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Money for nothing – 6 virtual products that earn revenue

December 19, 2012 by Richard in Marketing with 0 Comments

They are an entrepreneur’s dream – products that don’t exist but will earn revenue, never suffer manufacturing defects and never run short if demand is high.

Virtual products have no physical form and are created at the stroke of a keyboard. The market for them is now worth an estimated $7 billion a year.

Marketing teams have created suites of virtual products as a byproduct of trying to differentiate otherwise standard products. What originally started as bundling additional benefits to build customer loyalty or achieve a better price, have become products or even currencies sought in their own right. Airline marketers seem to have had better success than other industries in building products that don’t exist.

Here are six of the most prolific virtual products I’ve either personally felt an urge to pay for, or know people who have.

1. Video Game Currency

No discussion about virtual products can go without a reference to the mother of all virtual products, so we might as well start with it.
Virtual Products in Farmville
Zynga is now an electronic game company under pressure, but it built its business off virtual currency and in-game virtual products. Need to buy a plot of virtual real estate for your virtual farm? Need to buy an outfit for your avatar’s virtual night out? No problem. Swap real dollars for game dollars (and you generally can’t cash out game dollars) and the virtual items are yours.

Genius.

Now back to virtual products in the real world.

2. Credit card points

Points for spending on credit cards are one of the original virtual products. Some credit card point schemes have become currencies in their own right. While I wouldn’t consider points awarded for spend that would have happened anyway as a product, I believe that position changes when consumers deliberately pay a premium to acquire points.

American Express Rewards

The various reward point schemes that American Express runs are the reason it commands the extra commission in the market. Many retailers will charge an additional 1% to 1.5% for the use of American Express, reflecting the surcharge that Amex levies over Visa or Mastercard.

Furthermore, many cards that provide points are able to charge consumers higher annual fees compared to those that have similar terms but no points. In Australia for example, a card that rewards with Qantas Frequent Flyer points would typically cost $80 a year more than a card that did not.

If you pay the extra surcharge instead of using an alternative card, or pay more for the card that issues points, you have bought into a virtual product.

3. Airline status credits

Whether you hold Silver, Gold or Platinum with an airline frequent flyer scheme can strangely matter a lot to some people. It determines which lounge you can sit in for a few minutes, which queue you can stand in, or how near the aircraft exit you are seated. (While I poke fun at it, there are times when I’m thankful I’m Gold!)

Status credits were traditionally awarded based on the fare class of ticket. However, I’ve noticed this has now evolved and some airlines are now inviting you to pay a supplement specifically to acquire those credit.

For example Jetstar, the low fares airline of Qantas Group, offers a $19 add-on that buys some Qantas status credits, frequent flyer points as well as a seat reservation. Think about it, all Qantas has sold you are some numbers on an activity statement. And you’ve paid them $19.

Paying for Qantas Status Credits

4. Carbon Offsets

Windfarm in Sea
It may be slightly controversial but Carbon Offsets strike me as a virtual product. For a few extra dollars (or sometimes, virtual frequent flyer points) you can pay to offset the carbon generated by an activity such as flying.

What exactly are you buying?

  • A carbon credit that was electronically written when an electricity generator created 1 kWh of power from a wind turbine?
  • A promise to plant part of a tree?
  • A promise NOT to cut down a tree?

All of the above it would seem. While I do believe in the benefits of a carbon trading scheme, you are trading in promises and credits written by a computer.

5. Q Jump

So you think you’ve found a flight for a bargain, but by the time you’ve worked your way through 5 screens of prepayment add-ons, you find you’ve doubled your fare. Some add-ons are arguably real services with real costs. Check-on baggage for example isn’t required by everyone and its handling does cost the airline more. Other add-ons are virtual products. The best, or worst, example of this is Priority Boarding, sold by Europe’s Ryanair.

Boarding a Ryanair flight is a fight. With no reserved seats, whoever gets on to the plane first gets first choice.

Non-priority boarding Ryanair
So for £5 you can queue in a priority queue. Its next to the normal queue but they scan you through first.

The catch comes because many Ryanair flights from low cost airports require you to board a bus which takes you to the plane. So the first ones on the bus are the last ones off the bus and on to the plane.

6. VIP clubs

Exclusive club entry
I recently got a phone call inviting me to join Accor Hotel’s VIP club. There are many others like it. For over $100 you can become a member.

In return you ‘receive’ nearly a thousand dollars of ‘value’.

You don’t actually receive anything, except presumably a membership card. You do get the chance to book at reduced rates, get reduced dining costs, and get better rooms for the same price. In other words you are pre-paying the right to pay less than an inflated price in the future.

You are also paying for the privilege of being marketed to. The typical person’s name, details and email address is can be worth $50 to the value of companies that trade in data. When it comes to VIP clubs, they should be paying you.

Virtual products may exist only in a computer file but they are not necessarily worthless. Accountants do fret about the liabilities they incur since they are often financial products that can later be redeemed for vouchers or products.

I’m not knocking them at all; quite the opposite in fact. I’d happily create and sell one.

More: Global market for virtual goods
Segment Est. Revenue
Video Game Currency (1) $2.9 bn
Voluntary Carbon Offsets (2) $1.3 bn
Airline frequent flyer – voluntary purchases (3) $1.2 bn
Total $7.1 bn
Notes
(1) “Video game virtual goods market worth $2.9bn”, Techcrunch, Dec 11
(2) Estimated market comprising of US, EU and AU only. EU voluntary carbon offset market http://www.businessgreen.com/bg/news/2181368/corporates-push-voluntary-carbon-market-level-2008″ target=”_blank”>EU market in 2011 estimated to be $576
AU carbon voluntary trading market estimated to reach $230m in 2012. Assume US voluntary market has reached the same size as the EU.
(3) Qantas Frequent Flyer generates A$1.3bn in revenue a year from selling points to Qantas and credit cards that reward points. Assume that (i) 5% of point purchases are deliberate, (ii) Qantas has around 5% of the global market for reward points. This is a high level assumption but little data is available for other schemes.

Acknowledgments
Windfarm photo (c) Jan Oelker/Repower

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