The Economics of Second Life Clubs, Part 3

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.

The Economics of Second Life Clubs, Part 2

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.

The Economics of Second Life Clubs, Part 1

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...