A new study published in Marketing Science, a journal of the Institute for Operations Research and the Management Sciences (INFORMS), shows double-digit revenue growth for firms that create their own brand-specific online communities.
The study, Social Dollars: The Economic Impact of Customer Participation in a Firm-Sponsored Online Customer Community, is by professors Puneet Manchanda of the University of Michigan, Grant Packard of Wilfrid Laurier University, and Adithya Pattabhiramaiah of the Georgia Institute of Technology.
Engaging consumers through online social networks is an increasingly mission-critical activity for major brands. While some firms host their own brand-centric online communities, Facebook has become the dominant host for online communities of brand enthusiasts, taking over $10 billion and 10% of U.S. digital advertising spending in 2014. But do firms see real economic returns by enabling their own customer communities? And if so, what is it about one’s own online community that drives these returns?
Watch an interview with Prof. Manchanda
This study investigates this question by looking for “Social Dollars” – economic returns to firms from customers that can be attributed to the act of joining firm-specific online communities. The results of the study offer the first hard evidence that these social dollars exist. Specifically, they account for almost 20% of all dollars spent by customers after they join the community, representing a significant additional benefit. The study reveals that the key to achieving these returns is not so much the customer’s increased exposure to relevant brand or product information as it is enabling social engagement among consumers over their shared brand or product interests (for example, creating “friend” ties and “posting” to one another).
“While many firms think of enabling online customer communities as just a form of advertising, we reveal that supporting consumer social interactions can generate a substantial direct revenue benefit to the firm on their own,” said study co-author Puneet Manchanda.
Armed with a unique data set—consumer panel data from a large multi-category, multi-channel retailer for a fifteen-month period before and after the launch of the retailer’s online community—the researchers were able to isolate how much of the post-launch revenue from customers was attributable just to their joining and participating in the online community. The firm’s online community allowed consumers to create friend ties, talk about, “like,” or recommend products, and create special-interest group pages. The researchers ran many robustness tests to assess the strength of a causal linkage, all of which supported the validity of their findings.
The big question for companies, of course, is whether these additional social dollars outweigh the cost of setting up and maintaining one’s own online community. Using confidential data from the retailer, the researchers estimate that the firm achieved break-even on its investment within months of launching the community.
“While not all firms may achieve the same level of economic returns, firm-sponsored communities can be valuable on other dimensions,” says Manchanda. “The ability to design the community’s features and observe customer behavior is preferable to ceding control and insight of a brand’s online social network to a third party like Facebook. Of course, such communities will never draw the volume of traffic that sites like Facebook get. However, they are likely to get a much higher quality of traffic driven in no small part by the user-generated content from the community. This traffic leads to better organic searches.”
(Organic searches are online searches on keywords that do not generate paid advertisements.)
Reprinted with permission of INFORMS