This May the e-retail giant Amazon is set to hand over tens of millions of dollars' worth of free cash to just about anyone who wants it, in the form of 'Amazon Coins', according to Vanessa Armstrong, head of marketing for Collinson Latitude, who examines how and why Amazon is launching a virtual currency - a loyalty strategy already tried and abandoned by many online retailers and social media operations.
Facebook Credits were launched in 2011 in an attempt to standardise the method of payments made to developers of various Facebook apps and games, and to make the purchasing experience easier for customers. But Facebook quickly found out that, given the choice, most people prefer real money. Microsoft, too, appears to be hedging with its Microsoft Points because Windows 8 offers a 'real money' platform. The public's attention hasn't been captured too easily by other virtual currency initiatives either.
But Amazon might be on to a winner. The key to its potential success is the Kindle, or the Amazon Kindle Fire to be precise. Virtual currency, both in the forms of online digital credit and redeemable paper vouchers, have in the past been intended to generate customer loyalty or to gain control of the point-of-sale; But with this launch Amazon is aiming to stimulate loyalty among both purchasers and software developers.
Amazon Coins will be redeemable only against Kindle apps and in-app purchases at the Amazon Appstore. Amazon understands economies of scale better than most retailers and believes that its Coins will stimulate increased activity and sales in the Kindle market which will, in turn, encourage developers to produce more Kindle apps, thus creating a virtuous circle fuelled by this restricted virtual currency. Amazon may also create additional demand from the younger market if parents are able to gift this currency as a weekly allowance, for example.
The real challenge for Amazon - and indeed the one that faces any creator of a virtual currency - is to imbue the currency with value. The mistake that many make is to create something that's clearly of value to the business (a virtual currency is, after all, designed to fulfil your own business objectives) but that fails to address the customer's needs and wants.
Amazon has already invested in creating an extremely attractive ecosystem that customers obviously want to use. So the new virtual currency has value because the Amazon ecosystem has value. It is the equity within the Amazon brand which may enable an immediate transfer of both real and perceived value to Amazon Coins.
It makes sense to create a digital currency to drive demand for digital products, but the value in both needs to be apparent if consumers are going to respond, and if the programme is going to be successful.
The Amazon Coin launch will be an interesting case study in whether or not virtual currencies can thrive as a loyalty promoting tool. Giving away 'free money' is not a sustainable business model and it will need a rapid return - even for Amazon - so the results are worth keeping an eye on.