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The Free-to-play Business Model

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DOI: 10.1145/3151759.3151802

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Cite as: Flunger Robert, Mladenow Andreas, Strauss Christine: The Free-to-play Business Model. In: Indrawan-Santiago,
M., Salvadori I.L., Steinbauer M., Khalil I.,Anderst-Kotsis G. (eds.) The 19th International Conference on Information
Integration and Web-based Applications & Services (iiWAS). ACM Conference Proceedings Series, 2018, pp. 373-379.

iiWAS2017 Papers Proceedings of iiWAS2017

The Free-to-play Business Model *

Full Paper†

Robert Flunger Andreas Mladenow Christine Strauss

University of Vienna University of Vienna University of Vienna
Vienna, Austria Vienna, Austria Vienna, Austria
flunger58@univie.ac.at andreas.mladenow @univie.ac.at christine.strauss@univie.ac.at

ABSTRACT
The 1 free-to-play model in the online gaming industry is based on
providing an online game at no charge on either mobile devices or
on a PC. Monetization would occur with virtual items which
players may purchase during the game. It has been demonstrated
that there are several motivations for gamers to purchase such items
including unobstructed play, social interactions with other gamers,
competition and economic rationale. These motivations can be
exploited as drivers for value generation when designing such
games in a way that appeals to the gamers by using several
strategies. We elaborate on seven strategies, i.e. stratified content,
inconvenient gameplay elements, mediums of exchange, inventory
mechanics, special occasions, artificial scarcity, and alterations of
content. Additionally, the theory of customer lifetime value has
shown to be a beneficial concept in segmenting customers and
identifying those who are especially valuable from a business
perspective. Overall, research on business value generation in the
field of online gaming seems less developed than in other segments
and applications. Consequently, a common understanding of
available concepts and strategies need to be developed to enable
identification and overcoming of challenges in free-to-play online
gaming.
CCS CONCEPTS
• Software and its engineering → Virtual Worlds Software;
Interactive games; • Computers in other domains → Personal
Computers and PC applications; Computer games
KEYWORDS
Free-to-play, online game industry, business model, social
interaction, virtual goods, customer lifetime value, value creation.
ACM Reference format:
R. Flunger, A. Mladenow, and C. Strauss, 2017. The Free-to-play Business
Model In Proceedings of 19th International Conference on Information
Integration and Web-based Applications & Services, Salzburg, Austria,
December 4–6, 2017 (iiWAS '17), 7 pages.
https://doi.org/10.1145/3151759.3151802
1 INTRODUCTION
Along with increased use of information and communications
technology (ICT) and mobile devices novel business models and
sectors have emerged [cf. e.g., 1, 2, 3]. A representative example is
the online gaming industry, which has become increasingly
relevant over the last few years [4]. Revenues are steadily on the
rise [5], incentivizing business models [6, 7] that are specifically
tailored towards the challenges in this industry [8].
As such, the free-to-play model has gained significant traction
[9] and has led to an abundance of games that are competing for a
share of this market [10]. Thus, the purpose of this research paper
is to present a review of current scientific literature on the free-to-
play business model, defining it, and examining its incremental
factors in order to understand how it appeals to customers, and how
business professionals can use it effectively and how to generate
business value. This paper is composed in a large part on the works
by Juho Hamari (see for example: Hamari [11]; Hamari, Alha et al.
[12]; Hamari, Hanner, and Koivisto [13]; Hamari and Keronen
[14]) who can be regarded as some of the major contributors on the
topic of free-to-play gaming.
The remainder of this paper is organized as follows. First, the
model itself will be discussed in order to understand how it works
at its core. Additionally, the first section will define the concept of
virtual goods, which are the main monetization source in this
business model, and a distinction will be made between different
relevant online game types. The second section will discuss the
attitudes and motivations of gamers towards purchasing virtual
assets in a free-to-play environment as this aspect is crucial for
professionals for understanding how they can generate value.
Afterwards, methods will be discussed on how business
professionals can leverage these findings to generate business
value. In the end, a conclusion will be formed, summarizing the
major findings and discussing further incentives for future research
in this field of studies.
2 THE CONCEPT OF FREE-TO-PLAY
Free-to-play is a direct derivative from the so-called freemium
business model [13]. This model is characterized by providing its

