In recent months, if there is one story of huge success besides the growth of the virtual goods industry (reportedly exceeding $1 billion in sales in 2009), it is the worldwide popularity of the movie Avatar. Currently, Avatar is on track to become the highest grossing film of all time. What is particularly interesting about this movie is that it is driving people in hordes to 3D showings and IMAX theaters, and paying more than the usual movie theater ticket price to do so.

Now you may wonder why this is relevant to the virtual goods industry. After all, virtual economies are centered on consumers purchasing virtual, intangible goods such as power-ups and armor, and digital flowers and drinks to send to their friends. Yet, movie tickets are very real-world, tangible objects that enter you into to a physical theater for an offline experience. I challenge you to look at this model differently.

When you watch a movie at the theater, you don’t walk away with anything in your hand or your pocket, such as a DVD or a CD with the soundtrack for the movie. All you walk away with is the memory of a rich experience enjoyed with friends. The $15 you paid at the theater wasn’t for a physical good, but instead it provided you 162 minutes in front of a large screen, seated in the dark wearing a ‘borrowed’ pair of 3D glasses.

When you consume a virtual good, you don’t get anything delivered to your doorstep, or walk away with anything new in your pocket. All you walk away with is your experience, and potentially this experience can be repeated over time (such as leveling up in an online game) as well as something that maybe your friends can share (such as a virtual gift). For virtual goods, you may have only paid $1 or even less, but what you got in return was enjoyable experiences that may have extended more than 162 minutes, perhaps even for a very long time.

Aren’t these two purchases more alike in the value they provide than you ever imagined?

The success of Avatar in IMAX and 3D formats underlines yet another aspect of the economy we live in that we’ve discussed previously: Ever more, we live in an experience-based economy. People are willing to pay for a differentiated, unique experience — something they enjoy. And, this experience doesn’t need to be born from tangible objects. These experiences – whether they are about driving fun, entertainment, relaxation, or competition – are the kind of experiences that virtual goods deliver, and deliver exceedingly well.

Next time you see a long line of people waiting to pay $15 to see Avatar in 3D or IMAX and walking out of the theater empty-handed, let it be a reminder to you why virtual goods have grown to be such a successful market and the opportunities that lie ahead.

When it comes to measuring the monetary value of an online gaming community or virtual world, the industry standard as of late has been ARPU (average revenue per user) and ARPPU (average revenue per paying user). ARPU is essentially the total revenue divided by the total number of users, and ARPPU is calculated by dividing the total revenue by only paying users. But, are these the right metrics for measuring the financial stability and success of a community? As social gaming and virtual world communities continue to grow in 2010, it’s relevant to explore these metrics further.

What’s good about the ARPU and ARPPU metrics?

• In the user-paid model, these are metrics based on the total number of users rather than impressions or clicks. That’s good because it helps you focus on the right things:
  • Growing the user base
  • Ensuring the user experience is good — if you truly believe that the experience is what users are paying for then these metrics will reflect that
• Combine ARPU or ARPPU with a viral coefficient and growth numbers, and you can arrive at the amount you should need to invest in acquiring customers. At least it seems reasonable.

What’s missing in the ARPU and ARPPU calculation?

• By accounting for only revenue in these metrics, the actual cost of generating this revenue is overlooked. People often claim that the cost of virtual goods is marginal, but it still remains that hosting, payment processing, customer support, licensing, and development are costs that must be accounted for. So, when calculating the acceptable cost of customer acquisition, you should really be using profit instead of revenue in this calculation.
• It is also important how you define revenue. If you calculate your revenue before taking out the payment processing costs, and you use a high cost payment system such as iPhone payments (30% per transaction) or Facebook credits (again believed to be 30% per transaction), then you are going to be very far from the true measurement of total revenue. Alternatively, you may think your costs are nominal because you use a Paypal or credit card payment fee structure, say $0.30 + 3%, but even this is 9% of a $5 transaction value – and as high as 33% of a $1 transaction value. In other words, cost of processing micropayments can be a significant portion of your revenue, and you should question if ARPU is really the right metric. Clearly, if your ARPU comprises a lot of $1 transactions, your margin per user is much smaller than if ARPU derives from larger price points.
• Once you start investing in acquiring customers, you will need to look at additional metrics, such as customers acquired via paid advertising versus customers acquired through viral adoption. As an example, on average it may cost you $0.20 to acquire a user and if your ARPU over the user’s lifetime is $0.50, then your profit margin per user is actually $0.30 as opposed to the ARPU calculation of earning $0.50 per user. Further, hypothetically, you may generate lower revenue from free users versus paid users and this may lead you to believe that paid users are more valuable than free users. However, by looking at the margin or profit per user, you may arrive at a more accurate metric about the value per user.

No metric is complete in itself, and so it is questionable if ARPU is really all you should be looking at to measure the success of your community. We suggest that Average Margin Per User (AMPU), as opposed to ARPU, may be a more important metric to measure and track. Once you factor out the variable cost associated with the revenue as well as the cost to acquire the user, you have a better sense of what is the true value of the user to you.

How does Social Gold help? First of all, the cost of processing transactions is much lower than other systems, including iPhone payments and Facebook credits. In the example above, inclusive of all payment processing costs, Social Gold pricing never exceeds 10% of the transaction and we scale our processing fees for merchants with higher transaction volume.

Secondly, and more importantly, our in-game payments flow significantly improves conversion and revenue — we consistently see merchants achieve more than 20% revenue lift by using Social Gold. Social Gold’s zero-friction payments solution increases the likelihood of repeat purchases by more than 200%. And finally, we tune the payments flow to convert a larger number of users from free to paying users. In other words, your costs do not increase as user base increases, but your ARPPU as well as your AMPU grow.

