The report explains the options available to luxury brand marketers when considering virtual goods strategies.

Companies referenced in the report include L’Oreal Paris, Hublot, Rayban, Mercedes Benz and Armani.

Examples of marketing initiatives and campaigns explained in the report:

• Product launches
• Competitions
• Metabranding
• Customer engagement
• Brand extension
• Advertising

The report can be ordered here.

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We think one of the major contributors to growth in the KT&T category will be branded worlds – virtual worlds created by real world companies in the toys, games and media spaces.

We’ve already seen some indication of the power of branded worlds, namely with Barbie Girls, Webkinz and Buildabearville (shown right in a segment from the Radar).

The MTV suite of worlds are also worthy of note, albeit slightly less successful (in terms of comparative registered accounts), perhaps due to targeting a slightly older age group.

All three of these branded worlds amassed multi-million registered account user bases in a relatively short period of time – something pure-play virtual woods typically struggle with.

Here are the reasons why branded worlds are set to be major growth areas in 2010+:

1. Brand awareness

The importance of The Brand is often over-looked by new VW companies. Sure, having a technically sound platform and product is one thing and of course, viral marketing is great (as a theory) but potential users need to know about the world. Branded worlds have a huge advantage over pure-plays because they have incumbent levels of real-world brand awareness – they have customers that already have a relationship with the brand.

We’ve recently completed a consulting project for a global games publisher on one of their tween brands, providing guidance and strategy on the in-world user experience/journey, financial model, marketing/acquisition and monetisation strategies. What blew us away right at the start was the incredibly high level of brand awareness in several key territories – an ideal start for a virtual world.

Furthermore, creating the virtual world was almost a ‘no-brainer’ strategy as it’s simply an evolution and extension of the existing real-world experience.

2. Distribution channels

A large real-world base of potential users who know the brand – check. Next thing, tell them about it. Another key advantage branded worlds have over pure-plays are distribution channels.

These are existing communication tools and platforms already in place, typically supporting marketing activities for the real-world brand. Integrating supporting messages to propel potential users to registration can often be done effectively creating economies of scale from marketing and acquisition perspectives.

3. Ability to monetise

This is key. A challenge facing pure-plays is convincing parents (if the VW is targeting younger ages) that the new VW brand is ‘worthy’ of their disposable income. Factors such as credibility and value come in to play here. Clearly, real-world brands have already crossed that bridge and (being overtly commercial and direct) taken their money. Therefore, converting active to paying users is in a way marginal income for the brand and not an entirely new process.

Digging a little into optimal VW business models for branded worlds, our view here is that virtual goods is the way to go, even if it’s tempting for the brand to think they can leverage users sufficiently towards premium subscriptions. Whilst in theory premium subscriptions might make a lot of sense for real-world brands creating VWs, the vast majority of these companies have products, not subscriptions for their real world offerings. Don’t introduce a new mechanic here. Stick to what you know (and your real-world customers know) – virtual goods is the way to go (no intention for rhyming there BTW).

4. Multi-genre

There’s an awful lot of real-world brands in the KT&T space (particularly kids and tweens) that are ripe for virtual world entrance. And, they cross many different genres – girls/boys, sports, music, fashion, real-world games/activities,…the list goes on. One branded world to definitely watch is Lego Universe. It’s been over two years in the making – so it had better be good! Another couple coming down the track are World of Cars from Disney and Kung Fu Panda World.

And they’ll be a lot more to come and many a deal struck this February, seeing as Engage Expo is co-locating with the Toy Fair 2010 for their NYC show. See you there .

The full KZero report, Virtual Worlds 2010+ can be ordered here.

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Furthermore, it’s a great example of virtual worlds being used in a non-consumer fashion (albeit a little Second Life centric). The media tends to focus pretty much exclusively on KT&T VWs when covering the sector and what a lot of people don’t realise is just how much hard work is going on in B2B and governmental sectors. Roll the (slickly produced) video.

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via Mal Burns

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Virtual Worlds Companies: This list includes official virtual world Twitter streams (Twinity, SmallWorlds, Habbo etc) as well as supply chain companies (moderation, payments etc):

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Virtual Worlds Research: Individuals and companies commenting on the virtual worlds market:

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Virtual Goods Companies

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Virtual Goods Research

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This is a concept KZero first presented and explained over two years ago as a good (read – build engagement) use for mirror worlds.

The concept of using mirror worlds for time travel is explained in this post as well as in a summary presentation delivered at Virtual Worlds London. Well done Twinity.

We see mirror worlds with the right positioning and activities as being a key driver for older user VW adoption. Here’s the slide from the 2008 conference referencing this…

They’ve re-constructed the Berlin Wall ala 1989 from the Reichstag to checkpoint Charlie in remembrance of the upcoming 20 year anniversary of it coming down. Here’s the video.

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Backing up on this point slightly, let’s talk about the area of revenue sharing for brands in virtual worlds. By this, I mean real world brands earning out of virtual transactions.

