McDonald's Corporation (NYSE: MCD) is the world's largest chain of fast food restaurants, serving nearly 58 million customers daily. McDonalds started in 1940 and yet in February 2009, 69 years after it launched, it again turned in a stellar sales month, increasing same store sales 1.4% over the previous February, in spite of one fewer day and a horrible economy. This wasn't always true - 10 years ago, the critics were saying that McDonalds was over in the US as a growth company, that the format was tired, and that it would never again increase sales. But instead, a series of new CEO's (the old ones kept dying) re-invigorated growth by refocusing on the core business of serving fast, simple, value-priced food to its customer - the company has since continued to increase its same store sales almost every single month, which is the key business health indicator in most retail businesses.
So how is that relevant to virtual economy-based companies? It's becoming increasingly relevant because some of the more "mature" virtual economy-based firms are starting to see slower sales in their core business, leading some critics to say that a virtual item business outside of China or Second Life just can't exceed $2-3M a month in revenue. That statement is wrong, but let's look at the reasons behind it.
In the last few years, the rise of social media and community sites has created hundreds of companies of that have millions of registered users, lots of repeat visitors and high levels of engagement. For example, our virtual world Meez is now #10 in the US in overall engagement with 2M+ monthly unique visitors, or Inside Social Games lists here more than 25 Facebook games that had 1M+ users in February- these sites and games didn't exist 2 years ago, but are now growing like crazy.
In spite of all of this engagement, or sometimes because of it, advertising rates have simply plunged due to massive over supply of impressions, a weak economy, and low click through rates on traditional display ads since the users are engaged in a discussion, not a commerce experience. Therefore, many sites have intelligently begun to roll out virtual currency systems to enable their more committed users to purchase different types of status - each time the site rolls out different things to purchase, the revenue goes up. At Meez it went from avatar items to virtual room items to in-room animations to gifts, etc. So you keep rolling out more things to buy, and revenue increases, but generally less so with each new feature.
Then the last thing new virtual economy sites do to increase revenue is to increase the number of ways to purchase virtual goods. At Loki Partners, we've studied a wide variety of virtual economies and the most popular payment options in order are credit cards, Paypal, mobile, pre-paid cards, Offers/cpa/surveys, and cash in the mail, but this vibrant industry keeps producing new ways to facilitate currency purchases. Each time a site offers a new payment option, revenue increases 10-20%, although that decreases with most succeeding options as the law of diminishing returns kicks in.
So now what does a virtual economy-driven site do? It has lots of engagement, lots of things to buy, and lots of ways to buy the currency. Well, it's kind of like McDonalds - once you've saturated the country with stores, and your stores can't hold any more equipment, and you can't generally increase prices, then in order to keep growing, you actually have to run a business, and not just throw payment options and new items at the users with no real method behind the madness - its far more effective to run your business more efficiently than to continue to market to new users or to always build new games.
As the Wall Street Journal stated today in its big McDonalds article (here) about how the company is continuing to grow: Behind the effort is an increased focus on examining reams of customer
data measuring everything from whether customers are trading down to
smaller value meals or dropping Cokes from their orders to exactly how
much they're willing to pay for a Big Mac. "I love numbers," Mr.
Alvarez says. "I think data used well really tells a story."
And that is the key driver: DATA/ANALYSIS. Eventually a business has to truly understand its operations, such as what's driving purchases, what type of user is buying items, which items are they buying, are the prices elastic or inelastic, which purchase methods are used by the most profitable customers, where do the most profitable customers come from, etc?. Many virtual economy sites I see can't even produce a simple report detailing their Money Supply/M1 - that means each week did the economy grow in the overall money supply or shrink, and if so, what were the top sources of currency, and what were the top sinks of currency? Without that type of Analytics and Reporting, sites will never be able to approach McDonalds way of steadily growing their revenue each month, even without driving more customers or building more stores, both of which cost more money.
One example is that in Q3 2008 at Meez we looked at our overall economic reports and we saw that there was too much currency coming into the economy - no user ever really had to buy anything. Therefore, we significantly adjusted how we awarded currency in return for labor - we reduced the number of coinz given initially at sign-up, we increased the spread of prices of our goods, and we really pulled back on the number of coinz given per level of game while increasing the coinz awarded for certain game trophies - this significantly increased our monthly revenue while still driving the type of user behavior we were trying to incent.
None of this would have been possible without a sophisticated reporting and analytics system which took us way too long to build, so make sure you either have a good team to build one as a key part of your business, or go license a system like TwoFish (where I'm on the Board) or a similar system which provides that deep level of analytics, reporting and catalog management. It's the only way to organically grow a site's virtual item revenue once you have tapped out the other obvious methods - it works for McDonalds and it will work for your sites as well as we all drive the virtual goods business to $1B+ in 2010.