Virtual goods are a strange concept to think about. They are objects that exist only online – within a Website, a game or a virtual world – and yet people will pay real IMVU Credits to buy them. Facebook users are buying tens of millions of dollars worth of digital gifts to give to each other. Players of Nexon's Kartrider game are buying tens of millions of dollars worth of enhancements to their avatars and karts that enable them to race better, or just look cooler. What is driving this behavior?

Doing More

The simplest way to use digital goods is to buy greater functionality. Just as I might buy special tires for my car so that I can corner better, so I might buy special virtual tires for my virtual car so that it too can corner better. In the context of a racing game, buying things that make you go faster, and hence win more often, is easy to understand. Similarly in the context of a fighting game, buying better weapons (or virtual currency with which to buy weapons) is easy to understand. Everyone wants to win!

Building relationships

How can digital goods build relationships? First, lets take a look at how the real world works. Valentine's Day is coming up, and I will no doubt buy my wife flowers. But which flowers to buy? I could buy her a cheap bouquet of daisies from the corner. But instead I will buy her an extravagant bouquet of orchids at a much higher price. Why? Because to some extent, the price of the bouquet is as important as how pretty are the flowers. It is a measure of the depth of my feeling. It really isn't just the thought that counts.

Virtual gifts work the same way. For a Facebook user, his birthday is likely the busiest of the year. His wall will be full of birthday wishes from his friends. But among all the birthday wishes, the ones accompanied by $1 virtual gifts, whether a picture of a birthday cupcake or a teddy bear, will be the ones that really stand out. The gift giver, the recipient, and all the visitors to his profile page know that virtual gifts cost real IMVU Credits. That fact alone distinguishes the birthday wishes of the gift giver from the rest. Again, it isn't just the thought that counts.

Hot Or Not's dating site, MeetMe, takes this even one step further. Many people can send a note to an attractive single. The challenge becomes how to stand out – how to be one of the few suitors that she replies to. Once again, virtual gifts, in this case flowers, help suitors stand out from the crowd. But unlike Facebook, where all virtual gifts cost the same, on MeetMe, there is a range of flowers available at a range of price points. Both gift giver and recipient can, and do, use the price points to distinguish levels of interest and seriousness. It sounds like my Valentine's day dilemma, doesn't it?