Virtual Goods / Currency and Mobile Payments: the business model for Social Apps
I had a great time at the Virtual Goods Summit in San Francisco a few weeks ago where I spoke on the payments panel. Although Zong is already powering hundreds of Facebook and MySpace virtual currency and goods systems, either through partners such as Offerpal Media and $uper Rewards who add targeted offers for monetization, or directly, I was amazed to learn that the Virtual Economy was already worth $1.2 billion and was going to reach $6bn by 2010.
We now all know advertising is not the solution to monetize Social Apps and Networks, clickthrough rates are low, CPM abyssal, and with the economy going down the drain and its resulting advertisers pull back, it’s not going to get better anytime soon. The situation of the world’s economy also serves as wake-up call to startups that were solely focused on growing their audience, thinking that a potential business model will emerge at a later stage. Now time has come for Web 2.0 to adapt itself and to enter into a new era of monetization, virtual points/goods/currency users can purchase to enhance their experience and gameplay, to gain a competitive advantage in a game, or for gifting purposes.
There’s an art, mastered by few, that almost scientifically drives users to complete transactions for virtual items. From what I’ve seen across the apps we power with Zong, it has to do with not presenting the premium element of the app/game early on. When a user starts using an app, the focus is solely on making the experience addictive and viral. This takes some time. Only once the user is hooked and obsessed by defeating his friends (men), or collecting virtual items (women), can the notion of virtual goods purchase kick in.
Some of our apps using Zong are generating over $10,000 a day worth of transactions for virtual goods. The average active user completes more than 2 transactions by session, which means the experience is gratifying and addictive.
So why is mobile such an important ingredient of success in the virtual economy? The first reason has to do with the ultimate dematerialized nature of mobile payments. It is a well-known fact that people tend to spend more with credit cards than they do with cash. The underlying reason for that is pain associated with paying. Paying for anything is always painful. Deferred payment makes it less painful, but at the same time, credit card debt has become a chronic disease in America and abroad. Paying with cellphones is new, so there is no remnant pain associated with completing a transaction. We’ll therefore assume mobile is the least painful way to pay.
The second reason has to do with friction. User experience gurus always advise to limit the number of steps a user has to take to complete a given action online because you lose users each step of the way. Completing a credit card transaction requires the 16-digit card number, the expiration date, credit card verification number and often, billing address. People don’t know their credit card details by heart, so they need to fetch their wallet, take the card out, etc… Remember the golden rule of limiting steps? Well it wouldn’t surprise anyone then, that most of our partners report they have a completion rate of 0.5-1% when they present a credit card payment page to their users for virtual goods. Add to that the fact that virtual goods don’t have a high perceived value, and you quickly realize that by the time the user has his credit card in his hands, the thing that crosses his mind is: “What the heck am I doing??”. Mobile on the other hand is ideal. A vast majority of users have their cellphone next to them at all times, they know their number by heart and all it takes to complete payment is typing that number, getting a text message with a PIN code and typing it back on the web. Payment takes 15 seconds, and off goes the user to his virtual good or points that will enhance his game or app experience immediately without ever leaving the environment of the app.
Numbers we’ve been seeing recently are staggering. Average conversion rate from visitor to buyer is 53% from the point the user clicks on the Zong payment button!
So for which types of apps does the winning virtual goods/mobile payments combination work best? Social Gaming and Virtual Worlds definitely come first, and with the advent of flash apps on Social Networks, it is only the beginning. But this model is also applicable to simple dating apps, or any application that taps into the social graph. The minute you touch users’ social graphs, you can enable virtual gifting and enhance egocasting with virtual items. So whatever your app does, if it’s social, you need to start tapping into the virtual economy to succeed in the real world, and you better start now!
