Friday, June 20, 2008

Using the Virtual Goods Model on Social Networks

Sean Ryan, CEO at Meez, wrote an excellent blog post forwarded to me by my good friend Sidney Price of Social Emotions.

In the post, Sean suggests that Facebook take the Cyworld approach and monetize via virtual goods.

Here's the core reason, and one that I've spoken about before (so naturally I agree):

The best reason for them to pay is that in an SNS, which is really about people interacting with each other, the #1 goal is STATUS - how can I be different, better, have more authority, etc, and most importantly, how can I impress those around me with that status? It's so basic, and is sometimes overlooked.
It is overlooked and it is super-important. You have to know why people buy virtual goods if you plan to sell them. At Interplay, I was talking to someone who provided me with an interesting theory about why Koreans and the Chinese are massive consumer of virtual goods. He suggested that because teens in those countries are required to wear uniforms in school, thus not allowing to express themselves through clothes as teens do in the US, that their outlet for self-expression becomes virtual goods and decorating their homepage.

Obviously, the need to decorate is alive and well in U.S. teens as evinced by a five minute survey of Myspace pages. Check out how many status brands like Gucci and Playboy that you can spot. (yes, Playboy is status brand - especially with young female teens - I'll let you figure out why.)

By Sean's estimates, social networks can earn the following through a virtual goods model.
In an SNS, a well structured virtual item program should be able to generate, on average, $5-7 monthly from 5%+ of the monthly unique users, and I've seen both numbers go higher in certain cases. That compares to $3-5/year in advertising from a unique user.
I assume they are based on looking at Cyworld, QQ, and Sean's own experience at Meez, though he does not discuss how he arrived at the numbers, so feel free to be incredulous.