This is a concept I think we’ll see a lot more of in the virtual worlds sector. And it makes sense. If a company brings their brand into a third-party world and part of the offering is to allow residents/users to purchase virtual branded items, then surely the brand is entitled to a share of revenue. I think we’re about six months away from seeing this type of arrangement take hold.

Back to luxury brands.

Virtual goods (read clothing, accessories, hair styles etc) are all about perceived value. You can’t touch or interact with virtual goods as you can with real world items, so the purchase decision is made heavily on the perceived value – how the product will differentiate the owner from others and/or an overall assessment of it’s value and use. (the KZero report, Luxury Brands and Virtual Goods is here).

Something else to consider is pricing. Virtual goods at present are mainly priced at low points. Why? Because we’re yet to see the mindset of associating higher prices to virtual items and also with a virtually nil cost of sale or production, only the brave can justify increasing the price.

So what’s going to stimulate an increase in people buying virtual goods?

Firstly, I think kids, tweens and teens (KT&T) will play a big part in the growth. This group has ‘less of an issue’ paying real money for virtual goods – their decision-making process does not take into account its a virtual good – they just want the product and see technology as invisible.

So worlds targeting KT&T clearly have a major opportunity to create strong revenues here, as long as the products are right. But which types of product are right?

Obviously the ones that are demanded are the right sorts of products. But what is this demand? Certainly in the younger worlds and to a certain degree in older worlds, some virtual goods are viewed as status symbols – a ‘badge’ that sends out a message that the owner (wearer) has something unique / purchased / earned, that others do not have. And in this context, there’s a lot of perceived value associated with the item.

Luxury brands in the real world have very similar values. Luxury brands are status symbols with high price elasticity and of course perceived value. So due to this similarity, perhaps the inclusion of real world luxury brands into virtual worlds will act as a catalyst for more widespread usage and adoption. Using the brand attitude map helps to explain this thinking….

This map positions a brand accordingly to two factors, motivation and involvement. Motivation relates to the emotive output of the purchase. Negative motivational products are problem-fixers, whereas positive motivational items are ‘feel-good’. Involvement relates to the assessment of the purchase from a risk perspective. Low involvement products need little time to be bought whereas high involvement products have a higher degree of financial or associated risk.

So, some examples: Buying a painkiller is low involvement and negative motivation, whereas buying a glass of wine whilst still being low involvement is a positive motivation. Buying a mortgage is negative motivation and high involvement but a holiday on the other hand whilst being high involvement, creates a positive motivation.

I think we’re currently at phase one. The majority of virtual item purchases in virtual worlds relate to clothing – typically purchased by newbies wanting to ‘blend-in’ to their new virtual home and not look like a new-comer. On this basis, one can imply that these types of transactions are more negatively motivated than positively because the user/resident has a problem to fix. And, when considering the level of involvement, it’s actually low because of the typical wide array of choices available and the comparatively low price of these goods.

Phase two will be a critical point on the path to wider adoption and usage of virtual goods. We already have some luxury brands in virtual worlds (such as L’Oreal Paris, DKNY, Sephora and Armani) and more will follow – we’re currently in a phase of seeing slightly more urban brands appearing in virtual worlds and socnets (Rocawear, Paris Hilton) – these are still luxury from a comparative pricing perspective. .

On this basis, users of virtual worlds will see more of these brands in their worlds and as the user bases grow in these worlds, the ‘want’ to stand out will also increase, thus leading to an increase in the demand for virtual luxury brands. In this instance, phase two means an increase in motivation (because of the feel-good essence of the purchase) but also a slight increase in involvement as higher pricing points will be adopted by luxury brands and supply (competition) will also increase leading to a more involved purchase decision.

As more luxury brands enter the virtual space, involvement will increase further due to the wider range of products for users to choose from. This aspect is explained by phases three and four – as motivation increases all the while.

So will we ever get to the point where real world luxury brands fully realise and embrace virtual worlds as a legitimate sales and revenue channel?

I think we will and this is demonstrated by the shift from phase four directly to the real world positioning of luxury brands – medium to high involvement and strong positive motivation. How long will this take? My guess is 18 – 24 months.

KZero services:

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KZero services:

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Updated Universe chart for Q3 2009

VW registered accounts increase by 92m to 671m in Q3 2009

New KZero report: Virtual Worlds 2010+

Habbo and Stardoll show largest growth in Q3 2009

Talking with RezEd about education in virtual worlds

Updated Radar charts for Q3 2009

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In terms of new virtual worlds, growth is slowing down in the casual gaming and socialing segments for KT&T.  This is actually a good sign because there’s some over supply here, caused by a rush of VC money into the space in late 2007/early 2008 – we call it ‘Chasing the Penguin’.

Segments seeing an uplift in terms of pending worlds include fashion (Chasing the Stardoll?), education and development (here’s an interesting podcast on this theme) and thirdly branded worlds. We expect branded worlds to be a dominant force in 2010 – real world brands creating virtual platforms for their IP. In fact, we’ve just completed a business planning and strategic project for Ubisoft in this category – more about that later.

Here’s a segment from the Radar chart. The full set can be seen and high-res versions ordered here.

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