What is the business model for use of virtual money and virtual goods in social networks?This is the third in a four-part series on virtual currency and virtual goods. The first covers definitions and potential revenues from virtual goods. The second, purchase motivation. The final post features examples of the use of virtual currency and virtual goods in social networks.
Benefits for Owners of Social Networks
In his excellent video on Virtual Currency in One Hour, Tom Hale of Second Life describes three advantages of virtual goods for website owners:
Direct Monetization. Revenue comes directly from users, “not from ads or eyeballs.”
Profitability. With virtual goods being very inexpensive to produce, profit margins are high. Hale says the average user earns the site owner $2-3 per month, and a few into three figures monthly.
Engagement. Once users have spent money in a site, they are invested both in their personal reputation and in the community itself. Hale calls the virtual goods model “incredibly sticky.”
Similarly, in Beyond Facebook Gifts: Virtual Payments, Anu Shukla described user activities associated with virtual goods and shows how they benefit the social network owner:
- Inviting other people to the property, which encourages viral success and growth
- Logging in every day, which helps increase stickiness and loyalty
- Completing certain tasks or quests, which helps to build engagement and activity
- Completing ad offers, which advertisers like
Business Models for Virtual Goods
Hale also lays out three business models:
Direct Model, in which the publisher sells games, currency or brand partnerships.
Indirect Model, where users create content and the site owners collect transaction fees, ad and listing fees, service fees and exchange fees.
Hybrid Model, which combines the above with subscriptions or hosting services.
Virtual Good Purchase Percentages
Virtual goods is one of the five models that Jun Loayza describes in 5 Social Media Business Models. He reports that an astonishingly high number of website members take advantage of virtual goods. He quotes Ali Moiz of Peanut Labs as saying that 10 to 20% of users purchase virtual goods with credit cards, and another 30 to 40% get goods free by taking surveys or viewing offers through companies like his. In Virtual Currency Monetization, Hussain Fazal explains how an “ad wall” works, where social network users fill out surveys or subscribe to services to receive virtual currency. In conclusion, the model for virtual currency/virtual goods is rich, and the outlook is promising. But despite its rapid growth, Ro Choy sees brand advertising in social media as the winner in the long term. In The Future of Social Media Monetization: Virtual Currency, Choy concludes “…brand marketing has a high probability of being a much bigger opportunity than virtual currency in the space and deserves real focus from developers and publishers given its true potential within social media.”
What do you think about these business models?
More on Business Models
See also this page of related posts on social network business models.