Game refunds & the hidden costs of 'getting to net' on Steam

Sorry, it's another numbers column.

[Hi, I’m ‘how people find your game’ expert Simon Carless, and you’re reading the Game Discoverability Now! newsletter, a regular look at how people discover and buy video games in the 2020s.]

Though the world has been submerged in ‘Epic vs. Apple’ hot takes in recent days - and I may address it in the GameDiscoverabilityland round-up later in the week - I thought I’d zig, rather than zag for this piece.

So let’s focus on something granular, but important if you sell games on Steam. How is your title’s net revenue calculated from your gross, how much does it tend to be, and why do refunds need some extra discussion? Heck, I’ll tell you.

The ‘Gross to Net’ Conundrum

OK, so you hear a game has ‘grossed $1 million’ on Steam. This means that at some point, people have paid Steam $1 million for the content. Sounds nice, everyone rolling in money, etc?

But there are multiple stages you have to go through to calculate what percentage of that money actually reaches the publisher or developer. And if we take it in the same order as Steam’s ‘sales reports’, it would be the following:

Part 1: Factor In ‘Lost’ Revenue From Refunds & Chargebacks.

Back in 2015, Steam introduced a much-expanded refund policy for those players who’ve played the game for less than two hours, and are dissatisfied with the title for whatever reason. This is - compared to console and iOS/Android policies - an extremely generous policy.

At the time, there was significant concern around sky-high refund rates of more than 50%. But luckily, these were people who hadn’t played games much ‘catching up’ on games that would have been otherwise refunded many months before. So it normalized to a non-terrible - but still non-zero - figure.

In 2020, at least across the portfolio of games I have access to via my friends at No More Robots, average monthly refund rate by unit across the portfolio ranged between 5% and 8%. Actual dollar refund rate varied between 6.5% and 11%. (Refunds from higher-priced countries skew the dollar refund rate upwards.)

Just looking at raw units, the highest recent refund rate for a game during a 1-month period was around 17%, and the lowest was around 3%. Quite a difference!

I’m not sure it’s that easy to change your game’s refund rate. But here’s my back-of-a-napkin ‘why is your rate low or high?’ comments:

• Your refund rate is higher because your game doesn’t make a good initial impression. Perhaps it’s not what people expected, or it looks clunky, or it’s not sufficiently finished, if it’s an Early Access title. You can do something about this! (Particularly the Early Access issues.)

• Your refund rate is higher because of the country mix you are selling into. Certain countries - particularly China - tend to have a higher Steam refund rate. Two examples: Game 1: a 5.5% unit refund rate in the U.S. and a 15% refund rate in China. Game 2: a 12.7% unit refund rate in the U.S. and a 24% refund rate in China.

• Your refund rate is lower because your title is in a niche. If you made an amazing bass fishing game, it’s likely that most of the people buying it will be bass fishing fans. They may be ‘bought in’, understand what they are getting, and less likely to refund.

• Your refund rate is lower because your title is good! This is definitely a thing - if people like a game, they are less likely to refund it. (lol.)

• Your refund rate is lower because of the countries you are selling into. Don’t need to rehash this one - it’s the opposite of the point above. (But don’t forget that if you don’t localize, you may be missing revenue from those countries. Even higher-refund revenue is a part of much-welcomed extra $.)

But concluding, let’s say your refund (& chargeback) dollar rate for this million-dollar grossing game was 9%. This is the first deduction you’ll need to make from our gross to reach net.

TOTAL = 91% of gross revenue. (You now have $910,000 of your notional $1 million.)

Part 2: Factor In VAT & Sales Tax Payments

Looks, I’m not going to lie, I have to talk about VAT/sales tax now. And you are willingly reading this newsletter of your own volition. Sorry.

But actually, it’s pretty straightforward. Many countries demand that Steam pays them a sales tax - mainly between 10% and 20% - when a game is sold to a player in their country. You can see the full list of countries here.

Those country-specific taxes are inclusive, which means that if you sell a game for $15 in that country, and there’s a 20% inclusive tax, $3 of it gets sent to the local authorities. So that obviously reduces your revenue further.

(In the U.S., Valve does charge ‘exclusive’ sales tax in some states. That is to say, if a player is in New Jersey, they pay an extra 6.625% on top of the $15 game cost, and this % gets sent to the state authorities. This started happening more widely in late 2018 after a U.S. Supreme Court decision.)

Anyhow, looking over the portfolio I can see, this VAT/sales tax is between 8% and 9% of the gross. This is the next deduction. Let’s say it’s 8.5% on average, though it may vary depending on country and state mix.

TOTAL = 82.5% of gross revenue. (You now have $825,000 of your notional $1 million.)

Part 3: It’s time for Steam’s cut!

So, now these things have been removed, Steam takes… its 30% platform cut. Yes, I can hear you calling plaintively, but is that a fair cut? *prepares 43-Tweet long analysis of the topic*

(I’d personally like to see Steam and other non-Epic Games Store platform services reduce their revenue cut for lower-grossing games. But overall, I certainly don’t want to be the person puzzling out how to submit sales tax to the Chilean authorities.)

In any case, that 30% cut is what you’re getting deducted right now, unless your game happens to have earned more than $10 million net in its lifetime. And that means we can get to our much-vaunted net number.

Recent net totals across the portfolio I can see have ranged from 56.5% of gross to 59.5% of gross in any given month. However, 70% of the 82.5% we’re modeling here gets you to 57.75%, so let’s use that!

TOTAL = 57.75% of gross revenue. (You now have $577,500 of your notional $1 million.) That’s your net revenue. Done.

[NOTE: One more important thing. As a Gamasutra commenter adds: “If you or your company are in a country that doesn't have a double taxation treaty with the U.S. (e.g. Argentina) there is a withholding tax which is usually 30%.” So that’s the cherry on top of the cake for some countries - lots more info from Steam here.]

Conclusion - are we there yet?

Of course, there’s always more to pay out. You may have a publisher share to split, or other contributors may get a percentage of the net. But we’re basically sorted.

However, I did want to highlight two other notable cost centers:

• Company taxes: if you suddenly make a lot of this ‘notional $1 million’ towards the end of a fiscal year, and it’s actually profit that you haven’t paid out to anyone, you’ll end up paying corporate tax on it. In the UK, for example, that’s 20%. Need to remember that.

• Exchange rate costs: this is a big one, and not spotted by many non-U.S. developers. Is your local bank giving you ‘real’ exchange rates on the money sent to you from U.S. sources like Valve, Microsoft and Nintendo, or have they set their own exchange rate that’s 2-3% worse? (Ugh.) It may be the latter, which is why using Transferwise or similar services can save you money. Consider it!

Oh, and independent verification: I was pleased to note that Danny Weinbaum just put up his excellent Eastshade postmortem on Gamasutra and noted: “Across all platforms we have grossed about $2M since launch. That translates to about 1.1M post-platform net.” So that looks ballpark correct compared to the above math - 55% net.

So that’s it. I didn’t cover console ‘gross to net’ in detail, but it has some of the VAT/sales taxes (maybe not quite as many, because of less international buyers), and almost none of the refunds (since it’s a lot more difficult to do so on console.) Also, NDAs.

But that’s how your $1 million turns into just over $500,000, before it gets to you, the dev. Speak to you later in the week!

Take care,
Simon.