Friday, April 4, 2008

Virtual Goods and the Community values of Facebook

Above: The most popular sticker from Bumper Sticker, Facebook's most popular self-expression/gifting app.

For all practically purposes, virtual goods cost nothing to create, they're infinitely reproducible at no cost, and distribution costs are nil. To put in other words, their marginal cost is zero.

Chris Anderson, editor of Wired, is fond of saying:

Basic economics tells us that in a competitive market, price falls to the marginal cost. There's never been a more competitive market than the Internet, and every day the marginal cost of digital information comes closer to nothing.
So, virtual goods, in theory, should cost nothing. Except, they don't.

Why? Because marginal cost applies (mostly) to commodities. Virtual goods are not a commodity. They are luxury goods. Exactly like a Gucci handbag. Or a Rolex. You buy these things to show off your status, usually wealth. The more expensive an item is, the more perceived value it has in the community. However, you can't simply declare that a urinal is worth a million dollars and expect someone to buy it...unless you're an artist. The item's worth has to be aligned with the value of the community.

With traditional luxury goods, craftsmanship and uniqueness are the value that the community uses as justification for prices 100x greater than marginal cost. I say justification, because the luxury goods purchaser is primarily seeking the status value of the object, because goods of equal craftsmanship and uniqueness can be had at near marginal cost.

With virtual goods, craftsmanship is irrelevant - no one really cares if Susan Kare created your icon. Yet. I imagine as the virtual goods market matures, we'll see brands emerge based around rockstar designers. Especially, if virtual goods become portable among virtual communities.

But until then, uniqueness rules the roost. People want something special that gives them status and allows them to express their unique identify. Rare items serve both. So a virtual community creates artificial scarcity, by limiting the copies of a virtual good.

But it's easy to imagine a virtual good that no one wanted no matter, despite its uniqueness. For example, I just created a 75x75 orange square in Photoshop. I'm selling it for 250,000 dollars. I doubt I'll find a buyer for this unique virtual good (but I'm hopeful).

Each virtual community has different values and for a virtual goods to have value, it must reflect those values. In World of Warcraft, players value things that help them kill more monsters. The item's core value is functional (it helps achieve a task). However, the color of the item is equally important because it signifies status. For instance, in WoW, orange armor is "legendary". In Habbo Hotel, furniture is valuable because decorating your room, it the primary means of differentiating yourself, as well as the core single-player activity.

It's easier for individual games/sites to define the value of the community. After all, those communities are largely self-selecting. If you didn't value armor, you wouldn't be playing WoW. If you didn't like decorating your room, Habbo Hotel is much less interesting.

So what are the core values of the Facebook community? People in the know, will tell you that self-expression is a core value of the social network crowd. Great, but what values do they want to express?

Let's look at the top gifting apps on Facebook to get sense of the values expressed.
Bumper Sticker (938,239 DAU, 72% female): female friendship, humor/wit, sexuality, love
Lil Green Patch (358,095 DAU, 77% female): concern for the environment
Free Gifts (159,487 DAU, 66% female): random, but cute. Couldn't pin down values
Hatching Eggs (146,761 DAU, 69% female): cuteness (all cute animals), holiday events
Growing Gift (189,817 DAU, 75% female): holiday events.
Pieces of Flair (117, 176 DAU, NA): humor/wit
Stickerz: (103,593 DAU, NA): humor/wit

Looking over the list, purely gifting apps (Free Gifts, Hatching Eggs, Growing Gifts) all resemble Hallmark cards: warm, funny, emotional, cute event-driven. Values uses to describe the relationships we have with others. Unsurprisingly, these apps are dominated by women who traditionally value interpersonal relationships more than men.

The self-expression/gifting apps (Bumper Sticker, Pieces of Flair, Stickerz) appear to be wittier, darker, yet still cute. But at the core, Facebook users are trying to express how funny and intelligent they are. I think that makes sense for a community dominated by college students and the college educated.

Bottom line: Facebook users value intelligence and humor...and cuteness. If you're creating virtual goods for Facebook, you'd be advised to design with those factors in mind.

Wow, that was long post. I should have just said, if you want to understand Facebook users, go to Hot Topic.