Merchandising Virtual Goods for Brands in Social Games

As currency markets take a ride, international sales of virtual goods have outpaced the U.S. quite dramatically, as witnessed by the explosive growth in South Korea and China, which had 2009 sales estimates of $3.5 billion to $4 billion in a market expected to reach $5.5 billion by 2012.

A new report Inside Virtual Goods: The Future of Social Gaming 2010 reveals not just the potential for revenue growth but how many opportunities are still available for clients to better leverage sales of branded virtual goods in social games.

Analysts estimate that virtual goods could bring in a billion dollars in the United States and around $5 billion worldwide this year — all for things that, aside from perhaps a few hours of work by an artist and a programmer, cost nothing to produce.

Users of social networks can buy one another gifts, like images of flowers and birthday cakes, typically for a dollar each. Facebook recently expanded its gift store to allow other companies to list their virtual wares, like greeting cards.

The companies that create and sell virtual goods, including Zynga, Playfish and Playdom, three online gaming start-ups in the San Francisco area, say they are recording significant revenue and profits, which have been elusive for many Web companies. Companies like SocialGold are also managing the in-game payment platforms.

In Restaurant City, a game by Playfish on Facebook, 18 million active users manage their own cafe and stock it with virtual casseroles and cakes. In Zynga’s game FarmVille, 62 million agrarian dreamers cultivate a farm, plant squash seeds and harvest their crops with tractors.

Most of the momentum in the virtual goods market comes not from gifts but from social games, where people buy items to improve their performance in the game or just to build up a collection that will impress friends.

In Zynga’s games, players can also earn virtual currency by signing up for subscription services or installing pop-up advertising software. But some social gaming companies have cut back on such offers after criticism that they were misleading and in some cases defrauding players.

Zynga says direct purchases of virtual currency and goods will account for most of its more than $100 million in revenue this year, and that the company is profitable.

Game creators talk openly about their strategies to make people pay for virtual goods: get them addicted, then steer them to purchases that speed up the pace of the game and help them succeed. In FarmVille, for example, the tractors’ gasoline tanks replenish themselves slowly over the course of a day. Instead of waiting, players can pay to buy gas — something that might be considered cheating in more traditional games.

Creating a new virtual economy is a pretty big deal too, Facebook Credits, will allow people to buy units of a virtual currency that can then be spent on various applications across Facebook. I wouldn’t be surprised if Foursquare eventually deployed a virtual goods currency of their own.

Recently, at Future of Money conference Phil Rosedale, founder of Linden Lab (Second Life) said that Linden dollars, the currency used in Second Life, are not backed by real money but they do have real value. He said the exchange rate has remained stable over the past few years and he believes that a virtual currency could one day become a safe haven in troubled times, just like gold.

James Grant Hay is an expert in content monetization of digital entertainment and is currently working on a social retail gaming network with a major French personal grooming retailer brand. The Virtual Goods Summit 2010 will be held at Moscone West, San Francisco on October 12, 2010.