Social Networks To Social Dollars
New research shows company-sponsored online communities can pay off quickly.
ANN ARBOR, Mich.—Companies are fast adapting marketing strategies to leverage social media since Americans now spend more of their online time engaged in virtual networks than in any other activity.
But how should firms best connect with the market in the social media space? Through third-party sites like Facebook or with their own branded, online communities? Between a quarter and a half of the top 100 global brands host their own online social networks, a move that requires a significant upfront investment and maintenance costs.
New research from Michigan Ross marketing professor Puneet Manchanda suggests a significant payoff for companies that set up their own online communities. Using data from an unnamed retailer of books, CDs, and DVDs, Manchanda found a 19 percent bump in incremental revenue from customers after they joined the online community. He calls this revenue "social dollars."
His paper, Social Dollars: The Economic Impact of Consumer Participation in a Firm-Sponsored Online Community, also shows this spending persists over time, well after the novelty of joining the network wears off, and doesn't cannibalize between channels. In this case, the company sells products both online and in stores, and network members spent more in both. The spending increase came via more frequent purchases, rather than bigger receipts.
This monetary reward is in addition to the benefits of a hosted social online community, such as customer engagement and the ability to better target promotions.
The study is one of the first to examine empirical evidence of social network outcomes.
"Most of the research on the effectiveness of social networks is based on self-reported data," says Manchanda, the Isadore and Leon Winkelman Professor of Marketing. "There's little actual evidence people change their behavior once they join an online community in terms of actual outcomes. So we wanted to see if we could find these social dollars and our research confirmed their existence. We stress-tested the findings in multiple ways because the results surprised us at first."
Manchanda's co-authors are Ross PhD candidates Grant Packard and Adithya Pattabhiramaiah. They obtained data from the company on customer activity 15 months before the online network was established and 15 months after. They were then able to form control groups and examine before-and-after results.
In the virtual community they examined, members can recommend products, share reviews, create favorite lists, and socialize with each other online.
A deeper dive into the data found that a network member with more "friend" connections was more likely to spend more.
"People that occupy an important place in the network—who are connected to other people who are well connected—spend more," Manchanda says.
In addition to the monetary benefits of the community, there are indirect benefits in terms of information that members volunteer. A robust network gives a company a picture of customer preferences and lets it examine pre-purchase and post-purchase activity. Manchanda says that's a boon for customer relationship management and other life cycle-based marketing strategies.
It also allows the company to identify trending products and topics of conversation that can help it optimize product and marketing mix decisions.
The firm-sponsored network creates a two-way street that can benefit both customer and company, Manchanda says.
"For the engaged customer, the fact that they join the community suggests this is of value to them," he says. "For the firm, it offers them the ability to learn a lot about their most engaged customers."
Manchanda and his co-authors are looking to learn even more. They hope future research will determine exactly where the social dollars come from. Is the customer spending more overall on the product category—in this case books, DVDs, and CDs—or is the company sponsoring the online community getting a bigger share of the customer's wallet at the expense of competitors?
And what drives the correlation between highly connected members and higher spending? Are they spending more because they are connected or are those likely to spend more also likely to create more connections?
"We could hypothesize, but not definitely say, with this data," Manchanda says. "Hopefully that's an avenue for future research."
But the results of the study make Manchanda believe that a company-sponsored online community is a better engagement tool than using a third-party site such as Facebook.
While setting up a Facebook community costs the firm nothing, it's not clear what it gets in return. The overall Facebook community is huge, but the number of people who ultimately "like" a particular brand is a fraction of that. Facebook also provides limited data on what people do in the community to connect.
"With Facebook, the audience is huge, the cost is low, but it's not clear the engagement is high in terms of delivering positive outcomes," he says. "It seems like you're not getting much, at least from what we can tell from anecdotal evidence and a couple of studies."
By contrast, the data he and the co-authors gathered and analyzed from the company-sponsored community showed clear advantages for the firm. The economic return for the company they studied was not long in coming.
The break-even point for the cost of setting up the network was when 33,000 customers signed up. It acquired 260,000 in the first 15 months.
"This was clearly a very profitable investment for the firm," Manchanda says, "even though immediate profit wasn't the original objective."
For more information, contact:
Bernie DeGroat, (734) 647-1847, firstname.lastname@example.org