In the end, the short answer of whether ARPU is a good measurement of success in our opinion is “not by itself.” We recommend looking at AMPU as much as looking at ARPU in order to get a complete perspective on the welfare of an online gaming community or virtual world.

As always, email us or follow us on Twitter — and we would love to work with you to increase your AMPU.

Recently, I had the opportunity to participate in the Virtual Goods Industry Forecast 2010. Encompassing discussion amongst industry executives, analysts, and other influential people within the space, the Virtual Goods Industry Forecast offered a chance to share the Social Gold perspective with many of my other contemporaries.

Much of this discussion runs rampant between one another as we see each other at industry events. Engage Digital Media took the lead in organizing our predictions, and we’re really looking forward to delving deeper into these thoughts and projections at the Virtual Goods Conference, part of the Engage Expo in New York City next month (of which, we’ll be attending and speaking.)

I highly suggest you take a look at the full report, as it is quite interesting to view the ideas and thoughts of many influential individuals impacting virtual goods. My prediction that the virtual goods sector will exceed more than $2 billion in revenue within the year is backed up with thoughtful input and analysis from other passionate leaders who also feel that 2010 will truly be a year where the virtual goods sector witnesses “explosive growth.”

As one will find when reading the report, 2010 will certainly be an exciting year for Social Gold and the industry on the whole. While the established companies will continue to expand, we expect some new leaders to come to the forefront. In order for such companies to establish themselves at the head of the pack, the top virtual good providers must be able to adapt with evolving consumer needs.

We feel that retaining a deep IP and differentiable brand are both key steps in doing so. To establish deeper brand experiences, we expect developers to go multi-platform with products offered, continuing to build a connection across multiple platforms, such as Facebook, the iPhone and Android.

Just as developers will continue to evolve, Social Gold will continually innovate our product to create the most frictionless virtual economy and payment service for users all around the world. We’re clearly not the only ones excited to see where 2010 will take the virtual goods industry, and you can read everyone’s expanded feelings in the report, which you can download here.

Beginning in the first quarter of 2010, social networking sites IMVU and MyYearbook announced that they will launch a virtual currency exchange allowing users from either service to exchange currency between the sites. This is particularly interesting, primarily because it gives users on both platforms a perception of value in both currencies. It doesn’t by itself create one “universal” currency, but in fact leads the path to multiple currencies being popular among users.

Additionally, this is a more subtle way of exchanging users, and growing a community. Users with one currency can now take their value to another site, and vice-versa, thus creating a user exchange through the medium of currency. It is particularly significant because users who transition from one currency to another likely have a higher value because paying users are more likely to spend money on the new site they visit.

Despite these opportunities, currency exchanges bring some challenges in the long term. As long as these exchanges are tightly controlled and the number of participating currencies is small, it poses fewer problems. However, over time, as more currencies jump in, there will be a need for more regulation and monitoring. Specifically, issues around fraud and money laundering will have to be addressed. Instability of any one currency can also pose risks for other currencies. These challenges can potentially be addressed by ensuring there are well-structured rules and regulations around the exchange. For example, there will need to be controls that grant permission for users to participate in the virtual currency exchange program. Publishers will also need to store the history of users’ transactions, which can be used to protect the users from certain kinds of abuse. In addition, participating currencies will need to establish a shared concept of user identity to prevent fraud.

Virtual currency exchanges are still in the early stages, and potentially only a select few currencies will engage in these exchanges because of the risks involved. For indie developers who aspire to be included in the set of currencies users can exchange, as their currency grows in popularity over time, they will have the opportunity to choose whether to participate in such exchanges. As currency exchanges develop further, it will be clearer whether the rewards will outweigh the risks.

While the social gaming scene truly took off in 2009 and is expected to generate even more explosive financial growth in 2010, sometimes the basic nature of how the industry has evolved into its current state is often overlooked. Revenue generation in social games is undoubtedly one of the strengths of the medium that has garnered much of the rightfully deserved attention. Regardless of the content of the game, profit generation in online games lies heavily on introducing the proper virtual currency to your game.

As with any new business opportunity (thinking broadly beyond the social gaming industry), one’s success relies heavily on a well-planned financial model. Before the ground can break on a building site, and way prior to any ribbon-cutting ceremony, the means for monetization must be established. Introducing virtual currency into a social game essentially opens up the doors to profit generation for the following reasons:

a) It separates “value” from “cost” –– People perceive points or virtual currency as more affordable than actual money. As a result, the mental “cost” of spending virtual currency is far less than that of spending real money. This phenomenon encourages impulse purchases, as the consumer feels more inhibited to pull the trigger on transactions when the guilt of spending money is somewhat removed. It also enables the user to have more fun with purchases by removing the everyday stresses associated with tight budgeting.

b) It enables micro-payments –– you can price items at arbitrarily small price points.

c) It removes the need to price goods in many different local currencies for users. In the same vein that the Euro united the European economy, virtual currency immerses users in a common, universal experience.

d) It can create a deeper gameplay experience. Currency is an integral part of the game experience. When implemented effectively, virtual currency serves as a lever that a developer can instantly pull to create discounts, rewards, scarcity and more. For the developer to build a great experience, the control and management of currency is just as important as the virtual goods found in-game.

So before putting on a hard hat when constructing a business model for your social game, make sure a solid blueprint is in place with the introduction of virtual currency.

If you’re thinking of implementing a virtual currency in your game or virtual world for the first time, and would like our feedback and perspective, please feel free to contact us at developers@jambool.com.