Gamers have spent hundreds of dollars on this game mechanic, yet others find this concerning. Here’s why…

Tuesday: Return Driven Strategy FROM THE DESK OF MILES EVERSON: Are you looking for ways to create and maximize wealth for your business? If you are, check out Return Driven Strategy (RDS). This will give you a clearer perspective on how to properly plan and execute your business and marketing strategies. RDS has 11 tenets and 3 foundations. When properly integrated into your brand, these principles will help you achieve true wealth and value creation. Today, let’s look at a case study related to the first tenet of RDS: Ethically Maximize Wealth. Continue reading to know why it’s important for firms to operate within the ethical boundaries of the constituents they serve. CEO, MBO Partners Chairman of the Advisory Board, The I Institute

Gamers have spent hundreds of dollars on this game mechanic, yet others find this concerning. Here’s why… The video game industry is considered one of the most profitable segments in the entertainment market due to its immense popularity among casual and dedicated gamers. According to Tom Wijman, the Lead Games Analyst at gaming analytics and insights firm Newzoo, over 3 billion gamers worldwide are expected to help the global gaming market generate around USD 200 billion in revenues for 2022. Have you ever wondered how video game companies are able to generate the revenues shown above? Aside from selling games at a set price like any commodity, video game publishers increase their profit margins by selling extra content that is added to the game through subsequent updates. One of these extra content? Microtransactions! In case you’re not aware, a microtransaction is a digital purchase players can make in a game. Users can buy experience (XP) boosts, cosmetic items known as skins, and in-game currencies. While these items can be earned through playing, buying them outright makes it easier for players to acquire them. In recent years, gaming companies have made microtransactions an integral part of their games. Out of all the types of this mechanic, one stands out from the rest in terms of profitability and popularity. Any ideas on what this is? Loot boxes! These digital “treasure chests” contain in-game items such as XP boosts, skins, in-game currency, and even in-game characters. To redeem what’s inside these boxes, players have to buy digital “keys” with real money. The items players can get from these boxes are randomized. What makes this mechanic popular is it gives buyers the chance to earn high-value items without spending hours playing a game. On average, it costs around USD 1 to USD 3 to open one loot box. Millions of players buy these boxes repeatedly on a daily basis, with some spending hundreds of dollars in the process. In fact, according to market analytics firm Juniper Research, in 2020 alone, loot boxes accounted for USD 15 billion in revenue across the gaming industry. This number is projected to increase to USD 20 billion by 2025. While this type of microtransaction is good for companies looking to make a profit, there are people who think loot boxes aren’t good for the gaming industry. Why? According to researchers from the University of Plymouth and University of Wolverhampton, loot boxes “are structurally and psychologically akin to gambling.” In the 2021 study, it was also found that gamers are “nudged” into spending money on loot boxes through tactics such as “endowment effects” and “fear of missing out (FOMO).” [Endowment Effects: In the context of the study, the endowment effect means players are given an item for “free,” but are required to pay to redeem the free item. Fear of Missing Out (FOMO): This is a strategy where developers create limited-time offers to persuade players into buying in-game content.] Government Action on the Loot Box Mechanic Due to public concern, some governments across the globe have made moves to regulate loot boxes. In 2018, the Belgian Gambling Authority ruled that games with loot box features had to be licensed under existing gambling laws. This means games with this feature were banned from the Belgian games market. Unfortunately, the ruling isn’t being enforced. Similarly, in November 2022, Australian legislators proposed a bill that seeks to require all video games with loot box mechanics to be sold only to those aged 18 and above. Games with the feature must also come with a warning for parents and guardians. Meanwhile, in the U.S., concerned groups sent a petition to the Federal Trade Commission (FTC) in June 2022 urging the regulator to investigate game publisher Electronic Arts (EA) because the loot box mechanic found in “FIFA,” a popular football video game “introduces kids and teens to gambling.” EA also received criticisms from the public because of its loot boxes in the “FIFA” game. Gaming industry observers expect that loot boxes are here to stay for a while. However, given the intense public scrutiny, it wouldn’t be surprising if regulators across the globe start to restrict the use of this game mechanic. — RDS’ first tenet—ethically maximize wealth—gives us a reason behind the public outcry and subsequent attempts at regulating loot boxes. According to Professor Joel Litman and Dr. Mark L. Frigo in the book, “Driven”: “Any business that wishes to succeed must find ways to understand the boundaries and limitations of the groups it seeks to do business with. What’s ethical in one part of the world may be considered unethical in another. What is ethical to investors may not be considered ethical to consumers. All of these communities’ parameters must be taken into consideration.” From a business perspective, there’s nothing wrong with the loot box mechanic because it’s a viable way of creating another revenue stream for gaming companies. The problem? Consumers felt that the strategy was an unethical way of creating profit. As a result, lots of people publicly criticized the game mechanic. … and because of the public outcry and petitions, some governments decided to take action. Remember: You should always take into account your target market’s ethical standards. While finding a way to profit from your products or services is good for business, it should be done in alignment with your customers’ values. Hope you found this week’s insights interesting and helpful. Follow us on LinkedIn.     Stay tuned for next Tuesday’s Return Driven Strategy! In a past “Return Driven Strategy” article, we discussed the factors that led to the downfall of toy retail company Toys R Us. Learn more about what enables this retail company to price its offerings more cheaply and still generate high returns in next week’s article!