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373
 Proceedings of iiWAS2017
IIWAS’17, Dec 2017, Salzburg, AUSTRIA
product or service at no charge with a set of basic functions attached
to it [15]. Monetization occurs with the offer of additional functions
and services that enhance the core product and its experience for
the customer [13, 15]. In the context of online businesses [10, 11],
the model was first used in the software sector where developers
offered free trial versions of their products that could be converted
to premium versions by purchasing them. A common example
would be anti-virus software that offered its basic functions,
namely scanning for threats, for free and then adding additional
security measures in a premium version that could be purchased
[12].
In the context of online gaming, free-to-play emerged as a
business model to compete with classic models [16, 17] such as
one-time payment and subscription-based models that required a
financial investment [cf. e.g., 8, 18, 19] before allowing the users
to play the game [20]. In this context, the core of the game is free,
but the gameplay is generally restricted in some manner [21, 22].
For example, it might only be possible to play for a certain period,
or certain actions are limited within the game. Another way of
monetization besides restricting gameplay is to offer a variety of
virtual goods for sale that enhance the gaming experience in some
way [8]. In fact, this has become the primary method of monetizing
these games [23, 24]. As reasoning for the surge of free-to-play
games in the last few years [5], Hamari, Hanner et al. [13] contend
that the development of online games has become relatively
accessible as well as inexpensive in comparison to a few years ago
when the market was dominated by only a small number of major
developers. Also, by offering a game at no charge, developers
expect to attract a large user base shortly after the launch. However,
due to everyone currently relying on this model, heavy competition
on the market has led to diminishing overall benefits for most
participants.
Paavilainen et al. [25] describe two major advantages of this
model compared to the traditional one. First, the virtual goods that
will be sold can be priced flexibly to appeal to different sorts of
players as different customers are willing to spend varying amounts
of money. The second advantage is that a wider segmentation of
players is possible as the entry is, per say, free and the virtual goods
offered can be tailored to different audiences.
In addition to these advantages, there is the possibility of
creating a network effect by having a large base of users even if
they do not purchase anything [26, 27]. More users make the
network “better” and more effective by exchanging information
and experiences which subsequently leads to increased visibility
and attracts even more users. In literature, this effect is referred to
as Metcalfe’s Law [27]. Consequently, the greater user base
potentially means more converts to paying users and thus higher
revenue and profit, especially since the costs of acquiring new users
are relatively low [cf. e.g., 16, 28]. Leveraging such an effect is
argued to be important as conversion rates from non-paying to
paying users in these games can be as low as 1% and rarely exceed
5% [22, 29].
Another core characteristic of free-to-play online games is that
the gaming world and its narrative are seemingly never-ending. The
story – if there even is one – and the gameplay do not have clear
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R. Flunger et al.
ending points, making it possible to play them for an indefinite
amount of time [30].
2.1 Virtual Goods
As free-to-play monetization happens mainly with virtual goods
[12], this section is dedicated at examining them more closely.
These goods are items that are imbedded into the game world and
can be used by a players’ character in some way. They can be
offered in a huge variety, for example, as weapons and armors,
clothing, or simple graphical badges (social games). As wide as
their variety may be, this applies to their usage as well [31].
Thus, a classification in two distinct categories is common,
specifically, as functional props and decorative props. Functional
indicates that the item enhances the virtual character’s (meaning the
players’ avatar) ability [8], making him/her stronger, better, and
thus more efficient in the game. The purpose of decorative props,
on the other hand, is for decoration by changing the appearance of
the player’s character or other objects and assets in the game world.
It may also be possible that items fall into both categories, for
example, a weapon that enhances the characters’ abilities
(functional prop) and also changes his appearance for everyone to
see in the game world (decorative prop) [32]. A similar
classification with slightly different wording has been adapted by
several other authors such as Marchand and Hennig-Thurau [23],
Park and Lee [34], Hanner and Zarnekow [23], Hamari and
Keronen [35], and Wu et al. [36].
Regarding the characteristics of virtual goods, they are bound
by the context of the service or game and do not have any value
outside of this environment. Also, virtual goods are rivalrous as it
is not possible to copy them and, if someone else wants to use them,
they must also pay [1, 13].
Thus, Hamari and Lehdonvirta [31] suggest to apply a
marketing rationale whereby the design of the goods is at the
discretion of the games’ developers who can decide on context,
purpose, and pricing themselves and aim to create products that are
perceived as valuable by customers.
2.2 Types of Online Games
It may be of value to make a distinction between different types of
games as research tends to only look at them individually without
taking others into account, raising the question if the findings are
holistically applicable to the online gaming sector [5]. It is
assumable that there is a general baseline but that some factors are
specifically tied to the characteristics of the game type in which
they are placed. A general distinction in games in the context of
free-to-play is made between online games that are played on a
desktop PC, social games, and mobile games [35].
Mobile games with social components have been especially
surging in popularity over the last few years as new technology
such as high quality touchscreens and displays as well as strong
network connections enable a very convenient gaming experience
[18, 28, 37].
Social in this sense means that the games are played via logging
