When I worked at Microsoft in the late 1990s, Alex St. John had a reputation as an infamous DirectX game development evangelist. That meant he had worked to convince developers to create games for Windows as a platform – but also that he had done some very clever items that skirted or sometimes broke the rules at Microsoft. 12 years later, meeting him at SXSW, I can tell Alex still looks for ways to get around 'the rules.'

As the President and CTO of Hi5.com, a social and gaming network, he's changing the billing and payment model for online games by changing pricing models and inventing new ones – so pay attention.  Pricing models are hard, but St. John is maximizing revenue from each customer by gaining the value from that customer where he or she wants to pay. He looks for revenue via their wallet, their eyeballs or their social networks - by showing them relevant ads, having them pay for power ups, by bringing more people to his network, or by providing entertainment value to other users. In the process, he's creating a different way of charging for online games.

When he left Microsoft, St. John founded Wild Tangent, a game development company. They created what worked in the mid-2000s - single player downloadable games designed to be sold for $20. They were games you could try or sample, then buy – or go away.  Wild Tangent found a successful way to mix advertising and playing games, according to St. John, however, ads in games tended to kill the retail value.

Meanwhile Yahoo and Facebook were becoming top gaming platforms with casual online games. And in 2008 World of Warcraft (WOW) earned roughly $500MM. But WOW at the time was about one quarter to one fifth the size of the illegal gaming market. According to St. John, right when the Bush administration started cracking down on illegal offshore gambling was when Texas Hold'em launched as a game on Facebook and became hugely popular.

St. John studied monetization and affiliate models with people from the gambling industry before working with Hi5 to create a new platform called SocioPay. What he found out may surprise you if you play online games: In the US only 3-5% of people will pay for a game they like. (The economics of mobile apps are different since the various app stores and wireless carriers make you set up a payment method in advance.)

As a game company, you get money from a small percentage of the audience, but that leaves everyone else - 95% or more of us. Says St. John, 'In a 'MiniClip.com type model' consumers get ads and offers, so the people who used to pay you now take advantage of offers. These offers provide companies lower (affiliate) payments instead of direct payments for their games. So this is inefficient by design. In fact, any one pricing model is inefficient.'

With Sociopay, Hi5 creates a dialog box that has a combination of ads and payments or commerce. At a point in a game where you need something that requires 'payment' the Sociopay server may serve a combination box that shows a way to pay, or makes you wait for an ad. The server watches what  you do, and in the future it will try to derive if you will or won't pay based on past performance. If you're not a payer, you see ad unit served by their ad server. They only ask for commerce from people who are more likely to pay for items in a game – thus maximizing the revenue from these people. If you serve an ad to someone who was willing to pay for an item, you'd be losing revenue.  

Their model separates players from payers, and even if their system does this badly, they claim they can increase revenue by 200%.  If they guess better – they should be able to do more than 200% better in revenue, and get both forms of dollars – people who pay, and people who watch ads.

Is this a unique model? I asked Michael Cavaretta, an intellectual property lawyer at Morse, Barnes-Brown & Pendleton who often works with gaming companies and also runs the MIT Enterprise Forum's New England Gaming Special Interest Group. 'One of the reasons I like the game industry is that they're on the bleeding edge of pricing models for other industries to adopt. This model, so far, sounds obvious when explained to me; I would be surprised if it is a unique model, but I can't think of anyone else doing it, so it may be the case. Others may be doing it, but their way might be better.'

Hi5 takes this payment model to another level. 'We saw only 2 models in the market – commerce or advertising," said St. John,  'So we have created 2 new payment types: virality and engagement. If you are not worth too much money to us, but you can bring 10 friends who can play and pay, we encourage you to ask your friends to join our network, and we can make money from that model.'

Finally, there's engagement.  You have entertainment value. (Facebook knows this very well.) There's value in keeping your friends on a network entertained, and Hi5 rewards those who can't be monetized, but who are entertaining those who can, and they don't even have to be playing the same game.

'As an example, a female Romanian user has almost no advertising value, but if she posts lots of pictures, is flirty, and has 35,000 friends, we can generate $238 a month from ad value when people look at her profile. When we give her $8 in free online currency to give her followers free gifts, and they reciprocated with over $168 in virtual gifts back that are paid. So flirting and engagement is a monetization model. '

Cavaretta said, 'The virality model sounds pretty interesting because you do have people on networks that obtain celebrity type status and can be valuable. The engagement model may have limitations – people with wide networks may use up their good will if they ask friends to join too often. Each user may be able to do this once or twice, but they may have a problem getting users to do this consistently.'

You don't have to be a gamer to appreciate that Hi5 is working to ensure they get the most value at the best price from every customer. They're using sophisticated techniques to find the place each user will contribute, and is happy to be contributing.  Well, happy may be relative if you're waiting for ads during your game, but you probably like them more than paying, and if they're well targeted they can be useful.

How can you apply what Hi5 is doing to pricing models for your business? Let us know your thoughts in the comments below.