SLENTRE.COM

By Sigmund Leominster
In an article for the Wall Street Journal, Jeremy Liew, Managing Director of the venture capital firm, Lightspeed, posited three reasons for why people buy virtual goods. His theory is that “people buy digital goods for the same reasons they buy goods in the real world; (i) to be able to do more, (ii) to build relationships, and (iii) to establish identity.”

And sales of virtual goods are big business. In a January 2008 report by Lightspeed, they estimated that sales of Facebook virtual gifts could be $15 million per year, but then upped their estimate to $35 million later the same year in September.

An upcoming article for the journal Electronic Commerce Research, by Vili Lehdonvirta, editor of the Virtual Economy Research Network site and a researcher at the Helsinki Institute of Information Technology, says that “The global market for virtual items, characters and currencies was estimated to exceed 2.1 billion US dollars in 2007.” Even with the current economic downturn, such figures are impressive.

Lehdonvirta defines virtual goods as “objects – such as characters, items, currencies and tokens that exist inside various online games and hangouts.” In Second Life, this ranges from a pair of earrings to a complete sim; or from a simple gesture script to a complex animation override (AO) with multiple functions and interactive possibilities.

Drawing on the work of Joshua Fairfield (2005), she says that virtual property items have to be rivalrous, persistent, and interconnective. The first feature refers to the fact that if one person is making use of the item at any one time, other people are excluded. Thus, if you buy a new shirt from the Second Life store, Redgrave, once you put it on, no-one else has access to it. Of course, another person can buy the same shirt, but that is then another independent item.

(Redgrave Skins are some of the hottest virtual goods in SL, residents can expect to pay about $1000.00 linden for each look.)

The feature of persistency means that whatever you buy has to remain available for a period of time in order for it to be perceived as valuable. If your newly acquired Redgrave shirt disappeared from your inventory the moment you logged out and had to be bought again, it wouldn’t be very persistent. Again, some items can be persistent over a short period of time. You can rent a surfboard for a period of time as some beaches in Second Life do; although once you have finished surfing, the boards disappear from your inventory. So long as the consumer is aware of the limited nature of the persistency, it is a bona fide virtual item.

Interconnectedness means that an object “must not exist in isolation: other users or systems must be affected by it somehow.” If no-one but yourself can see the Redgrave shirt you are wearing, not only will you be naked but your perception of the shirt’s value will be zero. The item has to impact others in the virtual world.

To investigate the factors that drive people to buy things, Lehdonvirta studied items found in fourteen different virtual platforms, which included not just worlds (e.g. Second Life, Habbo Hotel, and Eve Online), but social networks like Facebook.

(Virtual goods available to send on the social network Facebook.)

She also used research from real life purchasing studies to structure her analysis of virtual life markets. “In sociological and cultural studies of consumption, three basic perspectives can be identified regarding the uses of goods: functional aspects of goods, emotional aspects of goods, and the use of goods as markers for drawing social distinctions.” This three-fold pattern is the same as Liew’s analysis of doing more (functional), building relationships (emotional), and establishing identity (social distinctions).

In all, Lehdonvirta identifies nine attributes that drive purchasers:

• Functional Attributes: Performance (speed of a script)
• Functionality (adds new abilities)
• Hedonic Attributes: Visual appearance and sound (aesthetics)
• Background (role play items as part of a story)
• Provenance (does the item have a special history?)
• Customizability (how can the item be personalized?)
• Social Attributes: Cultural reference (reference to “outside” culture)
• Branding (brand names with caché)
• Rarity (SLentrepreneur of the Year award)

So how would a designer in a virtual world leverage these attributes to enhance product appeal? Lehdonvirta offers a summary:

“In applying the results to design, it is important to note that several of the attributes represent a relational characteristic instead of an absolute one: their value stems from how they compare to other goods and the surrounding environment. In order for a sword to be considered sharp, there must exist a blunt sword that can be used as a reference. The objective of the designer is thus not to attempt to ‘maximize’ each item on every dimension. For each attribute, the designer should consider a whole spectrum of commodities and their interaction with the surrounding environment. This applies in particular to performance, rarity and some aesthetic features.”

(Successful virtual goods retailer, Bare Rose, offers SL residents literally thousands of available outfits.)

Residents of Second Life have identifiable consumer characteristics. In December 2006, the French marketing company, Repères, produced a report based on interviews with over 400 consumers. Here are some of the key findings:

• 52% of Second Life residents are interested in buying things
• 33% are interested in selling things
• 48% of buyers rely on word-of-mouth
• 66% want assistance while purchasing in a store
• 96% want original and creative items
• 14% want in-world versions of real-life brands

This latter observation was also mentioned at the 2008 Virtual Goods Summit in San Francisco. The overall feeling of the panel for the session entitled Branded and User-Generated Virtual Goods was that branded goods are not yet in high demand. A series of videos from the 2008 conference is available from http://vgsummit2008.com/video/.

For Second Life business owners, this is good news in that it is likely that their customers (a) want original, creative items and (b) eschew SL faux real life brands. Focusing on building an in-world brand is a better strategy than copying established brands.

And as Liew reminds us in his article, “Digital goods are bought for the same reasons that real goods are bought; to give us more power, to build stronger relationships, and to be ourselves. It isn’t so strange after all.”

Resources
Fairfield, J. (2005). “Virtual Property,” Boston University Law Review 85(4), 1047–
1102.
Lehdonvirta, L. (2009) “Virtual Item Sales as a Revenue Model: Identifying Attributes that Drive Purchase Decisions,” Electronic Commerce Research, 9, 1-2, (Forthcoming in March 2009): http://www.hiit.fi/~vlehdonv/documents/Virtual%20item%20purchase%20drivers.pdf
Lightspeed Venture Partners: http://www.lightspeedvp.com/
Repères’ report: http://www.reperes-secondlife.com/purchase_habits.asp
Virtual Economy Research Network: http://virtual-economy.org/
Virtual Goods Summit 2009 web site: http://www.vgsummit2009.com/
Virtual Goods Summit 2008 web site: http://vgsummit2008.com/