originally published at Loki Partners
Update: Benchmark partner Bill Gurley just published a similar, but far more analytical post about the same topic (here)
After having the same conversation multiple times last month at Casual Connect Europe (see post here), as well as with numerous other big social communities, the easiest way I can express the value of virtual goods to non-gaming and non-virtual world sites is that Only Virtual Goods Will Pay for Community Features.
What do I mean by that? If you have a general consumer-oriented site that has community features (forums, chat, profiles, IM) as a big part of its traffic, then you have no way to currently pay for it, even if it has tons of traffic. There is very little commerce taking place in general community sites, few profitable advertisers want to be any where near this type of user-generated content, and almost no users will pay a separate subscription fee for it. Yet community features are driving the bulk of a site's traffic, producing tremendous time-on-site stats, and page views per visit - all at less than $.05 CPM (and declining), especially if you have a decent portion of non-US traffic.
Where virtual commerce enters the equation is that it is the ONLY proven method where active users in a community will pay tens of cents per month per user to:
- personalize their experience
- differentiate themselves from friends
- thank people for doing something
- show off for others
- flirt with some users
- simply waste time with friends
- in general, pay to be noticed
Those tens of cents per month quickly add up to tens of thousands of dollars per month in total revenue for smaller sites, and hundreds of thousands of dollars per month for bigger sites. For a huge site like Facebook, even its relatively primitive gifting program generates millions of dollars per month, and that's by barely trying. For a site with non-US traffic, it's even more important to drive this business since few countries outside western Europe and the US can support a robust advertising solution, yet those countries have hundreds of millions of Internet users. Hi5 and Tagged have realized this and are busily rolling out entire virtual goods economies.
Some folks I speak with seem to believe this will only work for hard core gamers or for teenagers. The data from Meez and other similar sites like Pogo actually shows that women aged 25-54 will pay the most for virtual commerce, and they do it in a wide variety of sites, not just in gaming ones, so it will work well for sites like BabyCenter, CafeMom, and TheKnot.
If you have a site with a big set of community features, and you're not offering a rich virtual commerce program, you're just leaving money on the table, which is a tough thing to do in this environment.