in on a social network, such as Facebook. In this context, the games
are generally easily accessible and do not take a lot of effort to play.
 iiWAS2017 Papers
The Free-to-play Business Model
They provide player expression through an individually
customizable avatar and/or game space for every player whereby it
is possible to interact with other players. Additionally, social
interactions are encouraged as part of the gameplay, for example,
by sending and receiving gifts (in the form of virtual goods),
fighting side by side with others against monsters, or fighting
against each other [37]. Mobile and social games are primarily
characterized by short but frequent playing times where players are
encouraged to engage with the game for a period of a few minutes,
multiple times a day, and the “dead time” between these active
moments of gameplay is often a central component of the monetary
strategy behind these games.
Online games on a PC, on the other hand, such as the popular
genre of massively multiplayer online games (MMOGs), encourage
long sessions of consistent play [38]. As in many cases, mobile and
social games are entwined and, as this is the case in the studies
discussed, they will be regarded as one entity for the purpose of this
paper.
3 PURCHASING MOTIVATIONS OF
GAMERS
In general, Hamari, Alha et al. [7] found from a survey with gamers
that there are six factors explaining the purchase motivation in free-
to-play games. These include unobstructed play, social interaction,
competition, economic rationale, indulging children, and unlocking
content. However, the latter two dimensions have been shown to
not be as predicative as the others. Unlocking content showed to be
too general of a category in the survey without providing concrete
reasoning for purchase motivations while indulging children was
too narrow and specific. Thus, the focus of this section is placed on
the first four factors.
3.1 Unobstructed play
Unobstructed play concerns motivations around being able to
continuously play the game. Thus, users may purchase virtual
goods that speed up timers that they would otherwise have to wait
for to avoid repetition, to reach completion, or simply to continue
playing, for example, in the case of a game-over (losing the game
and having to restart from a certain checkpoint earlier in the game)
as identified by Hamari, Alha et al. [7]. Interestingly, Hamari [6]
mentioned frustration as an efficient motivational factor in an
earlier study. Developers could leverage frustrations by placing
artificial barriers in the game environment that reduce or hamper
player progress. The same phenomenon had been confirmed by
Gainsbury et al. [26] in a study on social casino games where it was
indicated that players who experienced frustration by being stuck
in the game were prone to spend money to ensure further
progression.
Additionally, impatience is a factor that is somewhat entwined
with frustration and motivates players to make purchases. For
example, barriers in the game could be in the form of implementing
waiting times for contents that can be forgone by paying money.
As such, impatience has become a central part of game design,
especially in mobile and social games with short engagement times
[19].
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3.2 Social Interaction
Hamari, Alha et al. [7] argue that this dimension considers purchase
motivations that are related to the players’ social presentation and
interactions such as being able to play with friends, personalize
his/her avatar or other in-game assets, sending gifts to others,
avoidance of spam in the sense of spamming others, and
participation in special events.
Social interaction as a motivator has also been referred to as
social shopping by Cleghorn and Griffiths [27]. In this context, they
state that, when the gamer is in contact with other gamers, virtual
items become a means of expressing oneself and to show off. This
was demonstrated as being valid in their qualitative purchasing
behavior study. Thus, from a psychological perspective, the
intention of purchasing virtual items [5] not only has the hedonic
motivation of satisfying oneself but also the social motivation to
impress others, especially personal friends.
Other factors that have been determined to be relevant in the
context of social interaction as a motivating factor for a purchase
were identification with the player’s character [22], positive beliefs
on purchasing virtual goods of others in ones’ social circle, and the
amount of social connections the player has in the game [6, 7].
Social interaction is an important driver to stimulate purchasing
virtual goods. This was confirmed by the study performed by
Gainsbury et al. [26] who compared the paying players to the non-
paying ones. By doing so, they discovered that more than half of
those who paid, valued social features and interactions within a
game as important compared to only a third of non-paying players
3.3 Competition
Here, competition is considered as a motivating factor when the
gamer strives to become the best player possible and show off to
others, especially in his circle of online friends [9]. This can be
what Park and Lee [22] describe as character competency value,
meaning that gamers purchase virtual items that make their game
character(s) stronger in some way.
However, many gamers have a negative attitude towards this
kind of motivation as gaining competitive advantage by using
money is regarded as a form of cheating, enabling so-called “pay-
to-win”. This especially holds true for hardcore online games in the
online gaming environment where personal skill counts more than
it does in social games [19]. Nevertheless, it can be an effective
purchase motivation if it is implemented in a way that it is not
perceived as cheating [7]. This would be imaginable in such a form
that the possibility of purchasing certain visual items is locked
behind an achievement in-game. For example, a special skin (visual
makeover for the players’ character) could be locked behind
reaching a certain rank in the game that requires fulfilling a number
of hard gameplay tasks. If the skin is consequently purchased, this
blends in with a social motivation as the gamers can show that they
accomplished something special and can be proud of it.
3.4 Econmic Rationale
Economic rationale describes purchase motivations such as
reasonable pricing, special offers, the intention to support an
 Proceedings of iiWAS2017 iiWAS2017 Papers
IIWAS’17, Dec 2017, Salzburg, AUSTRIA R. Flunger et al.

