The Economics of Second Life Clubs, Part 2

Wednesday, April 2, 2008 Wednesday, April 02, 2008

In the previous post 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 around USD$1,000 to break even each month.

Part 1 generated some discussion, including this thread, where experienced club operators and musicians correctly point out that I don't know much about clubs. Yes, I certainly don't know much about clubs. But I do know about running a business, and remember I'm describing what I frequently observe: over-eager, non-business-savvy avatars attempting to build a club. Successful clubs would definitely not make these same mistakes. 

With the demise of gambling, there are fewer ways to generate huge revenue. Here’s some basic approaches, although I am sure there are a few more.

  • Sell items in the club, especially things relevant to the club’s theme
  • Operate a store near the club to take advantage of the hypothetically massive traffic arriving at the club
  • Rent mall space near the club for others to take advantage of the hypothetically massive traffic at the club
  • Rent residential space near the club, leveraging the theme of the club in residential design
  • Charge permission to “sales people” to inhabit your club and sell items or “services” to the patrons. Hmmm...
  • Finally, Tip Jars. Nothing more need be said about them

Once you have some ideas for making revenue, we need to do a sensitivity analysis. In other words, exactly how much of each would we need to break even?

  • Selling items at the club and in a store: Let’s assume a typical sale is 150L. Thus we’d need to sell 1,833 items per month or an average of 62 every single day. Or one sale every 23 minutes all day every day of the year. How likely is that?
  • Renting shops/residences at 300L per week: 230 shops must pay the 300L each and every week. Hmm, how many prims can we offer them? If we give them 50 prims, that means there are only 3500 left for the club! Also, where exactly do you put 230 shops?
  • Renting shops/residences at 600L per week: 115 shops may be easier to fit, but it would be much more difficult to find 115 viable businesses that could afford 600L per week, especially when there are many places charging less. Again, how likely is this to occur?

All of the above mistakenly assume you’ve got 100% participation. In reality, our hypothetical club owner will find they must grow sales/rentals over time from a zero start. Also, due to regular turnover of residents, grid issues or other mayhem, they may find only a fraction of the potential income is actually there on any given day.

Clearly, the club owner must use a combination of approaches to even hope to achieve profitability, and do each competently and efficiently. Here is a possible target state:

  • Sell 40 items per day at 150L each: 180,000L
  • Rent 50 shops/residences at 600L per week: 120,000L

That gets us close to the break-even point. But even so, both of those numbers could be very hard to achieve. A business plan this thin would be laughable, if it wasn’t in Second Life.

Worse, if our resident had a store that generated 180,000L per month, why not just run the store and throw everything else away? You gotta love the music to persist.

You can see why clubs vaporize often. In part three of this series, we’ll examine some techniques for making the business equation work.


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