Damek Tretiak’s Virtual Searches

A good friend of mine, Bill Nissim, recently published his latest article on virtual worlds. You may have seen his previous article here and here, which was about my very own SLQuery.com search platform. Bill has graciously allowed me to reprint his latest article in full, here on the Virtual Searches blog. Thanks Bill!

Many successful companies have made the transition from the Real World (RL) to a three-dimensional realm called Second Life (SL) – a virtual world steeped in commercialism. The rationale behind these “transitions” is vast and ranges from attracting press coverage to brand engagement with potential clients. Whatever the desired outcome and whether by design or happenstance, millions of dollars are spent daily in Linden Lab’s environment.

For example, IBM will invest $10 million this year and acquire over a dozen “Islands” to showcase different offerings, as reported by Reuters (November 9, 2006). Big Blue terms this effort as “V business” (similar to E Business in the 1990’s) and is already working with over 20 clients on current projects. The many benefits to utilizing this environment may include virtual conferences, training, sales meetings, and presenting concepts that are not attainable on the Internet or in real life (i.e. manipulation of 3D models). Taken together, SL is truly a unique and cutting-edge business platform.

As of this writing, there are 4.9 million registered users and a daily spend of $1.7M in SL. Since reliable consumer data and statistics are limited, one can only imagine the type of daily transactions that are occurring for a variety of goods and services. These may range from clothing, vehicles, pre-fabricated buildings, land purchases, and scripted tools. With respect to practical B2B endeavors, RL firms hire architects, builders, marketing consultants, employees, and technicians to perform specialized activities which turn an obscure landscape into a spectacular and functional creation.

So, what business model works best when transitioning to a virtual world? The short answer is - it’s situational and depends on the desired outcome. The following article will explore a variety of firms (first-hand in SL), identify similar attributes, and categorize them according to the value delivered. The outcome of this assessment will yield a sampling of business models “in play” and payoff from venturing into this environment. The “payoff” is defined as the tangible and intangible benefits derived from such an investment. To these firms, SL is a sand box of sorts and their models may evolve and adjust over time through continued discovery.

A good place to start this discussion requires an understanding of a business model design, coupled with the perceived benefits.

Business Model Defined:

Wikipedia encyclopedia defines a business model, whether virtual or real world, as…

A business model is a conceptual tool that contains a big set of elements and their relationships and allows expressing the business logic of a specific firm. It is a description of the value a company offers to one or several segments of customers and of the architecture of the firm and its network of partners for creating, marketing, and delivering this value and relationship capital, to generate profitable and sustainable revenue streams.” Osterwalder, Pigneur and Tucci (2005)

Joan Magretta, Senior Institute Associate at Harvard Business School, provides a no-nonsense definition in her 2002 article “Why Business Models Matter” (HBR R0205F). “Business models are, at heart, stories that explain how enterprises work,” states Magretta, and continues with“…It answers certain questions: Who is the customer? How do we make money? What underlying economic logic explains how we can deliver value to customers at an appropriate cost? Business models describe, as a system, how the pieces of a business fit together.”

In 2004, Osterwalder synthesized various business models into a single concept based on common attributes. He suggests that nine related building blocks constitute a business model template. They include:

1. value propositions
2. target customer segments
3. distribution channels
4. customer relationships
5. value configurations
6. core capabilities
7. partner network
8. cost structure
9. revenue model

For sake of simplicity and to fit the context of this article, this list will be reduced to three key constituents: value propositions, targeted customer segments, and customer relationships. Armed with these metrics, we now have a basis of evaluation for a virtual world business model.

Perceived Benefits

Plays well in the Press:

In a 2006 SL Business Magazine interview, Sibley Verbeck (CEO Electric Sheep), states “transitioning to a virtual world could be the hot, new thing, create buzz on the web (or blogs), part of an ad campaign, or just PR generation.” According to Verbeck, “creating buzz is very important – headlines are written on companies that are doing novel things! Since this world is still new and evolving, the ability to truly appreciate the value of a presence is undetermined at this point.” Verbeck concludes with “It’s clear that many firms have followed this path to both acknowledge and affirm the importance of being in-world.”