enjoyable game, and investing in a personal hobby [12]. In other Table 1. Business Implications for the Free2Play Business
literature, this is referred to as monetary value, meaning that gamers Model
need to perceive a virtual advantage to have a certain value when
purchasing it. strategy purpose example
Cost-effectiveness and an overall reasonable price within the stratified segmenting players creating content
context of the game are important factors in this context [34]. It is content vertically and for children or a
also commonly perceived that reasonable, low prices imply a horizontally wide spectrum of
perception of good will from the developer, making gamers more consumers
willing to pay and support them [12]. inconvenient convincing gamers to built in barriers or
gameplay purchase an item difficulties for
Additionally, Cleghorn and Griffiths [39] found that time
elements game success
investment is a positive predictor for purchase intention as
mediums of employing own including
committing time to the service increases the value perception of the exchange premium currencies exclusive
gamer. “jewels”
In this context, the concept of a product value discrepancy inventory motivating to play the setting space
between the free and premium game version is of relevance [13]. It mechanics game and collect limitation
describes to how the two versions differ, and represents a critical items more requirements
factor in the assessment of when the gamer would purchase a convenient
premium product. The idea is that, with great value discrepancy special incentivizing a integrating
(meaning a game with few free features), the number of paying occasions and purchase Christmas or
artificial Easter offers
users would be high as they perceive the premium value as high.
scarcity
However, if all of the value is placed on the premium content, the
alterations to animating to purchase designing new
game would be considered as a cash grab, and users may defer to a existing new content in order items for
different game where they perceive a higher value [29]. Bonus content to progress further in devaluing of old
offers, special deals and free promotions can help to counteract the game content
against this threat and increase the value perception of the gamers customer addressing high value providing unique,
[37]. lifetime value customers for exclusive content
efficient monetization for “VIP”s
4 BUSINESS IMPLICATIONS
This section serves to provide and discuss implications on how 4.1 Stratified content
business professionals can leverage the motivations [40, 41] and
attitudes of gamers to sell their virtual goods in a free-to-play Stratified content as a mechanism has the purpose of segmenting
gaming environment. In these regards, Hamari and Lehdonvirta players both vertically and horizontally. Vertical segmentation is
[31] stress the importance of marketing as game designers are those oriented towards the state of progression of players, for example,
individuals who are creating the rules and mechanics of the gaming their character level. It is suggested that every level of progress has
world, and thus have control over the characteristics of the virtual its own mechanisms and key aspects thus segmentation serves to
goods that are sold. In this regard, seven strategies of how to create target specific virtual items to these levels. Further segmentations
needs for virtual products are discussed in this section as depicted can then be made such as the time investment of the players or
in Table 1. sensitivity to item prices. Horizontal segmentation, on the other
Although further factors have been mentioned in the literature, hand, means that there are different gameplay dimensions within a
however, we consider those as the most important ones. Gamers game such as hardcore gaming for performance-oriented gamers,
found it important that a certain level of service quality is provided, socializing activities, trading activities, and casual elements for the
however, this already applies to the free versions. Survey results by less hardcore gamers. Here again, some items may be more
Hamari, Hanner et al. [13] also show that increasing service quality appealing to certain groups [31].
does not necessarily increase sales of virtual goods. Another factor Considering targeting mechanisms, Hanner and Zarnekow [35]
stressed by these authors is that it is an efficient strategy to give contend that the demand for virtual items can be actively stimulated
away free samples of the virtual goods being sold as this can by efficient marketing. An example would be to send a push
accelerate sales and convince gamers to purchase goods they may message containing an exclusive offer to the players. This is a
not yet have considered. Also, Koch and Benlian [29] deem it common practice on mobile applications as messages can be
efficient to reward gamers for bringing new users to the game by directly pushed to the user’s device. Efficient segmentation is
giving out free samples as this has a positive effect on the network beneficial in this aspect as it allows proper targeting and avoids
and can subsequently lead to greater revenue. spamming users who are not less interested and might interpret
such messaging as inconvenient or even disruptive.

