Virtual Goods Show Potential, Haven’t Yet Crossed The Chasm

With 350 million users playing social games on Zynga alone, and over 68 million social gamers in the U.S., the social gaming world looks to hold the potential for vast wealth. eMarketer expects the U.S. virtual goods market, which is the economic engine behind social games, to hit $653 million in sales in 2011.  After seeing that data, I was a little confused by a study published by Playspan stating that only 31 percent of the general gamer population used real-world money to purchase virtual content and of that group, 57 percent said they purchase virtual items using real-world money at least once every month.

I have no doubt that virtual goods are a real business opportunity and that some companies are making a fortune on virtual goods, but it’s a bad idea to mislead people about the size and engagement of participation in the apparent spending spree on virtual goods.

If you believe the study, Playspan’s results indicate that a total of 17.7 percent of online gamers purchase virtual goods monthly. So using the above figures, we have an interesting data set:

  • 68.7 million U.S. gamers
  • 0.31 x 0.57 = 0.177 or 17.7 percent of game players
  • 68.7 million gamers x 17.7 percent who buy virtual goods = 12.1 million buyers
  • $653 million in sales / 12.1 million buyers =  $54/year per year or $4.50/month

If the study’s results apply to the wider gaming community, there would be 12.1 million buyers regularly spending $4.50/month on virtual goods.

Does this pass the “ask your friends” test? I’ve repeatedly gone out and asked people if they spend money on virtual goods, and how much they spend. I’m personally looking for a 10 percent or higher response rate, as that would indicate a true market shift in my view. In my personal polls, however, the  numbers have always differed significantly. I typically see regular purchase rates approximately 5 percent amongst my group, but the average spend varies from $10-$30 per month.

That means my personal field test yields one third the conversion rate and up to seven times the monthly revenue. I tend to believe my numbers since Zynga, the leader in social games and virtual goods, reports that only 5 percent of its users pay for games. The 5 percent of Zynga versus the 17.7 percent from Playspan is important due to the market implications.

At 5 percent, it looks like there’s a small, but dedicated group of core buyers, while a 17.7 percent group feels like the practice has gone mainstream and is approaching 1 in 5 players being buyers. First of all, readers looking to implement fee-based virtual goods could waste enormous resources believing that their virtual offerings could be developed and marketed to a mainstream audience. That audience just does not exists. Second, the 17.7 percent also suggests a $4.50 price point, a buying behavior shift at the upper edge of micropayments, another shift I have not seen.

Likewise, increasing average revenue per user (ARPU) can be easier than converting users to new payment vehicles or payment systems, as the trust threshold necessary to begin using new payment vehicles is usually lower than that required to increase ARPU even 10 percent.

In the macro picture, if buyers spent seven times the revenue for one third the audience, that would represent 230 percent of the original revenue target, which still means there’s serious money to be made. Virtual goods are already a big market and growing, but businesses looking to cash in need to know that they’re still entering a market that has not crossed the proverbial “chasm.”


About Duane Kuroda

Business ninja, deal hunter, Internet marketer, and technology fiddler obsessed about growing companies and launching products. Currently at Peerspin, Duane’s past lives include Vice President of Marketing roles at companies leading micropayments, Internet video, and online communities as well as research and consulting for mobile advertising. Duane has spoken at conferences including Digital Hollywood and Digital Video Expo on topics covering monetizing online content and online video, has appeared on TechNowTV and KNTV, and has been quoted in various magazines. Follow Duane on Twitter: @dkuroda.

2 Responses to Virtual Goods Show Potential, Haven’t Yet Crossed The Chasm

  1. Justin Dupre says:

    The revenue generated from virtual goods will only get bigger in the coming years as more and more people will have access to social games. Great post.

  2. Spook SEO says:

    Shelling out goods through online markets is really a big thing now
    that it is already so popular. Name one famous social networking site that has
    no personal stores on them? That is right, there is none of them. It keeps getting
    better this way. If they are supplying more, then, there is a tendency people
    will be attracted to buy more.