Membership engages customers, who spend more across the board.
Title: Social Dollars: The Economic Impact of Customer Participation in a Firm-Sponsored Online Community
Authors: Puneet Manchanda, Grant Packard, and Adithya Pattabhiramaiah (all University of Michigan)
Publisher: Ross School of Business Working Paper
Date Published: January 2012
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| Image via CrunchBase |
... This paper, among the first to tackle the question empirically, tracked the effect of consumer membership in one company-sponsored online network on the amount of money members spent on the firm’s products. Although based only on a single case study, the results appear to be a significant affirmation of the economic value of these networks: The authors found that revenue from members increased by an average of 19 percent after they joined, a result of closer ties with other customers and more engagement with the company.
The revenue increase, called “social dollars” in the paper, represents spending that is over and above the members’ purchase history with the firm — and it similarly exceeds the spending of a control group of comparable consumers who did not join the network.
This increase in income is “economically significant for the firm as it more than covers the fixed cost of setting up the community as well as the variable cost of operating it,” the authors write. The increase is neither a novelty nor a cannibalizing threat to a company’s retail stores, they add. Rather, they say, the jump in social dollars “persist[s] over time, arise[s] in both online and offline channels, and affect[s] all product categories sold by the firm.”
The authors based their analysis on data obtained from a large North American retailer of entertainment and information-related media, such as books, movies, and music. The firm is the largest retailer in its market in terms of sales and operates in both retail store and online environments; about 10 percent of its total revenues came from Internet purchases in 2009.
The company’s online community is similar to Facebook’s — members can manage a profile page that allows them to post personal and product-related messages, convey a sense of their personality and interests, and display their status in the community. There are private and public discussion boards so users can establish friendly ties, start up special interest groups (for example, the “Vampire Movie Lovers Club”), and publish Top 10 lists or product reviews. ...
After controlling for several factors, the authors found that the quantity and quality of friendly relationships with other customers was key. Customers who had many friendly relationships, or who befriended more important or prominent customers, were likely to spend more on the firm’s products. Those who displayed more products on their profile page also tended to rack up purchases.
It doesn’t require many participants to earn a return on the investment of establishing an online community, the authors found. Based on the projected volume of social dollars taken in, and the costs and firm-level margins available in public financial statements, the authors’ conservative estimate is that the firm broke even on its investment when 33,000 of its existing customers signed up.
“Given that the firm acquired 260,000 members within the first fifteen months after community launch, this was clearly a very profitable investment for the firm,” the authors write, “especially as this number is comprised of a mix of both current and newly-acquired customers.”
Aside from the direct economic benefits of setting up the community, the firm has much to gain in other ways. For example, the data paints a clear picture of each customer’s preferences and behavior, the authors write, which is “an informational boon for customer relationship management and other life-cycle based marketing strategies.”
By monitoring which products are becoming more popular and identifying who is discussing them, marketers can optimize their promotional strategies. And the firm also disclosed to the authors that the massive amount of user-generated content produced via the community strongly improves the company’s position in major online search engines.
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| A segment of a social network (Photo credit: Wikipedia) |
Bottom Line:
Consumers who join a company’s online community spend significantly more on the firm’s products than they did prior to signing up or in comparison with similar customers who are not part of the network. The findings indicate that online communities more than justify the investment to create and maintain them, and provide a unique way for companies to connect with customers and monitor their purchases and behavior.
Consumers who join a company’s online community spend significantly more on the firm’s products than they did prior to signing up or in comparison with similar customers who are not part of the network. The findings indicate that online communities more than justify the investment to create and maintain them, and provide a unique way for companies to connect with customers and monitor their purchases and behavior.
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