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4.2 Inconvenient gameplay elements
Inconvenient gameplay elements have been previously discussed
with the notion that frustration is a motivating factor to convince
gamers to purchase an item. However, it is important to keep it
within certain limits as the gamer should not feel as if no progress
would be made without paying. Thus, a balance must be found that
elevates frustration but does not discourage the player [42, 43]. This
is also pointed out by Hamari [11], who ascertained that frustration
with progress in the game leads to a higher purchase intention.
4.3 Mediums of exchange
By now, it is common practice for free-to-play games to employ
their own premium currencies. Usually, there are two types of
currencies in a game. The first can be earned and collected by
simply playing the game and fulfilling certain tasks (these are
usually resources, for example, stones or other raw materials). The
second type is a premium currency that must be purchased with real
money and can be used to buy virtual goods. This currency carries
a name that establishes a sense of exclusivity, such as “diamonds”
or “jewels”. They come in packages that cost between €1 and €100
and offer options for players with different willingness to pay.
While the first type is usually tradable between players, the
premium currency is only distributed by the game developer [25,
30, 35].
The advantages of such a model are that it has a psychological
effect by representing an exclusive, virtual economy and also offers
flexible pricing options that are not as distinct as they would be
with direct real money purchases. For example, prices for items
could differ from the amount of currency that is purchasable thus
leaving the customer with some available balance and the incentive
to buy more in the future [31].
4.4 Inventory mechanics
Concerning inventory mechanics, this means that the amount of
virtual items that a player can store is limited. Thus, extensions for
this item space can be offered for purchase as an option to make
playing the game and collecting items more convenient [31].
4.5 Special occasions and artificial scarcity
Special occasions mean special events that occur in the game-
world. They are often modeled after seasonal real-life events (e.g.
Christmas) and come with exclusive sets of items and special offers
to incentivize a purchase. As seen before, exclusivity is a factor that
effectively motivates users.
This fits together with the factor of artificial scarcity where
items can be modelled in a way that they are difficult to obtain or
only available for a certain period [31]. Indeed, this was valid, for
example, in the study by Cleghorn and Griffiths [39] with the
annotation that the items with an “expiration tag” were those for
which the surveyed gamers spent the most amount of money. Thus,
the perception of exclusivity and scarcity is enough to motivate
gamers to purchase virtual goods.
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4.6 Alterations to existing content
This aspect refers to providing new content to the game of a larger
scope, often devaluing old content in the process. Usually, this new
content is similar in purpose to the core game such as new levels or
new areas to explore. This method is costly but highly useful in
terms of monetization according to Hamari, Hanner et al. [13] and
Hamari and Lehdonvirta [31] as the devaluing of old content makes
it necessary to purchase the new in order to progress further in the
game.
4.7 Customer lifetime value
In general, conversion rates from non-paying to paying players are
reported to be very low, i.e., between one and five percent. Thus, it
is important for game developers to be able to differentiate high
value customers that spend a lot from those who are less valuable
in order to determine the best possible strategy that yields an
increase in profit.
To do so, the theory of customer lifetime value (CLV) is
employed by Hanner and Zarnekow [35] and Voigt and Hinz [38]
and will be examined in more detail in this subsection. Overall,
acquisition is the core activity for business professionals. It is said
that the lifetime of a user begins with the installation of the game
with the next step being the conversion to a paying customer. With
the purchase, the acquisition phase is over and retention starts
whereby the amount of money spent on purchases is called the
monetization value [35].
Both Voigt and Hinz [38] and Hanner and Zarnekow [35] found
that there are specific factors that help in identifying potential
