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18/08/2009 by

Why Digital Consumers Buy Virtual Goods?

Marketing means being open to new trends and consumer behavior, but most marketers do not have the DNA to be successful in digital and social marketing. They tend to judge disruptive innovations. Consumers paying for virtual goods? Not sure if all linear marketing minds would understand?

It’s a topic that was on my list for a while. Digital consumers spend over $1.5 Billion on virtual items each year. Pets, coins, avatars, and bling: these virtual objects are nothing more than a series of pixels.

What could possibly possess people to spend real, hard earned cash on virtual objects that have no tangible substance?

Take the Facebook users. They are buying tens of millions of dollars worth of digital gifts to give to each other every year. About $35 Million to be more specific!

Habbo Hotel has over 75 million registered avatars in 29 countries and 90% of their $60 Million+ yearly revenue comes from virtual goods.

Tencent is one of the largest Internet portals in China with over 250 million active user accounts. They generated $100 Million+ in Q1 of 2007 and over 65% of their revenue come from virtual goods.

Gaia Online
does over 50,000 person to person auctions and 1 million message board posts a day- making them the 3rd largest auction site and the 2nd largest message board on the Internet. Their average user consumes 1200 page views a month. They employ 3 people whose sole job it is to open snail mail envelopes full of cash that people send in for virtual goods.

There’s a commonly held misperception that virtual goods are only for online gamers. Both Dogster and HotorNot are succeeding with a hybrid ad-virtual goods business model. Currently, over 40% of HotorNot’s revenue comes from virtual goods.

Major mainstream brands are now buying advertising in the form of virtual goods in social networks. Gaians can now purchase and pimp their virtual Scion xBs.

Coca Cola and Tencent partnered to allow Tencent’s users to trade codes taken from real Coke cans for virtual objects in the Tencent network.

Wangyou, a Chinese based social network, has also been extremely aggressive in experimenting with branded virtual goods.

So if you are now not yet convinced that virtual goods are BIG BUSINESS, please leave this article here. If you like to find out what drives digital consumers to spend their real money on virtual goods, stay and take the rest of our tour.

This is what experts like Jeremy Liew and Susan Wu will tell you:

Jeremy Liew says:

“My theory is that people buy digital goods for the same reason that they buy goods in the real world; (i) to be able to do more, (ii) to build relationships, and (iii) to establish identity.”

Doing More
The simplest way to use digital goods is to buy greater functionality. Just as I might buy special tires for my car so that I can corner better, so I might buy special virtual tires for my virtual car so that it too can corner better.

In the context of a racing game, buying things that make you go faster, and hence win more often, is easy to understand. Similarly in the context of a fighting game, buying better weapons (or virtual currency with which to buy weapons) is easy to understand. Everyone wants to win!

Building relationships
How can digital goods build relationships? First, let’s take a look at how the real world works. Valentine’s Day is coming up, and I will no doubt buy my wife flowers. But which flowers to buy? I could buy her a cheap bouquet of daisies from the corner.

But instead I will buy her an extravagant bouquet of orchids at a much higher price. Why? Because to some extent, the price of the bouquet is as important as how pretty are the flowers. It is a measure of the depth of my feeling. It really isn’t just the thought that counts.

Virtual gifts work the same way. For a Facebook user, his birthday is likely the busiest of the year. His wall will be full of birthday wishes from his friends. But among all the birthday wishes, the ones accompanied by $1 virtual gifts, whether a picture of a birthday cupcake or a teddy bear, will be the ones that really stand out.

The gift giver, the recipient, and all the visitors to his profile page know that virtual gifts cost real money. That fact alone distinguishes the birthday wishes of the gift giver from the rest. Again, it isn’t just the thought that counts.

Hot Or Not’s dating site, MeetMe, takes this even one step further. Many people can send a note to an attractive single. The challenge becomes how to stand out – how to be one of the few suitors that she replies to. Once again, virtual gifts, in this case flowers, help suitors stand out from the crowd.

But unlike Facebook, where all virtual gifts cost the same, on MeetMe, there is a range of flowers available at a range of price points. Both gift giver and recipient can, and do, use the price points to distinguish levels of interest and seriousness. It sounds like my Valentine’s Day dilemma, doesn’t it?

Establishing identity
In the real world, you can tell a lot about me when you meet me by looking at what clothes I wear, what car I drive, what movies I’ve seen, and so on. In essence, the way I spend my money defines what is important to me and who I am.

Virtual goods play a similar role in many social online environments.

In IMVU for example, users can go to great lengths to customize their appearance to suit their preferences. This self expression shows other users what they think is cool, and hence highlights the users tastes.

Identity is more than style though. Many users define themselves through affiliations with celebrities, brands, sporting teams and so on. These affiliations drive digital goods purchases ranging from Snoop Dog’s Dobermans to Randy Orton’s folded chair, a classic professional wrestling pro, in Gaia during WWE’s Summerslam 2008, to Brazilian soccer jersies in IRC-Galleria during the 2006 Soccer World Cup.

