Pricing Virtual Goods in Social Networks

Virtual goods have become an important part of gaming business models across platforms. With the rise of “social games,” game developers on social networks are taking a page out of games industry’s book and  using virtual goods instead of or to supplement advertising revenue.

Sean Ryan, CEO of Meez explains how virtual goods work as a source of revenue. “In a well run MMO or virtual world, most sites see $1 a month in virtual goods/services from their active/repeat users (ignore the ones who never come back).  But that curve has a steep distribution slope where really only 10% of your users ever pay, maximum,” says Ryan. “So if you had 100K active users and you were making $100K a month in virtual goods from only 10,000 of those users, then those users are paying roughly $10 a month per person, although even within those numbers, the curve is hugely tilted to those who pay $25+ a month in goods and services.”

This explains how the virtual goods model works – but what are players actually paying for? The variety in virtual goods is great and there is very little “fixed cost” involved in producing and distributing virtual goods. Ryan continues, “What they pay for is consistent – vanity, features and privileges, but in all cases, they are paying to be different than others.  The best example is from WOW – even though players actually have no payment mechanism – if you see a person on a horse, you know he’s cooler looking than you (vanity), he’s faster than you (feature), and if you know the rules, he’s reached a high enough level to unlock a steed (privilege).”

In essence what players pay for when buying virtual goods is the individuality and prestige of having that item – whether it be a unique background for your MySpace or an all-slaying sword of doom in EverQuest. The value of virtual goods is based on their rarity and desirability. MMO players and social network users alike want unique items that are going to differentiate themselves from everyone else.

Virtual goods vary in price greatly, but most commonly range from $0.50 up to $10 or more for rare and desirable items. Prices are also dependent on the target demographic and the geographic location of the market. There are also some cases like those of virtual real estate traders in Second Life have made their fortunes selling virtual homes.

The virtual goods model in social networks is currently very simple, because most items are about expressing individuality. As people begin to spend more of their time in virtual worlds in social networks, the model will need to adapt. That is where things will get interesting.