Evaluating virtual world business models. Part One
In terms of growth, the virtual worlds sector is exploding with dozens of new worlds across many different fields appearing on a regular basis.
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With this growth comes new types of business models, some tested, some untested. Some rely on ‘traditional’ web-based revenue streams whilst others are experimenting with brand new sources of income.
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What exactly what are the options for companies developing virtual worlds and associated business models?
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Premium subscription
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Probably the most popular business model at present and used by worlds such as Club Penguin and Second Life (for land purchase). Many KT&T worlds in development are relying on this business model of offering a basic service to all members and an enhanced version via premium upgrade. Some worlds also complement premium subs with a micro-transactional element.
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Pro’s
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- An understood pricing model for consumers and operators
- Provides higher than average (per transaction) revenue for the operator
- Can create recurring revenues if contractually structured
- Gives the consumer (the user) instant access to ‘upgrade’ areas or features
- Can be beneficial for real-world brands with high brand equity
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Con’s
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- Can create a barrier to entry from a free to premium conversion perspective
- Potentially(strategically)exposes world owner to free to play competitors relying on other business models
- Requires investment in brand building and/or relies on a ‘big’ idea, not a me-too
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Free-to-play
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These are virtual worlds offering a completely free service such as Dizzywood (for now).
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Pro’s
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- Lowest barrier to entry
- Universal access and engagement
- Unique differentiator
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Con’s
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- Ultimately requires supplementary revenues such as banner ads
- Expensive to maintain
- Requirescomparativelyhigher numbers of users to become attractive to investment
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Free-to-play with microtransactions
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Adopting a free-to-play virtual world business model with income derived from microtransactions (i.e from virtual goods) is where I think the market will head to in the short-term, as a shift away from premium subscription.
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Pro’s
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- Low barrier to entry for users
- Relatively easy to scale
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Con’s
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- Can be resource-heavy from an operator mgmt perspective
- Price sensitivity can cause downward pressure on revenues
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Free-to-play with real-world fixed transaction
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This is a business model being explored by real world brands. In this scenario, access to a virtual world is obtained by purchasing a real world product. This is currently being used in the toy sector with companies like Barbie Girls having already experimented in this and a new world, Revnjenz.
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Pro’s
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- Added value to the real-world purchase
- Brand extension and relationship building
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Con’s
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- Expensive to maintain unless other business model is augmented
- High barrier to entry
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Free-to-play with real-world variable transaction
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This is a yet to be explored business model but one I believe has a lot of upside. In this instance, real world recurring purchase transactions are rewarded with virtual currency (or items/access). Think of it like a virtual reward programme.
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Pro’s
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- Low barrier to entry
- Incentivizes and rewards usage
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Con’s
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- Potential real world margin erosion
- Needs careful management of heavy users
