorite movie is enough for someone to keep that brand at the top of their mind.
The same thing is happening in the games that Zynga is creating, but within the scope of the game itself. McDonald’s famously offered a Farmville product that had its golden arches on prominent display for virtual farmers to enjoy. Gamers get a bonus for including these brand specific products within the confines of the game, while advertisers enjoy the extra exposure that will naturally lead to more overall business.
The Zynga business model has taken this a step further to include branding within specific tasks and quests that must be achieved. In a restaurant game, for example, a gamer might be able to earn extra money or customers by developing a cappuccino product using Starbucks ingredients. Some of these product placements command big money: up to $750k for extensive inclusion in a Zynga game.
Are Virtual Goods Really Going To Be Sustainable?
Although the virtual goods part of the Zynga business profile is sustainable, it is also rather static. The structure of it is rather simple. For a small price, often $1 or less, users can purchase in-game upgrades that will help them progress through a quest more rapidly than if they did not make the purchase. When users can connect credit cards or a Paypal account to the game and purchase with a single click, the purchase seems almost effortless.
Now imagine you’ve got 500,000 people around the world who are playing that game. If just 50% of them were to make just 1 purchase per day of a premium upgrade, your game would be able to generate $250k of revenue every single day. That’s $1.75 million per week.
This means that Zynga is not only a gaming company, but also an entertainment company. This means they need to continually innovate new products in order to expand the virtual goods that are available to consumers. Over time, social games grow old and tired, even for regular players. There’s only so many times you can harvest your virtual farm, right? So new games mean gamers can stay engaged and tempted to purchase more virtual currency.
People Pay For Entertainment All of the Time
One of the few things that people aren’t afraid to spend money on today is their entertainment. They might be tightening their purse strings, but they will still invest in something that will help them pass the time. This is the greatest lesson that can be learned from the Zynga business model. If someone has to pay $10 to go to a movie for a couple hours of entertainment or they can get the same thing from a Zynga game for $1, which holds the most value?
It’s almost always going to be the Zynga game. Even two or three premium purchases will have more value than the one purchase of a movie ticket.
Zynga has also built into their games a factor called the “Impatience Cycle.” You can play the game for free, but you’re going to run out of lives, money, or have to wait hours or even days for your crops to grow. If a gamer wants to keep playing, then they must spend money on virtual goods to make that happen. Add in the better items that come from a purchase and one social gamer can prove that their account is better because their stuff is “cooler.”
The bottom line of the Zynga business model is this: sometimes you can create a problem within your own product that you can then charge to provide a solution. Value is seen with the free download. Value is also seen with the low-cost purchases to improve the gaming experience. Advertisers will pay to get involved with these games because their brands are virtually guaranteed to be seen. This makes revenue streams diverse for a low initial investment.
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