There’s a lot of talk going on about virtual goods economics in games. The developers hail it as the monetization strategy of the future. Economists love it because they can see results in real time. This ain’t your grandpa’s ultimatum game.

But as usual, it’s The Onion who reduces the new business model to its core essence.

Virtual goods are the golden egg laid by the social gaming goose. Social games are built around inviting your friends, and virtual goods are about looking awesome in front of your friends.

The successful social games developers know what’s up. In an interview with FreshNetworks at SXSW, Playfish cofounder Sebastien de Halleux said:

In-game micro-transactions are key. The game is free and we create emotional incentives that make people want more of the game. Audiences are ready to pay for good games, but in small chunks. Just don’t get fooled into believing that you need large ticket transactions. Try not to think in terms of a business plan based on: Price x Quantity. Instead, think about Distribution x Engagement x Lifetime User Value.

To which Eric Todd from Playdom added:

we’ve found that there are two things that can have a disproportionate impact on profitability:
• Creativity / self-expression – allowing people to be creators makes them care more and increases their life time value.
• Competition – player vs. player conflict drives a willingness to pay for competitive advantage.

Remember: the happiest man in the world is the one who makes $1 more than his neighbor. Only now, that neighbor is in Farmville.

Games industry consultant Nicholas Lovell gives his clients this simple question: “when you are at home, with no one watching you, do you dress up in your best trendy clothes, or hang out in an old T-shirt and tracksuit?”

Admit it: you answered the latter. Everyone else does, too.

Lovell goes on to point out the difference between a “reward” (as you get in a single player experience) and a “purchase” (usually as a microtransaction.) Purchases of virtual goods must give you “a feeling, an experience or a social benefit.” They must allow you:

to feel more powerful (i.e. have better weapons, level up faster)

to fit in (like the one million people who bought a Santa Hat in Kart Rider in the run up to Christmas 2007)

to stand out (like anyone buying a unique set of clothes for their avatar)

or a combination (like a guild all kitting themselves out in purple clothes so everyone recognises them).

Game developers are catching on. And they’d better do it fast, because virtual goods were worth over $1 billion in 2009. That number is expected to grow to $1.6 billion in 2010 in the US alone.

That’s a lot of fake farming.

Image credit: p e e p e r