Overview

Competitive Forces: Virtual Product Pricing & Life-Cycle

Business owners interested in understanding the profitability of a market or industry, prior to releasing a product, should be very aware of the forces affecting competition. These forces, are generally accepted as indicators to predicting profitability. Understanding these forces also exposes which forces in an industry may be advantageous to being profitable, and which are challenging the opportunity. Since I sell a line of pre-fabricated retail stores in Second Life, I've had to consider things such as pricing, feature sets, texturing, and correctly sizing the buildings for my target market, compared to existing substitutes or alternatives. Using the XStreetSL web site to sell my virtual goods, I have experienced a phenomenon in doing virtual business manufacturing that is completely different from the real world: my competitor's products never go away, they only get cheaper and cheaper until they are offered for free! What I am suggesting in this post, is that the lack of entry and exit costs (not to mention direct costs) associated with selling virtual products, negatively affects both pricing and product life-cycles in the virtual product industry. Combine this supposition with the exchange ratios of virtual currencies to real world currencies, and being a product manufacturer is a very difficult industry in which to find sustainable profitability.

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Your Time: Virtually, Your Only Direct Cost

An interesting concept I've realized about business in virtual worlds, involves the issues of direct and indirect costs. The concept goes like this. . . In the real world, creating a product or service has its associated costs. These costs are generally put into two buckets. Direct costs are those activities where costs can be tracked directly to the cost of making your widget or producing your service. Examples would be working on a drill press to machine a part, or the time you bill your client to be his personal trainer in the gym. Indirect costs are activities not directly tied to the output of your product or service; there's overlap in the costs as they are shared across activities such as utility bills, rents, and "general and administrative" time. But in the virtual world unlike the real world, there is only one direct cost: your time.

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Metaverse Technology & Demand Limitations

It's apparent that many people in Second Life join to try and make money in-world. "What can I do to make some money?", is a very popular question by these reward-seekers. If you're familiar with the Second Life life style, then a list of jobs pops into your head immediately. Dancer, host, DJ are usually at the top of the list. Look at these three jobs however, what does that say about the environment which you've entered? It says, "This is a very social place," and your job, and your success at these positions is based on people paying you tips for your service. Compare this to the real world now. The answer to, "What can I do to make money?", has a much broader answer; hardly able to nail it down to just three common tasks. This exposes two facts about this contrast. The first is that the virtual world is very limited to what new products or services you can create. The second is more reflective of real-life; consumers ultimately determine what is hot and what is not.

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Second Life Economy Overview

Second Life mimics real life where society needs and relies on money exchanging hands to support economic growth. As more real-world currencies are converted into Lindens (the financial unit of exchange in Second Life), more money becomes available for exchange between participants. "The Fed" (US Federal Reserve Bank) in the U.S. greatly influences the cost of borrowing money and setting its value through financial policy. In Second Life, Linden Labs has many of the same controls over the costs of capital, exchanges, its value, and availability of currency.

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