Will luxury brands drive the growth of virtual goods?

The purchase of virtual goods in virtual worlds is increasing and most worlds now incorporate this element into their propositions. But which categories or types of products will be most successful from revenue-generation and demand perspectives?

Backing up on this point slightly, let’s talk about the area of revenue sharing for brands in virtual worlds. By this, I mean real world brands earning out of virtual transactions.

This is a concept I think we’ll see a lot more of in the virtual worlds sector. And it makes sense. If a company brings their brand into a third-party world and part of the offering is to allow residents/users to purchase virtual branded items, then surely the brand is entitled to a share of revenue. I think we’re about six months away from seeing this type of arrangement take hold.

Back to luxury brands.

Virtual goods (read clothing, accessories, hair styles etc) are all about perceived value. You can’t touch or interact with virtual goods as you can with real world items, so the purchase decision is made heavily on the perceived value – how the product will differentiate the owner from others and/or an overall assessment of it’s value and use. (the KZero report, Luxury Brands and Virtual Goods is here).

Something else to consider is pricing. Virtual goods at present are mainly priced at low points. Why? Because we’re yet to see the mindset of associating higher prices to virtual items and also with a virtually nil cost of sale or production, only the brave can justify increasing the price.

So what’s going to stimulate an increase in people buying virtual goods?

Firstly, I think kids, tweens and teens (KT&T) will play a big part in the growth. This group has ‘less of an issue’ paying real money for virtual goods – their decision-making process does not take into account its a virtual good – they just want the product and see technology as invisible.

So worlds targeting KT&T clearly have a major opportunity to create strong revenues here, as long as the products are right. But which types of product are right?

Obviously the ones that are demanded are the right sorts of products. But what is this demand? Certainly in the younger worlds and to a certain degree in older worlds, some virtual goods are viewed as status symbols – a ‘badge’ that sends out a message that the owner (wearer) has something unique / purchased / earned, that others do not have. And in this context, there’s a lot of perceived value associated with the item.

Luxury brands in the real world have very similar values. Luxury brands are status symbols with high price elasticity and of course perceived value. So due to this similarity, perhaps the inclusion of real world luxury brands into virtual worlds will act as a catalyst for more widespread usage and adoption. Using the brand attitude map helps to explain this thinking….

This map positions a brand accordingly to two factors, motivation and involvement. Motivation relates to the emotive output of the purchase. Negative motivational products are problem-fixers, whereas positive motivational items are ‘feel-good’. Involvement relates to the assessment of the purchase from a risk perspective. Low involvement products need little time to be bought whereas high involvement products have a higher degree of financial or associated risk.

So, some examples: Buying a painkiller is low involvement and negative motivation, whereas buying a glass of wine whilst still being low involvement is a positive motivation. Buying a mortgage is negative motivation and high involvement but a holiday on the other hand whilst being high involvement, creates a positive motivation.

I think we’re currently at phase one. The majority of virtual item purchases in virtual worlds relate to clothing – typically purchased by newbies wanting to ‘blend-in’ to their new virtual home and not look like a new-comer. On this basis, one can imply that these types of transactions are more negatively motivated than positively because the user/resident has a problem to fix. And, when considering the level of involvement, it’s actually low because of the typical wide array of choices available and the comparatively low price of these goods.

Phase two will be a critical point on the path to wider adoption and usage of virtual goods. We already have some luxury brands in virtual worlds (such as L’Oreal Paris, DKNY, Sephora and Armani) and more will follow – we’re currently in a phase of seeing slightly more urban brands appearing in virtual worlds and socnets (Rocawear, Paris Hilton) – these are still luxury from a comparative pricing perspective. .

On this basis, users of virtual worlds will see more of these brands in their worlds and as the user bases grow in these worlds, the ‘want’ to stand out will also increase, thus leading to an increase in the demand for virtual luxury brands. In this instance, phase two means an increase in motivation (because of the feel-good essence of the purchase) but also a slight increase in involvement as higher pricing points will be adopted by luxury brands and supply (competition) will also increase leading to a more involved purchase decision.

As more luxury brands enter the virtual space, involvement will increase further due to the wider range of products for users to choose from. This aspect is explained by phases three and four – as motivation increases all the while.

So will we ever get to the point where real world luxury brands fully realise and embrace virtual worlds as a legitimate sales and revenue channel?

I think we will and this is demonstrated by the shift from phase four directly to the real world positioning of luxury brands – medium to high involvement and strong positive motivation. How long will this take? My guess is 18 – 24 months.

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