The Economics of Second Life Clubs, Part 3

Sunday, April 27, 2008 Sunday, April 27, 2008

In part 1 of this series, we described a hypothetical club’s monthly expenses, as envisioned by a typical over-eager owner. Our formula estimated an island-filling club would require approximately USD$1,000 to break even each month. Part 2 showed that generating revenue at that scale is extraordinarily difficult.

What can our hypothetical resident/club-owner do to make a go of this? Increasing revenue is very difficult, simply because it’s not directly in their control. The patrons that come by and buy or rent something will do so based on your club's features and attractiveness. You just have to provide a great product.

However, expenses are definitely in control.

Part 1 showed a basic expense model like this:

  • 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

Since it’s pretty clear a club could not easily generate the amount of cash required to cover the expenses, our hypothetical club owner should reduce those expenses:

  • Tier: Reduce it substantially. Perhaps 1/8 a mainland parcel would be appropriate, and it costs only USD$40 per month, an enormous USD$255 less than a full island. The 8192sqm parcel would offer more than sufficient space for a club, but possibly suffer from nasty neighbors in the sim. It's more likely the club itself would be the bad neighbor, but that’s another story. 80,000L could be reduced to 10,000L
  • Advertising: The club must advertise, but perhaps should pay less and use more elbow grease. In other words, our club owner should do viral marketing, in-person visits, contests, group titles, etc., which cost nothing other than time and an active imagination. 20,000L is reduced to 5,000L
  • Staff: Clubs do need performers and our club owner can’t do it all on their own. However, instead of 5 staff, we’ll have the owner do more work themselves and save money for performers. 150,000L could be reduced to 100,000L
  • Contingency: Disasters and unpredictable events still happen, and they are not controllable. Let's keep say, 10,000L for emergencies

Total expenses are now reduced to 125,000L, or less than USD$480 per month. This is much better, and perhaps even achievable. The club needs only to generate 4,200L per day, or 28 sales of 150L items (or a mere 14 sales of 300L items). Rent revenue from other retailers or residents on site is probably difficult due to the dramatically smaller space, but you might be able to cobble together some revenue from vending machines onsite in addition to selling your own items.

Once again, good quality events will attract many visitors. And if you have many visitors, you have the opportunity to sell them products during their visit - but only if they are of good quality. You can increase the probability sales by selling items somehow related to your event's theme. And did I mention that they should be high quality?

This will work ONLY if the club owner sticks to the budget. This may be one of the most difficult aspects to achieve, given all the items one can buy. Stick to the plan! If the plan doesn't work, change the plan. 

If a club in this configuration is highly successful (and ONLY IF), our hypothetical club owner could consider expansion to larger areas. But remember, Revenue Must Exceed Expenses. Or else! Start small and build up only when you can afford it.


Dr. Rafael Fabre said...

Dear Mr. Saiman,
Excellent series! Ty for the insightful analysis into SL business management and conduct.
Dr. Rafael Fabre

Angelus said...

Another common way to cut costs.

Employees work for tips.

Yah, it's kinda harsh but if it's explained to them that this is the economic reality of running a club in SL most of us DJs and dancer types are ok with it.

Of course the other side of that is not garinsihing tips like some clubs that pay do. I'm ok with paying 10% of my tips when I'm given money on top of the tips, but it just seems petty and mean otherwise.

SL is not RL. To run a club "Like in RL" Is a huge mistake. I've seen it done, the club is long long gone.

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