[Editor’s note: Lora L. Abe is the director of marketing for Gambit, a leading payments engine for online games. She writes articles on monetization for social games at blog.getgambit.com, where it was originally published.]

In real life, we make decisions every day on what to buy, and we base those decisions on how we feel our purchases will enhance our lives. We buy this detergent because it’ll clean dishes more efficiently and that overstuffed chair because it’s comfortable and looks great in the living room. We buy ridiculously huge stuffed animals because their comical appearance makes us happy with laughter, and we buy $7,000 electronic gadgets and $400,000 cars to make a statement about our wealth and status.

Inside of a game, that mentality doesn’t change. Whether we’re purchasing real, tangible objects or virtual, pixellated images, the driving question behind whether or not we pull out our wallet is the same– what will this do for me?

The general purpose of virtual goods is to make game play more interesting, more engaging, more enjoyable — and also to make game developers more revenue. In the case of casual social game developers, particularly those on MySpace and Facebook, virtual goods are their only driving components for revenue, with the following understandings:

  • Users exchange real money or take advertising offers for the game’s virtual currency, then use that currency to purchase virtual goods. However, the virtual goods (not the virtual currency) are the end goal, so users are basically paying for virtual goods.
  • For the sake of simplicity, virtual goods refers to both objects that can be obtained and actions, like getting to a more advanced level that can be performed within the game.

Virtual goods aren’t just for free games. In games that have an initial upfront cost, like The Sims, or that require a paid subscription, like World of Warcraft, virtual goods can still be a solid source of revenue. Either way, if developers want to make any profit from virtual goods sales, they need to really understand the dynamics of their game and tailor their virtual goods appropriately: Users will not want to pay for virtual goods that do nothing to enhance their game play experience.

How can virtual goods enhance game play?

  • Amusement: Owning the item makes the user happy (e.g. unique-print wallpapers or personality-reflecting furniture for a user’s virtual room)
  • Status: Owning the item allows the user to show off either wealth or devotion to game play, or both (e.g. highly expensive or limited-supply objects)
  • Progression: Owning the item allows users to increase skill points, which assists in leveling up (e.g. better weapons that enable more wins)

In Extreme Basketball, a Facebook application that lets users put together basketball teams and compete against each other, virtual goods include player items like shoes and apparel. This gear helps team members improve in offense and defense, which helps the whole team’s odds of winning games. Other parts of the organization, like stadiums and cheerleaders, earn more cash per game played.

Virtual goods that are purely decorative — that is, they serve no function within the game beyond existence — are, unsurprisingly, prominent in virtual communities where users are given spaces of their own to decorate. Users cannot actually play with their red-velvet-lined pool tables or relax in their hot tubs, but owning high-end items both shows off status and reflects the users’ personal tastes, which is motivation enough for users to buy.

Objects, however, aren’t the only thing users can be persuaded to buy — virtual actions can also enhance gameplay and make money. Extreme Basketball players have the option to purchase “training”, used to improve an individual player’s speed, strength, coordination and jump, all of which, when improved, ultimately result in better winning odds for the team).

Another example: In Mafia Wars, a top “gangster” themed app on Facebook and Myspace made by Zynga, (one of our clients), users can buy energy, stamina and health, allowing the user to participate in more fights and jobs. This gets the user more money and experience points, the latter of which leads to leveling up and unlocking new items within the game.

So if you’re a game developer, when deciding what sort of virtual goods you’re going to make available to your users, ask yourself: Why would my users want this? How does this add worth to my game for them, and how does it make their experience more enjoyable? Once you make virtual goods valuable and make that value evident to your users, the purchases will happen and your percentage of paying users will grow.