The Social Network Service Quest for Premium Revenue = Virtual Items

Originally posted at www.sharkjumping.com

What's become clear in the past 24 months is that the rise of social network services (SNS) is changing the face of the consumer Internet through a massive user base combined with enormous engagement metrics.  What is obvious is that advertising alone isn't going to pay the freight for these services, at least not at the rate their owners would prefer.   An article in the NYT today about MySpace's quest for advertising revenue (see here) points out the same dilemma, but without providing any solutions, outside of better targeted advertising.

The fact is that most successful media models offer 2 revenue streams - premium/subscription and advertising - Newspapers, magazines, XM/Sirius, and cable television come to mind.  It doesn't mean you can't create value with only advertising, as broadcast radio and broadcast television have done, but the holy grail is an additional revenue stream, and preferably one which doesn't reduce the overall audience count through a "subscription wall".

As you might expect from me at Meez, we believe that the required secondary revenue model should be a virtual item-based one.  Why?  Because at a SNS, roughly 10% of your unique users provide roughly 50% of your overall engagement (no one calls them page views any more).  This means that your best customers are actually your worst advertising targets since they are on your site so much that they "frequency cap" on advertising since they have seen every single ad you can possibly show.  Yet they are your most loyal users, so they are usually most willing to pay if you give them a good enough reason (and a convenient method, but that's another upcoming post).

The best reason for them to pay is that in an SNS, which is really about people interacting with each other, the #1 goal is STATUS - how can I be different, better, have more authority, etc, and most importantly, how can I impress those around me with that status?  It's so basic, and is sometimes overlooked.  It's not about getting loyal users to pay for premium services like Music since those are generally solitary services which don't take advantage of a social network filled with people checking each other out. It can be as basic as a virtual gifting system, and as sophisticated as a fully built-out virtual item marketplace.  The "online bar" FUBAR is probably the most developed in the US, with a relentless focus on getting users to pay to impress members of the opposite gender, or to somehow benefit the group through happy hour sponsorship, but there are numerous other examples emerging.

In an SNS, a well structured virtual item program should be able to generate, on average, $5-7 monthly from 5%+ of the monthly unique users, and I've seen both numbers go higher in certain cases.  That compares to $3-5/year in advertising from a unique user.  If a SNS can't technically implement this system, there are now virtual item platform providers like TwoFish (where I sit on the board) which can accelerate a site's development of this revenue model.

This doesn't mean I believe only in virtual item models, as you see with the now popular "Free to Play" MMO model in gaming.  It's the combination of the two revenue models which is so powerful since it matches harder core users with a great way to monetize them, while still leaving completely open all of the advertising opportunities that come with large audiences.  So if you're an SNS, you MUST consider implementing a virtual item/gifting program as a way to generate additional revenue which uniquely fits the social aspects of an SNS vs just subscribing to premium service.

What's become clear in the past 24 months is that the rise of social network services (SNS) is changing the face of the consumer Internet through a massive user base combined with enormous engagement metrics.  What is obvious is that advertising alone isn't going to pay the freight for these services, at least not at the rate their owners would prefer.   An article in the NYT today about MySpace's quest for advertising revenue (see here) points out the same dilemma, but without providing any solutions, outside of better targeted advertising.

The fact is that most successful media models offer 2 revenue streams - premium/subscription and advertising - Newspapers, magazines, XM/Sirius, and cable television come to mind.  It doesn't mean you can't create value with only advertising, as broadcast radio and broadcast television have done, but the holy grail is an additional revenue stream, and preferably one which doesn't reduce the overall audience count through a "subscription wall".

As you might expect from me at Meez, we believe that the required secondary revenue model should be a virtual item-based one.  Why?  Because at a SNS, roughly 10% of your unique users provide roughly 50% of your overall engagement (no one calls them page views any more).  This means that your best customers are actually your worst advertising targets since they are on your site so much that they "frequency cap" on advertising since they have seen every single ad you can possibly show.  Yet they are your most loyal users, so they are usually most willing to pay if you give them a good enough reason (and a convenient method, but that's another upcoming post).

The best reason for them to pay is that in an SNS, which is really about people interacting with each other, the #1 goal is STATUS - how can I be different, better, have more authority, etc, and most importantly, how can I impress those around me with that status?  It's so basic, and is sometimes overlooked.  It's not about getting loyal users to pay for premium services like Music since those are generally solitary services which don't take advantage of a social network filled with people checking each other out. It can be as basic as a virtual gifting system, and as sophisticated as a fully built-out virtual item marketplace.  The "online bar" FUBAR is probably the most developed in the US, with a relentless focus on getting users to pay to impress members of the opposite gender, or to somehow benefit the group through happy hour sponsorship, but there are numerous other examples emerging.

In an SNS, a well structured virtual item program should be able to generate, on average, $5-7 monthly from 5%+ of the monthly unique users, and I've seen both numbers go higher in certain cases.  That compares to $3-5/year in advertising from a unique user.  If a SNS can't technically implement this system, there are now virtual item platform providers like TwoFish (where I sit on the board) which can accelerate a site's development of this revenue model.

This doesn't mean I believe only in virtual item models, as you see with the now popular "Free to Play" MMO model in gaming.  It's the combination of the two revenue models which is so powerful since it matches harder core users with a great way to monetize them, while still leaving completely open all of the advertising opportunities that come with large audiences.  So if you're an SNS, you MUST consider implementing a virtual item/gifting program as a way to generate additional revenue which uniquely fits the social aspects of an SNS vs just subscribing to premium service.

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