The use of virtual goods in a physical form is one of the most interesting (and profitable) monetization techniques that I have seen. By “physical virtual goods” (my term), I mean taking a virtual good that is normally sold through an in-app purchase and making it into a physical retail item that is used to unlock the virtual good inside the game (with no functionality for the physical product).
The Skylanders example
Activision’s Skylanders are the perfect example of this monetization strategy. Activison has two video games, Skylanders Giants and Skylanders Spyro’s Adventure, that sell at retail, just as you would purchase Call of Duty or Super Mario Bros. However, instead of selling downloadable content or offering upgrades through in-app purchases (depending on the platform), players must purchase Skylanders characters at retail, place them on a game-specific portal (a device that plugs into the game console) or enter a code that comes with the character (again, depending on the platform) to unlock the character in the game.
Activision could easily have bypassed selling the physical character, allowing people to unlock the character in the game through an in-app purchase. This would be the standard strategy in the new world of gaming, but Activision decided to go with requiring customers to buy physical goods. The physical goods have no functional value other than what they unlock in the game. It added the friction of players being compelled to visit a retailer (or order online) and wait for the good, the cost of production, the large expense of retail distribution, the logistics of physical returns and potential manufacturing problems. Yet this strategy created one of the biggest successes in the video game space this holiday season.
Why it worked
Activision’s strategy was successful for several reasons:
- There is a higher perceived value. Even though the toys are inexpensive to manufacturer and have no functionality outside the game, people feel they are buying something real. More people are open to spending large sums of money if they get something physical in exchange rather than just getting more functionality in their game. That is why Activision can charge $5-$20 for these characters, while most in-app virtual goods are priced much, much lower.
- By offering a physical product, parents who are not comfortable spending money on virtual goods are very familiar with buying toys for their kids at Walmart or Target.
- Physical goods lend themselves much more to gifting. Friends and relatives can wrap a Skylander and put it under the Christmas tree. It’s difficult to wrap a virtual hero.
- The challenge of finding the desired Skylander figurine at retail actually drives interest rather than dissuades customers, as it creates positive reinforcement when they find a “rare” product.
- There is an additional viral element, as people discuss strategies for finding product.
- It leverages retailers’ skill at driving sales through discounting, coupons and sales. Most, if not all, game companies are not as sophisticated at discounting as major retailers (they may think they are, but I will take the opinion of a buyer at Walmart over an analyst at a social game company any day). Retailers thus drive campaigns that improve sales at levels game companies cannot match.
Tip of the iceberg
The use of physical virtual goods is not limited to Activision’s model. One variant is toys with a web component, such as Webkinz. This is a different business model than Skylanders, which is effectively the same as in-app purchases, but shows how physical goods can co-exist with the digital world.
Physical virtual goods could also be used to revive monetization techniques that are proven but not permissible with pure virtual goods, such as Kompu Gacha. Kompu Gacha is a monetization mechanic in social games that heavily incentivizes the practice of paying a small amount of money to get an item at random, and helped grow GREE and DeNA into billion-dollar companies. While Kompu Gacha is frowned upon now in social games (and illegal in Japan), it is common practice in the physical toy world, where people buy thousands of Pokémon or baseball cards for the chance to get a rare one and complete their collection. Social game companies could sell at retail sets of virtual goods (with a physical toy representation) in packaging that left the consumer blind to the content and thus replicate the mechanic that proved so lucrative. Given that it is a physical good and really no different than the sale of baseball cards, etc., it would probably not face the same negative publicity and government regulation.
What Activision has done with Skylanders shows the opportunity with physical virtual goods, but the opportunity is not limited to “copying” Activision’s strategy. Game companies have seen the micro-transaction monetization universe in a very narrow way, copying what the early companies have done and focusing on tactical optimization rather than creatively building their monetization strategies. By having a different perspective than companies in the F2P world, the team at Activision behind Skylanders could take the best from in-app purchases and present it in a new and much more profitable way. Hopefully, Skylanders will serve as the inspiration for new strategies that take monetization to the next level.
The Business of Social Games and Casino 
Great article! Many exciting possibilities…
A few years ago, 7-11 had a promotion where you could get in-Game Farmville items by purchasing certain marked convenience items. There were quite a few items, from bottled water to gummy bears. I thought it was a very clever and effective campaign, and I’m surprised we haven’t seen more of that type of thing.
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