Last year, my company, Viximo, released its first product in partnership with BigDates Solutions, makers of the Birthday Calendar, one of a small number of Verified Applications on Facebook. Viximo provides a complete virtual goods platform that enables social media sites, such as social networks, social networking apps, and dating sites, to launch and grow a virtual goods based business model. Virtual gifting is usually the first, and often the most important, virtual goods feature on those sites.

Pioneers of virtual gifting, especially paid virtual gifting, have faced a considerable amount of skepticism. Facebook, in particular, was criticized for gouging its users when it launched its Facebook Gifts program in February 2007, and many predicted that the program would be a dismal failure. During its first year, Facebook Gifts generated an estimated $15 million, or 10% of Facebook’s overall $150 million in revenue for 2007. And virtual gifting has become mainstream enough to be featured on the front page of major newspapers such as the Boston Globe.

Revenue from online advertising on social networks continues to erode because social networking users aren’t receptive to and can easily ignore traditional banner advertising. But virtual gifting is fundamentally different — it both adds value to and is integrated into the social fabric of online communities. That not only means that people are willing to pay for virtual gifts, it also means that brands can play a valuable role in the dialog that is native to social networks.

Who is giving virtual gifts?

The first step in creating a successful virtual gifting based business is to understand who is sending virtual gifts and why they are sending them. Virtual gifting behavior closely mirrors offline gifting behavior — it is much more a function of gender than age. Women of all ages give gifts with significantly higher frequency and for a broader set of reasons than men. Men, on the other hand, give gifts primarily for romantic purposes.

Based on the data we’ve gathered, we’ve found that in a roughly 50%/50% distribution of men and women, women are responsible for 80% of virtual giftings while men are only responsible for 20% of virtual giftings. Women send gifts with equal frequency to both men and women (40% of virtual giftings are female to female and 40% are female to male); however, men are 3x more likely to send virtual gifts to women (15% of virtual gifts are men to women and 5% are men to men). Sound familiar?

Unlike many social networking phenomenon but like real-world gifting, virtual gifting is age agnostic. We’ve found that more than half of giftings through Birthday Calendar are sent by women between the ages of 22 and 32, but that is more representative of Facebook’s audience than virtual gifting’s appeal. The Boston Globe article that I referenced earlier profiles a 62 year old women who spends over a $100 a year on virtual gifts on Dogster, the pet-oriented social network that is popular with an older demographic than Facebook’s.

Why are people giving virtual gifts?

Virtual Gifts as Greeting Cards

The $7.5 billion greeting card industry is based on the notion that relationships need to be periodically acknowledged with a token that requires a small investment of time and money. In the U.S., people send 7 billion cards annually — that’s a little over 20 cards per person for a variety of holidays and events such as Valentine’s Day, Christmas, birthdays, and graduations.

As relationships move online, it’s inevitable that these offline social gestures move online as well. In fact, these gestures are more powerful online since virtual gifts can be visible to a person’s entire social network, whereas Christmas cards are only visible to the handful of lucky friends and family that get to see your mantel during the holidays.

Willingness to pay for these types of virtual gifts is easy to understand. After all, if people are willing to spend $4.00 on a small piece of card stock with some glitter glued onto it that makes it from envelope to trash in a matter of days, then a $1.00 virtual gift is a relative bargain.

Virtual Gifts as Signals

In medieval times, the act of one monarch giving another monarch a gift was an gesture of critical importance. Distance and subterfuge had robbed written words of meaning, and gifts became an important way for one person to gauge another person’s intent.

Why are gifts such an important medium of communication? Why do people agonize over what to give and how much to spend? It’s because gifts, real and virtual, are overloaded with meaning that is difficult or impossible to communicate with words alone. Gifts signify:

1. the wealth and taste of the giver,
2. the amount of value that the giver sees in his or her relationship with the recipient,
3. and the extent to which the giver understands what the recipient wants.

Today, communication is cheaper and easier than it has ever been before, and that dilutes the meaning of e-mails, instant messages, and forum posts. Virtual gifts provide a valuable way to differentiate a message from the cacophony of information that people sift through every day — they show the recipient that the sender was willing to spend time and/or money to make their signal loud and clear.

HOT or NOT pioneered virtual gifting in the dating industry by letting users send virtual roses ranging from $2 to $10 to prospective dates. In an outcome that turns traditional economic theory on its ear, the $10 virtual roses have been the most popular because they send the clearest signal to the recipient, and HOT or NOT has found that recipients of virtual gifts are four times more likely to respond than users who did not receive a gift.

Virtual Gifts as Accolades

Today, eBay is a juggernaut of the Internet economy, so it’s hard to remember the days when eBay was widely considered to be one of those fringe business ideas that existed only because of dot-com exuberance. After all, who in their right mind would send money to an absolute stranger for a product that could only be seen in blurry, amateur photographs?

