The Economics of Second Life Clubs, Part 1

Thursday, March 20, 2008 Thursday, March 20, 2008

We’ve all been to them: those great clubs with dazzling dance floors, animation balls, fun people, and if I’m lucky some particle effects too. They can be a lot of fun to visit. And then suddenly, they disappear! Why does this happen? I suspect the following lifecycle takes place all too often:

  • Resident enters Second Life and discover they really enjoy clubbing
  • Resident gets over the “what is all this?” stage of SL existence and wants to do something useful and long term
  • Familiar with clubs, Resident decides to create one of their own. A big one, of course. Actually, the biggest!
  • Resident builds club, advertises, hires, operates and thus creates a truly large operation
  • Club fails when Resident realizes they don’t have enough money to run it

Sigh. I’ve seen this happen several times, as many of my particle clients are club owners. Sometimes it’s quite sudden, while other clubs die a slow, withering death of agony.

Why does this happen? I suspect a prime cause is a misunderstanding of the most basic business axiom: Revenue must exceed Expenses. I follow this rule absolutely, and I believe anyone who does can do nothing but succeed.

Let’s examine the typical club as set up by our hypothetical resident. Remember, they want to make it big, so we will assume they are building out an entire island, and are sufficiently capable to do a lot of the building themselves. (Don't laugh - I see this happening constantly!) Here’s the balance sheet:

Hypothetical expenses per month:

  • Tier for Class 5 Island (USD$295): 80,000L
  • Advertising (assume several techniques used): 20,000L
  • Staff (5 staff+performers @ 1000L/day): 150,000L
  • Contingency (for anything else going on): 25,000L
  • Total Expenses each month: 275,000L = USD$1,000

That’s a fair bit of change for a very basic no-frills club. Not to worry, our Resident/Club-Owner needs only to offset these expenses by generating more than 275,000L each month.

Oh. How do we do that again?

Well, we could require visitors to pay a cover charge. Um, nope that won’t work, because there are lots of clubs without covers. They’d take the customers instead! We can’t rake in cash from gambling, and we can’t charge them for drinks, hot wings or those greasy deep-fried potato chunks, either. So how can a club make some Lindens? Stay tuned for part 2 of this series...

3 comments:

DufauxDesigns said...

This is really interesting, part 2 please XD

Alan Cyr said...

One thing you've missed so far is recouping the initial investment - there could be (say) land purchase costs, initial month's tier for build time, lighting, effects etc - your initial model only thinks about breakeven, not this at all.

ArminasX said...

You are SO correct! The initial investment MUST be recovered. However, you can only do so if you are profitable from month to month. Once you are profitable, then you can consider how you want to make back your initial investment. Basically, the problem then is: over what time period should I recover it? It might be a few months, it might be years. Depends what you want to do (or basically your accounting philosophy.) I guess that's why I didn't really talk too much about it - it depends on your approach. Nevertheless, you gotta be profitable FIRST, otherwise there is no way to recover anything.

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