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How to Create a Virtual Goods Market
 

So you've heard there's money to be made in the virtual goods market and you're ready to launch your first virtual goods? Here's some tips on finding real customers.

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Global revenue from the sales of virtual goods will reach $6 billion by 2013, according to Minneapolis-based investment firm Piper Jaffray, which isn't too shabby for a product that has been deemed by many to be "intangible" or "non-existent." To the contrary, consumers have shelled out millions for clothing, housing and miscellaneous gifts made purely from a few kilobytes of data. The growth of the virtual economy is causing many to puzzle over how companies have reached major profitability from this phenomenon.

Virtual goods, which are basically electronic representations of objects in the physical world, have mostly been used to augment an already-engaging online experience, such as chatting, social networking or playing games. Zynga, for example, has profited from the wildly popular FarmVille application on Facebook, where users can grow and sell goods on an interactive farm, while socializing with other players in real time.

So what if you've already got your website or social platform set up, and are hoping to cash in by incorporating your own virtual goods market? Here are some tips to help you get started.


How to Create a Virtual Goods Market: Why Do People Buy Virtual Goods?

Your first step is to develop an understanding of virtual goods and why people buy them in the first place. Once you do that, it will be easier to figure out what types of goods you want to create and how to match those particular goods with the services your website or company offers.

According to Brian Balfour, co-founder of Viximo, a company that works with sites like BlackPlanet.com and Quepasa.com to help them profit from virtual goods, there are three basic reasons that people buy these products.

1. To gain an advantage. Users purchase virtual goods to compete with friends or to get ahead of other players and opponents, says Balfour. The role-playing game World of Warcraft, for example, allows users to purchase different levels of battle armor and weapons for their characters. This also applies to the online dating space, Balfour says. "It's the typical scenario of a bunch of guys finding ways to stand out of the crowd and get the hot girl," he says.

2. To communicate. All of these social products are simply about communication with other users, Balfour says. "There's a huge desire to visually communicate with people the same way we do in the real world," he says of the gifts that users can send one another on Facebook, for example.

3. To be unique. Many people buy virtual goods in the online space for the same reason they do in the physical world – to differentiate themselves from other people, much like shopping for clothes at the mall or getting a new hairstyle. "There's a really big need for people to want to express themselves and make their avatars or social networking page unique," Balfour says.

Dig Deeper: Should You Stake Your Claim in a Virtual World?


How to Create a Virtual Goods Market: The Do's and Don'ts of Setting Up Your Market


Once you've figured out how to shape your product to serve on of the above functions, there are several do's and don'ts to keep in mind as you move forward with your virtual goods market.

Do:

Integrate virtual goods as early as possible. It's wise to develop your virtual goods strategy as you work the early stages of your business. According to Balfour, it's a lot easier to integrate virtual goods in the "ground stages," rather than try to wedge them in later.

Make the experience engaging. In order for your virtual goods market to be a successful one, you must create a need for the product. What is the content that your goods are centered around? Whether it's a virtual world or social networking site, your service must be engaging enough that people will actually want to invest in the experience. If you're a game developer, for example, create levels that might actually require a certain item in order for the user to move forward.

Leverage the creativity of your users. One key to having a successful virtual goods market is creating a large catalog for users to choose from. In order to accomplish this, some sites, such as IMVU, a social networking site that allows users to create 3D avatars and interact through virtual worlds, allow users to design, create and sell their own virtual goods. By employing this method, IMVU's virtual goods selection boasts more than four million items. "User-generated content is paramount and almost mandatory to the path to success," says David Fleck, vice president of marketing at IMVU. "The counterpoint to that is, if you want to create everything yourself, that limits the scope and range of the type and quantity of goods," he says.

Don't:

Underestimate the work ahead. While the virtual goods industry has certainly grown in recent years, it's still a rather nascent technology that requires plenty of research and even consultation by experts. "It's still about building a quality product," says Balfour. "It's just a different marketing model layered on top of that."

Try to build it all yourself. Many large companies already possess an arsenal of designers and software engineers to create and maintain their virtual goods market, so if you're going it alone (or even with a few colleagues), it probably wouldn't be wise to take on all the behind-the-scenes work yourself. Balfour suggests enlisting the aid of independent software developers and third-party providers for certain tasks.

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How to Create a Virtual Goods Market: Developing Your Currency System

In order to actually make money from the virtual goods on your site, you must create a form of virtual currency system. This involves establishing a certain payment method – coins, credits, etc. – that allow your users to buy items or reach different levels of play or interactivity. IMVU's users, for example, receive 1,000 virtual credits when they pay the real-world equivalence of $1.00, which they can use to purchase a "dance move" for around 600 credits or a piece of furniture for 500. There are several tools out there that you can implement within your site that can help you monetize your virtual goods and collect on-the-spot payments from users, such as Social Gold or Offerpal Media.

Developing a virtual currency system also makes your users feel more comfortable paying for goods, says Fleck. "The key is to minimize friction," he says. "The first time, there's a bit of hesitation for the customer, but once they have access to those 10,000 credits, it's easier for them to spend because they don't have to keep pulling out their credit card."

Dig Deeper: Inc. 5000 Applicant of the Week: IMVU


How to Create a Virtual Goods Market: Using Analytics to Measure User Interaction

Once your virtual goods and currency are in place, you must measure the interaction of your users in order to further guide your strategy and expand your catalog of goods. How many times a day do users send messages to each other? What specific areas of your site do they visit, and for what reason? Keeping track of these things will help boost your conversion rate and keep your virtual goods venture profitable.

"People that have done very well in this space, like Zynga, measure things like pricing and social virality," says Balfour of Viximo. "There's a whole new set of analytics available to the online world because we're selling virtual merchandise." Balfour recommends the use of social analytics platforms such as Kontagent or KISSmetrics to help with this.

Above all, be sure to keep the social engagement of your users as the basis of your virtual goods market, says Fleck, not just with your product, but with each other, as well.

Dig Deeper: Using Predictive Analytics on Web Data

Last updated: Jun 29, 2010

J.J. MCCORVEY is a reporter at Inc. magazine, where he covers a wide range of topics, including technology and business research. He has covered metro news for The Detroit News, and his work has been featured in Men's Fitness.
@jmccorvey




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