heavy spenders. Specifically, customers tend to generate high value
if they make their first purchase soon after game
installation/registration, if they spend a high amount on a first
purchase, and if they use specific payment methods – especially
credit card users showed having a tendency of becoming big
spenders. It is suggested to treat these potential “VIPs” with special
care, for example, providing them faster response times for
enquiries or unique, exclusive content.
Also, the findings show that most users first make a small,
inexpensive value purchase but that more purchases will often
follow and that the financial value will increase with each
subsequent purchase. Thus, for efficient monetization to occur,
virtual items should be presented dynamically by presenting
inexpensive items first that fit the players’ while not overwhelming
them with expensive premium content [35].
5 CONCLUSION
It is highly accepted within the online gaming industry that the
paradigms of game development have changed with the advent of
free-to-play games, shifting away from developing the best
possible game in an artistic sense. Instead, developers would focus
more on designing them in a way that motivates users to purchase
virtual content [8] as frequently as possible while still building a
large user base [12]. Thus, this paper attempted to provide an
overview of the model and an understanding of what comprises the
main drivers for profit generation.
 Proceedings of iiWAS2017
IIWAS’17, Dec 2017, Salzburg, AUSTRIA
Understanding the free-to-play model is certainly an intricate
task, and not every aspect has yet been fully unraveled. Most of the
research conducted thus far has been focused from the gamers’
perspectives, researching motivations for purchasing content in a
gaming environment [cf. e.g., 10, 34]. However, research into the
business professional’s side is under represented. This has also
been recognized by Hamari et al. [12] who mention that, by now,
knowledge on reasons for purchase that stem from game design
itself is still not fully solidified. Even though Hamari and
Lehdonvirta [31] had established a set of strategies that game
developers could implement already seven years before this
statement, it appears that scholars are still not completely certain
about what exactly are the most efficient approaches. Thus,
additional research into these matters would surely yield interesting
results. For example, case studies could be conducted on the models
employed by different games, and their results could be compared
to players’ opinions and mindsets. Furthermore, selected sectors of
the gaming industry would be a suitable experimental ground for
novel business approaches, like for example service-dominant logic
(cf. e.g. [44]).
Another point that has only been rarely mentioned is the
relevance of ethical issues within these gaming models. As
mentioned above, in some games, conversion rates to paying
customers can be as low as 1%, meaning that this 1% of gamers
would finance 99% of gamers who do not pay anything to play the
game. This raises the question of whether it is ethically correct to
“milk” this very small portion of the player base to sustain the game
or if there would be other methods that are more feasible.
Additionally, there is the question if the findings presented here
are applicable to the online gaming industry in general or if they
are specific to their game type as most studies covered social
gaming or online gaming in the form of MMOs but rarely ever both.
Further investigation may be fruitful to fully understand the scope
of this business segment.
Other implications for further study would be to consider
additional demographic aspects and attempt to formulate profiles
of typical gamers as this would allow a number of further methods
for segmentation. For example, it could be researched whether
gamers with different demographic backgrounds have different
purchasing behavior and how their in-game behavior subsequently
differs. Also, it may be worth considering alternative models that
have not been extensively focused on in literature such as models
that require an initial small purchase for the basic game without a
subscription fee and then offer virtual goods that could be
purchased.
It can be assumed that the industry of online gaming as well as
the influence of the free-to-play model will grow even more in the
coming years and more research will certainly arise to further
solidify the intricacies of this young and lucrative business sector.
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