Many companies have now launched brand-specific online communities. Using data from a specific retailer, a research team from University of Michigan’s Ross School of Business and Wilfrid Laurier University sought to measure the actual revenues generated by an online community — also known as ‘social dollars’. Their findings confirm the effectiveness and profitability of online communities. Nearly 20% of the revenue from community customers in their research could be traced to their joining the community. Social dollars also persisted over time — the spending was not a temporary spike due to the novelty of the community — and appeared in both online and offline channels.
There are long been various types of communities bringing together like-minded product enthusiasts — from Corvette or 2CV car clubs to Tupperware party groups to the techies dedicated to Java or Apple. When consumers moved en masse to the Internet and to mobile technology, marketers immediately saw the potential for bringing consumers together through social media. Consider, after all, that one billion people on the planet spend a third of their waking hours in online environments that allow them to present a public or private profile.
While intuitively, online communities seem to be worth any investment, professor Puneet Manchanda of the University of Michigan’s Ross School of Business, joined by professor Grant Packard of Wilfred Laurier University and Michigan doctoral candidate Adithya Pattabhiramaiah, decided to quantify the return on investment in social communities. They used data from the online community of a large, North American multi-channel entertainment products retailer to isolate the customer expenditure that resulted from joining the community — expenditure that they labelled as ‘social dollars’.
The data used by the researchers was based on a random selection of 26,624 community members (out of a total population of about 266,000), and included both transactional data and community activity data; the data covered 15-month periods before and after the creation of the online community.
The statistical analysis of the data show that at least 19% of total customer expenditure can be linked to their joining the online community.
Specifically, online purchases in the 15 months after the launch of the community increased by 37%, while offline purchases increased by 9%. This is significant since it shows that the creation of an online customer community has a positive effect on both online and offline purchasing behaviour. The online community does not cannibalize purchases from offline channels.
The average order size during this period remains about the same; the increased expenditure results from more orders (nearly 20% more), not greater ones. This suggests that online communities generate more visits to the purchase sites of a company.
The research also showed that social dollars continued to be generated during the entire 15-month period after the launch the community, thus confirming that community-generated spending was not a temporary effect of the novelty of the new platform.
The data also showed that consumers who posted on the site —who actively participated in the social function of the site — spent more than what the researchers called the “lurkers” — those who joined the online community but never interact with other members of the community.
The researchers note that the company used in this study sold a variety of individually branded books, DVDs, CDs and ancillary items (pens, greeting cards, etc.). It’s possible if not probable that the social dollars from an online community dedicated to one brand, such as Lego, would be even greater than the social dollars from an assorted product community such as the one used in the research.
A recent survey of nearly 2,000 CEOs from 60 countries showed that 60% said they plan to invest or increase their investment in online communities in the next three years. For these CEOs, online customer communities were the second most important means of engaging customers, after face-to-face interactions. Traditional media came a distant third.
The results clearly indicate that the CEOs faith in online communities is warranted.
The following recommendations will help companies create and benefit from effective online consumer communities:
“Social Dollars: The Economic Impact of Customer Participation in a Firm-sponsored Online Customer Community” by Puneet Manchanda, Grant Packard, and Adithya Pattabhiramaiah, Working Paper, July 2013.
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