In the early days of Web 1.0, “reputation” was still a purely offline concept and it wasn’t clear that technology could replace or even augment the intricate network of factors that determined whether one person could trust another. One of eBay’s critical insights was that a person’s reputation is based on the collective opinions of many individuals who have had a meaningful interaction with that person, and cannot accurately be determined by singular authority. As a result, eBay enabled its users to influence each others’ reputations and that reputation system forms the foundation of trust that drives commerce on eBay to this day.

eBay’s reputation system benefits from the fact that one user can only rate another user after they have engaged in a transaction. This is a form of scarcity that imbues eBay ratings with significant social value. Many social media sites make the mistake of implementing reputation systems that are based on user-to-user accolades that are in infinite supply. As a result, these reputation system are easy to “game” and don’t hold the same weight as eBay’s reputation system.

Virtual gifts can be used in the place of ratings as the basis for a reputation system. Since virtual gifts are scarce and often have cash value, they have significantly higher social impact. In addition, virtual gifts can be designed to further enhance the effects of the reputation system with tiered accolades (i.e., gold, silver, and bronze), limited edition accolades, and accolades that are only accessible to elite members of the community.

Virtual Gifts as Social Play

In Virtual Goods and the Community values of Facebook, Bret Terrill analyzes the top gifting applications on Facebook to determine what is important to the Facebook community and why they send gifts. The applications basically fall into two buckets: apps, such as Free Gifts, Hatching Eggs, and Growing Gifts, which use the “virtual gifts as greeting cards” model that we’ve discussed and apps, such as Bumper Sticker, Pieces of Flair, and Stickerz, that features gifts with a witty, intelligent sense of humor. This shows that people often send virtual gifts for exactly the same reason they send YouTube videos or forward joke e-mails — they want to make other people laugh.

Although virtual gifts add color to the playful banter on social networks, humorous gifts face a lot of competition from status updates, joke e-mails, YouTube videos, photos, and other ways that people “play” with each other online. As a result, willingness to pay for gifts that are purely humor gifts is pretty low.

Virtual Gifts as Reciprocation

A few months ago, I was doing a presentation on virtual goods at a social networking conference, and I asked the audience to raise their hands if they had sent or received a virtual gift. A relatively large handful of people raised their hands, and I asked one of the audience members to tell me more.

She started out by saying, “I just don’t get virtual gifts. I can’t imagine why anyone would spend money on that stuff.” She went on to explain that a friend of hers had paid $1 to send her a virtual gift on Facebook for her birthday. Although I was pretty sure I knew the answer, I asked her whether she had ever sent a virtual gift. She said, “Yeah, I sent one to my friend to thank her for the virtual gift she sent on my birthday.” Surprised, I asked, “Did you pay for it?” She responded, “Of course. I don’t want her to think I’m cheap.”

Reciprocation is an essential part of giving gifts for the both the giver and the receiver. People give gifts, in part, because they want to elicit a positive response from the recipient, and recipients tend to feel indebted to the giver until they have reciprocated in kind.

If you are building a virtual gifting business, remember that a simple “thank you” virtual gift might just be the most important gift in your inventory.

Communicating through Virtual Gifts

The act of giving a virtual gift is just another form of communication, and we know that effective communication must be powerful, relevant, loud, and clear. Virtual gifts have a variety of qualities, including content, pricing, scarcity, and customization, which determine how effective they are as a communication medium. Best practices are starting to emerge, and the following table provides some guidelines on how to structure virtual gifting for different use cases.

	Content	Pricing	Scarcity	Customization
Greeting Cards	Large inventory of traditional greeting card content maybe with a unique twist	Most often $1, use greeting card prices as an anchor	Limited editions add value, gifts shouldn’t expire	Personalization adds significant value
Signals	Recipient should be able to discern price of content, so small inventory is usually the way to go	Sky is the limit, how much is someone on the site willing to pay to stand out?	Should expire after 2-4 weeks so that senders are encouraged to “refresh” their signal	Personalization helps makes signal more relevant and, hence, more effective
Accolades	Small inventory with explicit or implicit meaning tied to each item (i.e., bronze, silver, gold)	Vary based on level of accolade, must be cheap enough to send but expensive enough to be meaningful ($0.25-$5 is a good range based on current prices)	Expiration should be tied to level of accolade, cheaper ones expire faster, more expensive ones may last forever	Not important, uniformity makes accolades more meaningful
Social Play	Large inventory of witty gifts, in this case shopping is half the fun	Willingness to pay is low so make free or price under $2	Limited editions may add value, no reason for gifts to expire	Customization can add significantly to humor
Reciprocation	Small inventory, there’s only so many ways to say thank you	People like to reciprocate in kind, pricing should be based on prices of other gifts in the system	Limited editions and expiration not likely to be important	Personalization is very important; helps underscore apprecation

Cutting Through the Noise

Today, the volume of communication that individuals have to deal with on a day-to-day basis is increasing dramatically. Facebook, Twitter, dating sites, games, e-mail, SMS, and instant messages all vie for a person’s attention. In a world inundated with social media, virtual gifting provides an essential way for users to separate signal from noise and add impact to their online social gestures.