Social media is a new layer of business being ignored by many, because many of the social media experts come from a PR background, while many performance marketers sit on the sidelines waiting for someone to prove how it works so they can replicate it.
Trying to understand the Zynga IPO, and how Facebook monetizes its traffic, demands a new way of looking at the way businesses collaborate online. Social media is always discussed in terms of how it connects people (see Is Social Media Really Social to get a different point of view); rarely do you understand exactly how it monetizes.
In this video I share an exploration of the 3 tiers of partnerships (an example of my concept of Brevenue) that are developing among businesses, with Zynga as the example case study:
The Mystery of Virtual Currency
Virtual currency is defined as online currency that allows you to purchase virtual goods, like buying water on Farmville for example. This can be accrued by activity, in terms of points, or purchased with cash, or gained by redeeming offers from specific merchants.
What virtual currency really represents is the ability to continue playing the game; Zynga has created games without end (see my recent blog post here), unlike traditional games where the player progresses through certain levels to essentially win in the end.
Winning implies a beginning and end; planting a garden can imply a lifetime effort, or at least an ongoing, ever changing effort, much like life, and has appeal to an older generation who do not play traditional games as much. The genius of Zynga is inventing games for this generation, who have the time and money to spend, and creating value for that virtual currency in the eyes of the player.
What’s powerful about the Zynga model is that it envelops the player in a social environment, competing and working with others, to build a farm or a city. Just like any farmer knows, this can happen year after year, allowing for an immersive, multi-user game playing role.
What powers it is the value of virtual currency to the player. Many claim not to understand why anyone would pay money for something virtual. The fact is they don’t, most redeem offers on Zynga’s various offer walls – literally a billboard like collection of offers from merchants like NetFlix, usually free trials or sign ups which pays an acquisition fee to Zynga, that is shared with Facebook (who gets a 30% cut).
Virtual currency is an accepted practice in many countries, especially in Asia, where this form of gaming entertainment is deep and monetizes far higher, currently, than in the U.S. Because it’s valuable to the player and seeing the revenue generated, it’s clear that this model of competition, of leaderboards and recognition for action, is needed in a social world where basically the only recognition comes from creating content.
Here the player is creating the content, involved, and will pay, just not in real currency which few use to buy virtual currency. It has become a lead generation bonanza driven by 3 Tiers of Partnerships.
Tier 1 – The Distributor:
Facebook and Traffic Aggregators
Social media sites can generate a ton of traffic, yet most companies are too busy managing the interactions of users, privacy, and managing the multivariate complexity of interactions to monetize.
Facebook is an example of the first tier of partnership, the one providing the traffic and users. That’s their job and they do it quite well. Right now Zynga represents an estimated 10% or so of Facebook’s overall revenue, so the objection some have brought up to Zynga’s business model – that Facebook will simply replace or eliminate them at some time – is likely baseless.
Imagine getting paid 30% net for simply generating traffic; that’s Google-like margins for search, and evidence of why Facebook needs Zynga. Because what Zynga does is create immersive games for Facebook’s users that monetize.
Why would you want to replace that core competency? Traffic in social media is difficult to monetize, ads sell for $0.50 CPM, and the only one generating real revenue is Zynga and other companies intergrating game playing into the social experience.
Tier 2 – The Engager:
Zynga and Games as Business
What Zynga does with Cityville and Farmville is engage users, and create real value in their minds for the Virtual Currency. It becomes the center of their gaming universe, surprisingly for an average player who is 48, male, and lives in the U.S.
This is not your traditional game, nor traditional virtual currency which is often gained by effort, achievement, and recognition by the community, all of which play a part here.
Virtual currency can be purchased, or redeemed for an action just like a game. The difference with Zynga is the way it’s redeemed; you apply for a credit card or Netflix subscription, and gain points.
The monetization is now part of the game, another action, and frankly an easier one than simply participating and being patient. That is what drives players to purchase virtual currency through lead generation from traditional merchants.
The player doesn’t see that as paying money, even if they are billed monthly as many of these programs do. What the player gains is an ongoing, valuable, fun experience; it’s just entertainment that requires them to show up regularly and watch what’s going on.
If you want to get further in the game, you have to put some virtual currency on the line, and while you can gain enough by your actions to survive, to thrive you need to pay to play.
The lock in Zynga has is its games, brand name of those games, and the overall experience. It provides games without end that get people hooked and make them want to earn virtual currency in any way possible.
The easiest way is to simply redeem a lead generation offer on the Offer Wall; while it sounds crazy to an outsider, think of what an elegant, simple solution to the problem of achievement in a game.
And if the player didn’t value the virtual currency, they would not redeem for it. It’s as simple as that!
Tier 3 -The Monetizers: Lead Generation Deals
The final part of the equation is the easy one, lead generation. This is traditional 2-step lead generation, step 1 being to get in the game and gain virtual currency, step 2 to redeem an offer to earn virtual currency.
Why many of the traditional lead generation companies, like credit cards and Netflix, love this model is the age and quality of the player. These are not smart younger people trying to game and fake out the system. They have money and they have the urge to play, and the offers fit the demographic and psychographic profile of the player.
If they didn’t, the offer does not continue, because most of these are performance marketing deals, not just ads. That means an action has to be taken for Zynga and Facebook to get paid, redeeming an offer.
Given the scope and size of the revenue being generated, it’s clear that these users, much like folks watching TV, are willing to pay for brands and deals that give them a product, AND the virtual currency to continue playing the game.
Those are the 3 tiers of social media partnerships I see; Facebook generates the traffic, Zynga provides the immersive gaming experience, and lead generation companies use to incentivized and rewards-based marketing come in the finish to close the deal.
As you know if you’ve read this blog, I call it turning Friends into Fans and Customers…and in the new paradigm, it takes 3 to play!
It’s brilliant, simple, and viral and works only if all 3 partners are in the game. Best of all, it’s driven by performance the whole way.
What do you think of Zynga’s model, and have you seen anything better? Please ask your questions below…
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