How to plan a virtual goods sales business model

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Presentation given at Virtual Goods Forum 2010.

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  • The concept of business model has been used in variety of different situations and in describing different business aspects in such a degree that the concept has almost lost its explanatory value. In the following slide, I give a couple of examples.
  • In this presentation we will focus on the interaction between products and customers and how value is captured from it.
  • … These components
  • Ok. Now that we have established what business model is, we can get to the content of a business model.
  • Value proposition of a business model describes the overall service or a product.
  • It is problematic to divide the value proposition into practical value offerings that can be used in designing revenue streams.- Virtual goods, for example, have always been part of value proposition of digital games but they haven’t been identified as a sellable object of value. Systematic approach to identifying value offerings could have presented virtual goods as a viable revenue model earlier.- Of course, the development of information technologies enabled publishing and shipping products in smaller parts because of the reduced transaction costs. Therefore it wasn’t necessary anymore to publish games only in retail boxes.
  • Commonly sold value offerings in games
  • One way of sorting out the value sources of virtual goods is to map why people buy them. Lehdonvirta provides one classification of such sources of value of virtual goods.
  • Let’s use this classification as an example of different types of virtual goods offered in the business model.
  • Segmentation is a basic practice in marketing concerned with dividing the customer base to practical groups based on differing needs or demographic factors There are a plethora of factors that can be taken into consideration when segmenting customers However, in virtual goods sales model, game design provides an interesting perspective to segmentation as the game design actually, to some extent, defines segments instead of merely identifying them.
  • A position and activities of users in a game-service can be mapped in matrix. Vertical scale represents the intensiveness and progress of a user in a service, sort of like the casual <-> hardcore axisThe different gamemodes, playstyles or even avatar classes can be mapped horizontally and the user has a separate progression on them.With this sort of matrix we can map users on different segments in the service.
  • Its all very similar to product portfolios where products are differentiated according to the product category and from entry-level to high-end/luxury.
  • The game can be designed to pose different needs to each segment requiring different virtual goods to satisfy those needs.
  • We can map, for example, virtual goods of Frontierville with similar scales.
  • One example of a classification for the horizontal axis is for example the player types by Bartle, which categorises players into different playstyles which correlate with the needs for certain kinds of virtual goods.
  • Another way similar classification is the player motivations by Yee (2007)
  • However, the games are commonly designed in a manner that all the players can go through all the levels. Therefore a more sophisticated differentiation of virtual goods is required.In world of warcraft, items are also differentiated within level ranges to address to intensiveness of the playstyles.
  • - Subscription model
  • Selling performance enhancing item to top level warriors with a customer dependent single price.
  • Selling a bundle of goods with a subscription. For example Habbo has a “Habbo Club” premium subscription that is a bundle of multiple vale offerings.
  • Single price for the total value proposition is not able to capture value from customer who would be willing to pay more or from customers who would be willing to pay less.
  • The premise of virtual goods sales model is that the value proposition is sliced into smaller sold offerings that enable the customer to pay as much (or little) as she is willing and therefore enabling the business to capture all available value.Freemium business model enables value being capture from non-paying users in form of positive network effects. The more users the service has the more valuable it is to other users.
  • Its not just the subscription pricing or the value offerings sold, but all components together that make up the business model. Virtual goods sales model is pretty complex because the decomposition of the total value proposition to such small offerings demands careful analysis and planning
  • Its not just the subscription pricing or the value offerings sold, but all components together that make up the business model. Virtual goods sales model is pretty complex because the decomposition of the total value proposition to such small offerings demands careful analysis and planning
  • How to plan a virtual goods sales business model

