Two economic reasons gamification works to increase profits for firms

My ECONS101 class has been covering pricing and business strategy this week. So, I was interested to read this article in The Conversation last week, by Adrian Camilleri (University of Technology Sydney), which discusses 'gamification' in the context of business:

Gamification – the use of game elements in non-game contexts to increase participation – is on the rise.

Businesses use it to attract customers, boost sales and motivate employees to complete activities to drive profits.

The global gamification market is expected to increase in value from AU$23.6 billion in 2024 to AU$74.8 billion by 2029. This is the total revenue generated from products and services related to gamification, including software, platforms and applications.

The use of goals, points, badges, opportunities to level up and leader boards is now common in many industries ranging from education to health and wellbeing...

There’s a good reason why gamifying in business is growing – it works.

It works so well some engagement platform providers advertise gamifying a platform will increase website traffic by 50% and double social engagement.

Academic research is mounting to support the claim gamification increases customer engagement, which in turn increases positive word-of-mouth and boosts brand loyalty.

A good example is the annual McDonald’s Monopoly promotional marketing game. Based on the classic Monopoly board game, customers receive game pieces with their purchase of certain menu items.

By collecting these pieces, they can win prizes, either instantly or by completing sets. Of course, some pieces are rarer than others, encouraging customers to keep spending until they get a full set.

According to one analysis, the chance of winning a major prize is well over one in a million.

Camilleri 's article focuses on psychology (extrinsic and intrinsic motivation) to explain why gamification works in business. However, there are also complementary economic explanations for why gamification works, so let me provide two that use the economics I cover in my ECONS101 and ECONS102 classes.

First, gamification works because it locks customers into buying from a particular seller. Customer lock-in occurs when customers find it difficult (costly) to change once they have started purchasing a particular good or service. The seller can then profit by increasing the price for their locked-in customers, or by selling them complementary goods or services.'

Take the example of the McDonald's Monopoly promotion. Once a customer starts collecting the Monopoly game pieces, there is a switching cost of going to eat somewhere else - the opportunity cost of missing out on additional Monopoly game pieces, and the chance to win a big prize. That switching cost, albeit small, is enough to encourage customers to go back to McDonald's more than they otherwise would. This explanation also covers the loyalty schemes that Camilleri uses as an additional example (as I have discussed before here).

Second, gamification generates transaction utility. Usually, we consider transaction utility arising when a consumer feels that they are 'getting a good deal', and this makes them happier (higher utility) with the process of purchasing, and more likely to buy (as I have discussed before here). Camilleri uses the example of the 'Temu wheel of discounts', which provides a perfect example of this. But with gamification, the discount may not even be necessary in order to generate transaction utility. If the game is fun or rewarding in its own right, then the consumer will receive utility from playing the game (which is another form of transaction utility).

So, while extrinsic and intrinsic motivation may be good explanations for the success of gamification, there are economic explanations that are equally helpful in understanding why gamification may be a successful strategy for business.