In addition to a business model, the equally valuable question that must be posed: “What are the benefits to transitioning into this environment?” Four broad categories were developed to capture the business rationale for such a transition and include:

1. Press Coverage
2. New Brand Channel
3. Consumer Feedback
4. Brand Engagement

Press Coverage will be briefly discussed in a “side bar” notation and not included in this evaluation.

Business Model & Perceived Benefits Converge:

The following firms will be categorized into three groups. Those who seek a “New Brand Channel,” firms that utilize SL for “Consumer Feedback,” and the third group that addresses “Brand Engagement”. With each category, the consumer moves from a Casual (niche) to Preferred use (micro) and ultimately, to the deepest realm of Committed use (Nano). Within each category, the apparent value proposition, targeted segments, and type of customer relationships will help to define the abbreviated business model. Let’s start with a “New Brand Channel.”

New Brand Channel:

This type of enterprise closely mirrors the real world establishment in terms of form, fit, and function. Examples of organizations that use this model to extend their brand into a virtual world include Circuit City, Sears, Reebok, PA Consulting, and a host of other B2B & B2C firms. By establishing a presence in SL, they have created a conduit with a new channel to market.

Business Model:

• Value proposition = Virtual shopping, testing products, consulting
• Targeted segments: New and existing consumers
• Customer relationship: Casual

Payoff:

• Extends brand into new setting
• Tests viability of virtual shopping and services
• Track purchases, collects data on shopping experience for future store layout/design, and conduit for new relationships

Consumers in this realm view an interaction with one of the above listed firms as an affirmation of the brand. In the above mentioned B2C venues, shoppers explore and discover on their own the many products or services in this familiar environment (store or gallery setting). For example, Sears and Circuit City have several floors chock full of scripted items which portray real products (like iPods, refrigerators, and kitchen cabinets). With Toyota’s Scion City, current and future motorists are given the opportunity to buy a Scion ($300L) and take a “test drive” around the island. The key criteria of casual use means once the visitor tests a product, they possess little incentive to engage the brand in the future.

In addition to a predominately self-service experience, a recent development has come on the scene - Nokia “hires” employee’s to stand by a kiosk and answer questions regarding cell phones. The avatar is clothed in Nokia blue and white garb to match the brand identity. The idea of employing brand ambassadors in shopping venues can enhance the experience and possibly lead to further investigation outside SL!

What about B2B? PA Consulting, a UK-based firm, utilizes this environment to engage RL businesses on the use of SL for brand awareness or internal business process. PA believes they have developed insight into “best use” of virtual environments for a number of industries and are uniquely positioned to drive innovation within these two areas new financial retailers and transport industry.

During a recent interview with Marco Tippmer from PA Consulting, he stated “we are targeting national, international, and public organizations that desire to innovate and explore new emerging technologies, gain or maintain a competitive edge, or simply to realize cost savings. PA routinely has status meetings about project progress with clients in SL as well as conferences and discussions.”

According to Tippmer, “PA also utilizes greeters because we realized that the human element in SL is critical to the success of a virtual presence. SL is a social environment and the key element for our successful presence in SL is the ability to interact with representatives of PA.”

Consumer Feedback:

A firm which is actively using SL to incite specific customer feedback is Aloft Hotels (W Brand). In September 2006, Aloft was the first hotel company to launch a hospitality brand in SL. They opened its first hotel with a virtual concert (Ben Folds) and much fanfare. They constructed a hotel which included a lobby, food concessions, pool area, and an actual hotel room. They also placed laptop computers in the lobby for guests to provide feedback on their experience.

At present, the hotel on Aloft Island is covered by a box and under construction – the sign on the property reads “we are currently renovating the hotel thanks to the feedback we’ve received from our SL visitors.” Here Aloft has solicited (free market research) the views of thousands of users and integrated that data to build upon their hotel experiment. Before Aloft pours concrete or hangs a single curtain in RL, they will have a better assessment of what their guests really want out of a cutting edge, high-utility hotel.