As people spend more time in games and virtual worlds, this concept of affiliation can carry over to “brands” that exist only online. In Stardolls for example, one of the most popular brands of clothing that girls buy to dress up their virtual paper dolls is Fallen Angel, a gothic looking clothing label that existed initially only in Stardolls, but that has established an affiliation there.

End of Jeremy Liew’s vision

Susan Wu says:

So why do people spend real money on virtual objects? There are four major reasons:

Virtual objects aren’t really objects – they’re services
Virtual objects aren’t really objects – they are graphical metaphors for packaging up behaviors that people are already engaging in.

As James Hong from HotorNot tells it, his virtual flower service has 3 components: there’s the object itself represented by a graphical flower icon, there’s the gesture of someone sending the flower to their online crush, and finally, there’s the trophy effect of everyone else being able to see that you got a flower.

People on HotorNot are paying $10 to send the object of their affection a virtual flower – which is a staggering 3-4x what you might pay for a real flower! Of the 3 components, the two that James says are most important to his users are the trophy effect and the meaning of the gesture itself.

As the barriers between peoples’ online and offline selves continue to erode, this market for virtual goods is going to explode. People are going to continue to seek out ways to show real emotional engagement online. Virtual gifts are a particularly compelling way to package your attention.

Virtual objects create real value for people

Each day, thousands of transactions take place via markets such as eBay for virtual swords, currency, or clothing across a multitude of virtual world environments. For people who purchase virtual items such as swords or armor, buying these items increases the overall satisfaction she receives from spending time in this virtual world / online community / online game.

For example, struggling along as a level 20 character might give her 20 units of personal satisfaction per hour, whereas progressing as a level 20 character with a very powerful sword could confer 50 units per hour. In this case, she would be willing to pay the equivalent of whatever amount generates an incremental 30 units of personal satisfaction for the sword.

I’m an avid player of multiplayer online games. A couple of years ago, I spent 10 real dollars to buy 1 million gold in a game [yes, it was legal and part of a world where real money trade is not prohibited.] My friends mocked me and told me I was throwing money away, so I tried to explain it to them: 1 million gold would give me 20 hours of entertainment.

If I were to go to the movies, 10 real dollars would buy me 2 hours of entertainment. Assuming that 1 hour of movie watching entertainment gives me the same personal satisfaction as 2 hours of game playing enjoyment, I would have been willing to pay $50 in exchange for that 1 million of virtual currency. In fact, I felt like I had gotten a bargain paying only $10!

Probably the most powerful way that virtual objects create real value is through self expression. RockYou is now serving 150 million+ widgets a day – widgets that people put on their Facebook profiles to differentiate themselves – much as they do in the real world with accessories and bling.

The US retail market for apparel is ~$300 billion – there’s good reason to believe that people’s strong drive to personalize and differentiate in the real world will proliferate online as well. Widgets are a form of virtual good – though most widget companies are ad supported today, I see widgets fueling a massively distributed micro transaction economy in the not too distant future.

The cost of buying objects can be cheaper than “earning” them
Who hasn’t heard of the Chinese gold farmers in World of Warcraft? Typically, these farmers are young students who spend up to 12-14 hours a day playing the game. They can then sell these goods or characters to US based players for US dollars.

The term ‘farming’ refers to the fact that they spend hours performing the same tedious in-game action over and over again to yield a certain payoff. This industry has arisen to take advantage of arbitrage opportunities that result from the disparity in opportunity costs. The Chinese farmers value their time much less than American players.

This isn’t a moral statement; it’s just one of economic fact. While it might take both players 60 hours to progress a character up to level 40, the opportunity cost for the American player could be $900 (60 hours * $15/hr,) whereas the opportunity cost for the Chinese player could be $30 (60 hours * $.50/hr). The American player is willing to pay up to $900 for a level 40 character, creating profit opportunities for the Chinese player.

[Note to all the flamers: I don’t sanction farming in environments where it’s clearly prohibited by the game designers. I’m just trying to explain why this makes sense to some of the buyers and sellers.]

You can make money off of virtual objects

Last year we were inundated with stories about Second Life’s first real estate millionaire. Though it might seem ludicrous to spend as much money on a virtual island that you could otherwise use to purchase real acreage in the physical world, the buyer in this case could actually be quite financially savvy.

Buying an island in this virtual world is accompanied by the assignation of certain rights – such as mining for other virtual assets and real estate development. The buyer could in turn subdivide the island into multiple parcels and make a healthy return reselling the land to other players.

Of course, this type of investment strategy requires market liquidity; that is, a sizeable and willing market of buyers willing to pay your desired price. With the rapid growth in number of players in virtual world environments and burgeoning market infrastructure, market liquidity is likely to increase with time.

End of Susan Wu´s vision

Well, it’s up to you to make up your mind. Hope you are inspired or refreshed, and feel free to share your opinion with our audience; since peer discussions and collective wisdom bring great learnings.

Source: TechCrunch and The Wall Street Journal.


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