Template virtual world (or freemium) business model, spreadsheet included!

Matthew Warneford

Want to know how virtual worlds make money? What are the hosting and moderation costs? How to balance paid customer acquisition against viral growth? And how all these variables interact?

Then jump right in and download our Virtual World business model spreadsheet

This is the same spreadsheet we’ve used with our partners to help them develop their business models. For example, in the chart below, the dark green line shows a 12x return in 3.5 years. I think most of us would describe that as a pretty good success. But, with different inputs, what you believe your team can achieve, and your appetite for risk, its possible to take the same model and see a 20x return, or 2x return. Ultimately, the model is there to help make decisions and understand how the variables interact.

While the model was developed for virtual worlds, its a great starting point for any freemium business. All the gory details, the maths, and the metrics behind the model are covered in these four posts:

Average Revenue Per User (ARPU)
Keep in mind the actual metrics used to drive model are indicative; there are no certainties. But, there is one ‘bottom line’ number to keep an eye on, your average revenue per unique user per month (ARPU).

The ARPU is driven by a boat load of variables: market size, growth rate, funnel conversion, subscription price, micropayment conversion, and more. Almost every metric in the model has some bearing on the ARPU; its a great indicator of the health of a world.

But what makes it so useful is that we can look at other worlds and easily estimate their ARPU’s. What we find is that a successful casual world can generate between $1 to $2 revenue per unique user per month. If you want to know how we arrive at the ARPU figure for Club Penguin and Puzzle Pirates check out this post.

We can’t expect to come out firing on a $2 ARPU immediately after launch. It takes time to figure out what types of items your players want to buy, how to improve your conversion of players to subscribers, and increase their micropayment spend.

In our spreadsheet the ARPU starts around the $0.30 mark, and builds up to the $1-$2 region over a period of 20 months. These improvements are the result of AB testing on the following:

  • Funnel conversion
  • Subscription and micropayment conversion
  • Increasing micropayment spend
  • Reducing churn
  • Increasing repeat visits

Check out the ‘World Model’ tab, the cells highlighted in yellow are the manual inputs that give us our ARPU increase over time. Change these variables to see the effect on the model.

Only a Starting Point
This model should be a starting point. Use it to kick start your own model, but also have some fun, play with the metrics and see how the relationships between the numbers effect the bottom line revenue.

For example, the chart below shows what happens if we keep everything the same but change the addressable market.

Clearly market size makes an enormous difference. This is probably no surprise, but that doesn’t mean you should set out to build a world for boys and girls ages 3 – 14. While the market size might be ginormous, Nic Mitham will tell you:

…[if you] try to cater to a wide range [of users], the pitfall is concept dilution – you just don’t have enough engagement to attract and retain users. The lowest common denominator approach is no longer an option – relevance is key and a more tightly defined target market.

Nic Mitham, blog post: We’re targeting girls and boys aged 3 – 14

Its far easier to build a product that a smaller group of players love. The larger the market the more opinions and different tastes you have to deal with, ultimate it becomes harder it becomes to delight anyone while trying to please everyone!

But don’t go too small! At the opposite end of the spectrum are the niche virtual worlds whose addressable markets will never deliver a good return. One thing this spreadsheet can do is give you is an easy way to understand when a market is too small.

This model is not perfect, but I hope its a useful starting point for virtual world or freemium entrepreneurs. The top three improvements I’d like see are:

  • Traffic: should be able to model entering new territories, the change to the daily traffic flow, and synced to a marketing spend.
  • Funnel: more fine grained modeling of the steps from sending an invite through to signing up. I’d like to see the conversion from guest to player, homepage to guest, homepage to register, and so on. These metrics become essential for running and improving your world; if you don’t track them you wont know if you’re improving your conversion rate!
  • Paid Acquisition: the model could be more intelligent about when and how the paid acquisition is ramped up. For example, we should probably keep the paid acquisition low until our LTV is greater than the cost to acquire, it would be great if the spreadsheet could do that automatically.

The model is free for anyone to use and change. Indeed, I’d love to receive back any improvements so that we can create a really great model for entrepreneurs! Any questions, feedback, or mistakes do post them into the comments so we can all learn!

Download the spreadsheet

Lastly, if you’d like some help developing your own model, and don’t want to reveal too much in the comments, then get in touch with me (matthew@dubitlimited.com).

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