Bill Gurley has a great post about monetizing social networks. He analyzes TenCent, a Chinese IM company, and uses virtual world examples to demonstrate how social networks could monetize their huge base of users. The model has a few different names: freemium, digital item, micropayments. The New York TImes also has an recent article on digital goods.
It is my perception that most U.S. executives have trouble conceiving and believing in the digital item model. For starters, they simply think it’s strange. “Why would someone buy clothes for their virtual avatar? That’s weird.” What they fail to realize is that U.S. consumers pay for “virtual” things all the time.
And he gives a good example of consumers buying brands that are basically virtual, i.e. non-functional. For example, the willingness-to-pay for a pair of Channel sunglasses drops significantly if the Channel logo is removed. "People are buying an image" because they "care greatly about how they want to be perceived."
So yes, customers do by products that project an image about themselves in both the virtual and real worlds. In other words, they have emotional jobs that they want to get done in both worlds (and these jobs can be personal or social).
The crucial distinction is between the functional and the emotional jobs, not the physical and the virtual worlds. In both worlds customers will need to get functional jobs done to accomplish goals and complete tasks, and they will need to get emotional jobs done (personal jobs to improve how they feel about themselves and social jobs to improve how they are perceived by others).
If social networks want to analyze the opportunities for monetization, they need to focus on the functional jobs for two reasons. First, because these are the jobs that customers are more likely to have a willingness-to-pay for, and second, because it is much harder to consistently build solutions to satisfy emotional jobs (think about how fast brands and trends come and go).
It would be interesting to look at all the virtual products that have been sold by TenCent, Second Life, and ChangYou and divide the revenue and margins into functional and emotional job buckets (i.e. how much revenue has been generated by functional jobs vs. emotional jobs).
I suspect that the opportunity for solutions to functional jobs is much higher than that for emotional jobs.