4 Advantages of a Virtual Goods Business Model

Virtual goods is emerging as a major business model for community driven products such as social networks, dating sites, multiplayer games, and more. Virtual Goods have proven to drive significant revenues for many companies, but compared to other models such as advertising, subscription, and fixed fees, what are the additional benefits from a virtual goods model, in regard to community based products?

Value Add Business Model

Everyone can agree that online ads do not contribute positively to the user experience in an online community. Mostly, this is due to that fact that users behave quite differently within a community product then an editorial product, such as NewYorkTimes.com. As a result of this difference, online advertising CPM’s are extremely low due to poor user engagement and click thru rates.

Virtual goods, on the other hand, provide premium avenues for users to do what they want to do: communicate. Virtual goods are not only tightly integrated with the way users behave, but they also enhance that behavior, and thus add value to the overall user experience. Virtual goods are part of the conversation, not an interruption like online ads.

Almost Perfect Price Discrimination

A major problem with a subscription or a fixed fee model is choosing the optimal price. Dating sites and games spend a significant amount of time attempting to determine the price point/s that will optimize revenue. But despite this effort, there will always be users who were willing to pay more, and users that would have been willing to pay less, but instead don’t join the service. In other words, there is a segment of revenue that is not being captured.

The amount users are willing to pay varies from user to user. Therefore, to optimize you need to allow users to pay the maximum amount they are willing to pay (in econ terms, price discriminate). Virtual goods enables this type of price discrimination by allowing users to buy as much, or as few goods as they want.

Stronger/Larger Community

A rule applies to almost all community driven products; the more users that are a part of the community, the more the community as a whole benefits. The more users a dating site has, the more potential matches for an individual user. The more users in a multiplayer game, the more potential people there are to play with.

Capturing money from the user is difficult in many cases, since charging a subscription or fixed fee installs a large gate to pass, significantly reducing the size of the overall community. Virtual goods allow for users to participate in the core experience for free, while still charging the users who are willing to pay but without the negative effect of decreasing the size of the community.

Increased Engagement and Stickiness

As explained above, virtual goods enable the ability to sustain a larger community. A larger community inherently increases stickiness and makes it more attractive for new users. In addition, with every virtual goods purchase a user makes, they are increasing their personal investment in the overall product. As users acquire virtual goods, a “trophy” effect takes place as the user is able to show off his/her personal collection .

Advertising, on the other hand, encourages the opposite by trying to convince users to go to a separate site. Similarly, a subscription business model creates a user mentality of “get in, get out.” The clock is always ticking, encouraging the user to leave the site before their credit card is charged again.

If you are intersted in learning more advantages and strategies around virtual goods, join us for our free webinar August 12th at 2pm EST.

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