Business Model:

• Value proposition = Consumer-centric experience
• Targeted segments: Current and future business travelers
• Customer relationship: Preferred users - collaborative and sense of ownership

Payoff:

• Focus group research (free)
• Controlled setting
• Credible information – no payment made and driven by consumer initiative

Consumers in this realm gravitate to this model for two reasons – they’re invited to take a “peak behind the curtain” of a new hotel design concept and secondly, are able to voice their opinion on what really matters to them. This powerful combination meets the needs of both parties. On the business side, Aloft can experiment with novel concepts (innovate) at a minimal expense. For the consumer, they gain a sense of involvement (buy-in) and will develop a preference for this offering, virtual or otherwise. With the ground breaking of the first RL Aloft hotel expected in 2008, these participants have inadvertently joined Aloft’s journey. In essence, if you were part of the design, you’ll want to experience it in real life!

Brand Engagement:

Probably the most powerful use of SL comes in the form of scripting – the ability for the user to engage a product or service through direct interaction. Consider Dell City. Once you get past the high-tech design, giant computer tour, or people-mover monorail system, you have the opportunity to enter the Dell factory and actually witness the construction of your very own laptop or desktop computer.

Sitting comfortably in an ergonomically designed chair and facing a drafting board, you interact with the screen and select components that will ultimately complete your Dell computer system. After each click, the selected computer component “rezzes” in front of you and loads into the computer frame. During this process, you actually witness the construction of your own system in real time and 3D! Once complete, you are whisked off to Dell’s RL website to complete the transaction. During this experience, Dell has moved to the next level of brand engagement – from 2-D web-based format to 3-D entertainment.

Business Model:

• Value proposition = First-person engagement
• Targeted segments: Techies and progressive computer users
• Customer relationship: Committed user = “Brand Patriots”

Payoff:

• Engage consumers in a way (virtual experience) not readily attainable elsewhere
• Turn purchasing a Dell system into a fun and memorable experience
• Users will most likely advocate this venue via word-of-mouth

Consumers in Dell City have progressed beyond casual use (testing products or shopping) or providing feedback. Both of these types of engagements are certainly valuable in their own right, but Dell’s venues moves beyond that and requires consumers to actively make choices.

This “consumer behavior-based model” provides Dell with extremely valuable data – all aspects of the decision-making process can be codified! This process would equate to having the consumer’s describe (verbalize) how they make choices based on the selections. Dell has the ability to monitor transaction completion rates and barriers to progression. In addition, the technology exists to literately track the movements of consumers throughout the visit.

This data, if actually collected and used, would allow Dell to better configure the experience and conduct a value-gap analysis. This simply means eliminating areas or experiences not utilized, capitalizing and enhancing high traffic areas, and experimenting with new options and innovations. Through continual learning and discovery, Dell could further increase their value proposition, broaden their segment, and ultimately turn visitors into Brand Patriots!

Conclusion:

This article explored business model “archetypes” used by firms that are transitioning to a virtual world called Second Life® (SL). The intent was to draw broad business model categories and limit the discussion to three constituents: value propositions, targeted customer segments, and customer relationships. In addition to defining a business model, the equally valuable question that was posed: “What are the benefits to transitioning into this environment?” Three segments were developed to capture the business rationale for such a transition and include: new brand channel, consumer feedback, and brand engagement. The outcome of this assessment yielded a sampling of business models “in play” and the anticipated payoff from venturing into this digital realm.

A “Virtual World” environment as a business platform possesses huge potential for the future. This topic will be discussed in great depth next week at the first Virtual World Conference in New York. As noted on the virtualworlds2007.com web site,

“Virtual Worlds Conference 2007 is the leading event for Fortune 500 businesses seeking to understand and maximize marketing and business strategies within virtual worlds. VW07 gives you an inside look at the Virtual Worlds activities of MTV, Disney, AOL, Pontiac, Nickelodeon, Leo Burnett, Sundance Channel, GSD&M, IBM and other major brands.”

The central point of this article and a VW07 panel discussion session focuses on this very question – “Virtual Worlds Road Map - where is it all going?” Although one can assess what major firms are doing, the question of which business model works best remains subjective and open to interpretation. Until such time that comprehensive consumer data or reliable research exists, the question of a preferred model remains aloof.

Bill Nissim consults with organizations on strategic branding imperatives. His website www.ibranz.com contains reference materials, links, and helpful articles on the many facets of branding. In addition, Nissim has helped firms make the transition to Second Life and fostered Brand Creation in virtual worlds.

This article is Copyright 2007 Bill Nissim