Falling Revenues, Explained?

Sunday, April 5, 2009 Sunday, April 05, 2009

I’ve been puzzling over this one for months now, and I think I might have figured it out. The revenue (sales) at Electric Pixels has been dipping lower and lower for months now, but why? I had several theories, including:

  • Bad economy
  • Everyone already bought what they needed
  • All shoppers are tied up in Grid-Wide Hunts
  • Freebies are so good that no one needs to buy anything
  • Competition from elsewhere
  • Aliens from space

To counteract the trend, I’ve been conducting all sorts of different business experiments, such as different advertising, new products, and even entering Grid-Wide Hunts (which, by the way, definitely increase your traffic substantially.) However, none of these actions has significantly affected the decreasing revenue trend.

More research was in order, and I came up with the graph above. The Blue Line is the revenue. As I began operations in early 2007, the business slowly grew, and it seemed to reach a bumpy plateau through September 2007 through August 2008.  From then on things just went south, with little effect from any of the business experiments.

However, the interesting part is the Red Line. It’s the United States Unemployment Rate, scaled to fit overtop of the revenue line. The unemployment remained more or less constant until, guess what, June-July 2008 and kept rising thereafter. At that moment, my revenue started to fall. It appears that there is a direct correlation between US unemployment and SL revenue, at least at my shop. Revenue seems to be inversely proportional to unemployment.

This intuitively makes sense. As increasing numbers of people become unemployed in the US (and presumably elsewhere to varying degrees), they cut back on non-essential spending, including Second Life. Thus, overall revenue decreases.

Is this the same for all SL stores? I don’t think so. Like Real Life, different products and services are needed at different moments in time. Who wouldn't want to be a repo-man these days? I am certain there are several thriving markets still going strong in SL, but in my case much of my product is (was) sold to those building new sims. And we know what happened to that activity.
Now here’s the interesting bit. Suppose we add another line to the chart, representing expenses. As I’ve said many times before, revenues must always exceed expenses. Suppose our expenses were as represented by the Green Line. We would have been losing money starting last October, and probably given up shortly thereafter.

I believe this is what has happened to many businesses in SL over the past few months. More than a few businesses were operating on a just-barely-breaking-even basis, and a financial storm such as we’re experiencing would kill off many of them.
Is there anything that can be done? Yes, certainly. In this theoretical chart we’ve realized something bad was going on and taken quick action to reduce our expenses. Notice that the Green Line is always below the Blue Line. This is the only way to survive.

In some cases the amount of expense cutting may have been too much for the business to survive, and those business expired anyway. But how does one cut expenses? That’s a topic for another post, stay tuned, dear readers.

Is this all bad news? I don’t think so. We’re witnessing in SL today a process of evolution within the business community. The less efficient businesses have either died off or must become much more efficient. The well run businesses will survive. When the smoke clears, we’ll have a virtual world filled with well-run, highly efficient businesses ready to take on anything. And that can only be good.


Anonymous said...

I think prices are just too high. It makes me sad and angry when I walk into a store and would gladly buy several items if the prices were cut in half. Instead I leave the store with nothing. So the creator makes zero profit when they could have cleaned up. Sad.

Raul Crimson said...

I think you wrote here a good analysis of what's going on. People has less money to use in SL and they try to keep it only for really needed stuff.

Peter Stindberg said...

This is very interesting. I meticulously track all business metrics for my two businesses as well and so far found no rule to them. I will email you the graphs later.

While the unemployment suggestion makes sense, I heard it mentioned a few times already that people cut on RL entertainment (movies, attractions, restaurants) in favour of virtual entertainment. The 12 US$ for a movie ticket bring you less far than the 3200 L$. But maybe this only applies while you still HAVE a job.

Rich said...

Correlation is NOT causation. The relationship you've discovered may or may NOT be the causal explanation for your situation.

If you tried other variables, you might find similar relationships.

So I caution you--at this point--from jumping to conclusions, just because the apparent "explanation" is intuitively satisfying.

Stats--properly applied--are much in order here.

ArminasX said...

@Rich - I agree, there is no proof here. It's merely a hypothesis. There are many, many factors involved, most of which have no available data for analysis. That's why I put the "?" in the title. Thanks for the feedback!

Anonymous said...

this is interesting data. i believe that there is another factor that causes sales to go down and that is lack of time.

every time there is a grid wide hunt, my sales go down. when there isn't a grid wide hunt, my sales are very good. i do not think the poor sales is because people are satiated on free quality items. a lot of the stuff is quality but it becomes common and thus disposed of. but in this discovery process of the hunter, in the meantime they are spending time hunting with high focus on finding the item. their time on SL is spent hunting, and it is a set amount of time for most people usually.

for instance say you only spend 1 hour or 2 a night on SL a few days a week. when you login you go hunting on this grid wide hunt and it consumes all of your time. this effects everything, not just sales, but people aren't exploring either or going to entertainment venues during these high hunt time periods. i know dj's and hosts at clubs that say their tips have gone way down as well.

if you could, please look at data during months with big grid hunts for instance a few weeks before halloween, christmas, and now easter is huge. during february the 2 weeks before valentines my sales were horrible but picked back up after valentines. also you could check registration of new memberships to see if registrations went up because people create alt mules to go hunting with.

i would be curious if you saw anything relating to these smaller sections of time. sorry to write so much.

thank you

R. said...

re-engineer your products and marketing aimed at new parcel/sim owners to more personal av-based devices and effects?

change pitch from a parcel or sim one owns to effects that can be incorporated in sandbox temporary builds/homes?


Gwyneth Llewelyn said...

No matter if this graph actually explains the reason for falling sales, at least there is one good advice here: keep running costs down :) That's the only survival strategy for any business. If sales pick up again, you can invest again...

I hardly make any sales from my in-world content, but I remember that in the "good months" I used to spend like crazy on all sorts of things — from ads and enhancements on XStreetSL, to paying models for my things, and so on. Most of that was wasted in the sense that the little extra return I might have gotten never compensated the costs I had. However, since I had enough to spare, I didn't mind :)

Nowadays, the few sales I make barely cover tier. But... in my case, it's not the economy's fault :) It's just that I have outdated and obsolete content for sale — and far better products exist elsewhere, often for free!

I'd love to see a chart showing the increase of free content in SL vs. overall sales. But the problem is, where to get the data for free content?... I'm sure LL is not willing to show us those numbers.

ArminasX said...

I've been thinking the same thing, Gwyneth - what has been the effect of mountains of quality freebies on the in world economy? And worse, how could one ever measure it?

Anonymous said...

"Stats--properly applied--are much in order here"

Statistics -- properly applied -- can do nothing to prove causation, only correlation. So your solution doesn't really address your problem, does it?

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