For many the very idea of spending money on virtual goods is just strange; why would anyone spend money on a digital T-Shirt when it doesn’t even exist!
In this post I’m going to try and answer that question.
Most importantly, I believe that, no matter who you are, you already buy virtual goods, and have been doing for years.
Why do APC jeans cost over $200, when physically similar pants can be had for one-tenth the price? They both have similar practical utility, so what are we paying extra for? The same is true of brand-name products in almost every category. Brands are so pervasive that even those people who want to make a statement against ‘the logo’ have to invest substantial time avoiding it, which is just another kind of premium.
Every product contains both tangible and intangible sources of value; its this intangible value that is in fact virtual, everything you buy has at least some “virtual” component. By recognizing these components, we can make better sense of what’s going on in the online virtual goods market, and craft strategies that leverage people’s pre-existing experience with virtual goods. Paying a premium for a branded pair of virtual jeans is actually a pretty similar experience for most virtual goods customers.
There are four sources of value a product gives to a customer:
- Practical utility: This is the tangible benefit that a product enables, whether that’s transportation, warmth, cleanliness, or entertainment. Many products derive all of their value from this utility, online as well as off: generic drugs are pretty similar to a number of non-epic consumables in your average MMOG.
- Perceived value: This is the extra value a customer perceives as a result of good marketing, product design, product quality, or exception product/market fit. For example, many customers derive satisfaction from feeling like they bought the “best” product in a given category, even if that product has no objective performance difference from its nearest competitor.
- Social value: When I can use a product to my benefit in a social situation, it can be transformed in value. All gifting-type products are influenced by this source, as Hallmark has long understood. But plenty of other product categories depend on social factors: status purchases, beauty products, and fashion products.
- Identity value: This is the strongest source of value of all, and it’s a little tricky to differentiate from the preceding two sources. This is the benefit you get from incorporating a product into your self-conception. For example, take your average Mac fanatic. When they buy an Apple laptop, they are doing more than enjoying a premium product and showing off. They are saying to the world and – more importantly – to themselves: I am the kind of person that buys Apple products. Apple has done a phenomenal job of convincing us that we, too, can be a little like Steve Jobs, if only we had one more iFoo in our lives. Many fashion and beauty products create this kind of affinity. Identity products are not easily displaced, because the emotional investment is very high.
We find that consumers generally have separate budget for each category (not necessarily consciously). We’ve observed from our own products, and others, that if spending can be moved out of the entertainment budget (which is often constrained) and into the identity budget, it is possible to make a lot more money per customer. Even in tough times (actually, especially in hard times) people spend significant sums to bolster their sense of who they are.