    1. Virtualgoodssales as a business model<br />How to plan the interplaybetweenvalueofferings and game design basedsegmentation… and how to capturevaluefromit<br />
    2. Juho Hamari<br />Researcher @ Helsinki Institute for InformationTechnology<br />M.Sc. (Econ) @ Information System Science - eBusiness<br />web: virtual-economy.org || tweet: @VirtualEconomy<br />
    3. The aim of the presentation is to breakdown the virtualgoodssales business modelusingconceptual business modeltools.<br />(Pleasesee the slidespecificnotesbelow for moredetaileddescriptions)<br />
    4. What does the term business model actually mean?<br />
    5. …which are components of a business model<br />They are components of a business model<br />Osterwalder et al. (2009)<br />
    6. Business model definitionOsterwalder et al (2009)<br />In short …<br /> “A business model describes the rationale of how an organization creates, delivers, and capturesvalue”<br />
    7. But what value are we offering?<br />Ok.<br />
    8. Value proposition<br />Value proposition is an overall collection of the firm’s products and services<br />Value proposition can be decomposed to smaller value offerings <br />
    9. Value proposition<br />Large array of possibilities to break down the value proposition<br />What is a meaningful way of identifying relevant entities of value?<br />Games have always had virtual goods, but they have been inside bundles<br />Virtual goods<br />Server/name/faction<br />Expansions<br />Gameplay<br />Avatars<br />Virtual world<br />Community<br />Value proposition<br />
    10. Value offerings<br />Essentially every texture, model, sound and a line of code has value and could be sold separately<br />Virtual goods are essentially small bits of the total value proposition<br />… but which parts do we sell, to whom and how do we create demand (value) for those parts?<br />Value proposition<br />
    11. Commonly sold objects of value<br />Physical goods<br />- Boxed games<br /> - t-shirts etc<br />Avatar competencies<br />Added services:<br />     - timesavers - functionality    - social interaction features    - name/gender/race change    - server change<br />Time<br />Content (areas)<br />Virtual goods<br /> - aesthetic<br /> - rare items<br /> - consumables - time-based - use-based<br /> - performance<br /> - social        - gifts<br />
    12. Sold objects in WoW<br />Physical goods<br />- Boxed games<br /> - t-shirts etc<br />Avatar competencies<br />Added services:    - timesavers - functionality<br />     - social interaction features    - name/gender/race change    - server change<br />Time<br />Content (areas)<br />Virtual goods<br /> - aesthetic<br /> - rare items<br /> - consumables - time-based - use-based<br /> - performance<br /> - social        - gifts<br />
    13. Sold objects in FrontierVille<br />Physical goods<br />- Boxed games<br /> - t-shirts etc<br />Avatar competencies<br />Added services:<br />     - timesavers<br /> - functionality    - social interaction features    - name/gender/race change    - server change<br />Time<br />Content (areas)<br />Virtual goods<br /> - aesthetic<br /> - rare items<br /> - consumables - time-based - use-based<br /> - performance<br /> - social<br /> - gifts<br />
    14. Elementary value of virtual goods (Lehdonvirta 2009)<br />
    15. But to whom<br />Now we know what we are offering<br />
    16. Segmentation<br />The purpose of segmentation is to identify and divide populations into strategically relevant homogeneous segments based on proven segmentation variables and matching customer needs<br />Enables a firm to differentiate and target their value offerings<br />
    17. Segmentation based on game design<br /><ul><li>Intensiveness
    18. Levels
    19. Points
    20. Dimensions of content
    21. Styles of play
    22. Avatar classes</li></ul>Intensiveness<br />Dimensions<br />
    23. Product portfolio of Volkswagen<br />http://www.autointell.com/european_companies/volkswagen/vw_marke/volkswagen-group.htm<br />
    24. Differentiation<br />Level z items<br />Level y items<br />Level x items<br />Type d<br />Type b<br />Type c<br />Type a<br />
    25. Product unlocks in FrontierVille<br />
    26. Player types (Bartle 1996)<br />
    27. Player motivations (Yee 2007)<br />Advancement<br />Mechanics<br />Competition<br />Socializing<br />Relationship<br />Teamwork<br />Discovery<br />Roleplaying<br />Customization<br />Escapism<br />
    28. In World of Warcraft items are divided into quality tiers that address the different play styles and intensiveness: casual to hardcore<br />
    29. Value offering<br />User segment<br />
    30. But how do we capture value<br />Now we know what we are offering and to whom<br />
    31. Pay-per-use<br />Single price<br />= a revenue stream<br />subscription<br />Customer dependent<br />
    32. Everything<br />Pay-per-use<br />Single price<br />subscription<br />Customer dependent<br />
    33. Mighty Sword of Slaying<br />Top level warriors<br />Pay-per-use<br />Single price<br />Customer dependent<br />Subscription<br />
    34. Bundle<br />Pay-per-use<br />Single price<br />Subscription<br />Customer dependent<br />
    35. Meeting the willingness to pay<br />Goal is to break down the total value proposition to such small offerings that the customer is able to pay the amount for the service that she is willing to pay<br />
    36. Pure retailmodel<br />Lost revenue<br />Lost revenue<br />
    37. Retail + subscription<br />
    38. Retail + tieredsubscription<br />
    39. Virtualgoods<br />Freemium bonus:<br />Value captured from non-paying users<br />
    40. Value offering<br />User segment<br />Pricing<br />
    41. Pricing<br />
    42. Why business models frameworks?<br />Understanding and sharing <br />Analysing<br />Managing <br />Prospecting<br />
    43. Thankyou<br />web: virtual-economy.org || tweet: @VirtualEconomy<br />
    44. References:<br />Bartle, R. (1996). "Hearts, Clubs, Diamonds, Spades: Players Who suit MUDs. http://www.mud.co.uk/richard/hcds.htm<br />Lehdonvirta, V. (2009). Virtual Item Sales as a Revenue Model: Identifying Attributes That Drive Purchase Decisions. Electronic Commerce Research, 9(1-2), 97-113.<br />Osterwalder, A. (2004). The Business ModelOntology – A Proposition in A Design Science Approach. Thesis. University of Lausanne.<br />Osterwalder et al. (2009). Business ModelGeneration.<br />Yee, N. (2007). Motivations of Play in Online Games. Journal of CyberPsychology and Behavior, 9, 772-775.<br />
    45. Furtherreading:<br />Hamari, J. (2009). Virtual goods sales: New requirements for business modelling? Thesis. University of Jyväskylä. - https://jyx.jyu.fi/dspace/handle/123456789/23051?show=full<br />Hamari, J., & Lehdonvirta, V. (2010). Game design as marketing: How game mechanics create demand for virtual goods. International Journal of Business Science and Applied Management. 5(1), 14-29. - http://www.business-and-management.org/paper.php?id=48<br />

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