Net Gain Expanding Markets Through Virtual Communities
Net Gain Expanding Markets Through Virtual Communities
What are virtual communities?
Virtual communities are groups of people who share common interests and needs who come together on-line. Most are drawn by the opportunity to share a sense of community with like-minded strangers-regardless of where they live. But virtual communities are more than just a social phenomena: what starts off being a group drawn together by common interests ends up being a group with a critical mass of purchasing power-based in part on the fact that in communities, members can exchange information with each other on such things as a product’s price and quality.
So is America Online a virtual community?
AOL is too broad in focus to really be considered a virtual community. But within AOL there are fledgling virtual communities that are more targeted at specific member needs, like personal finance, sports, or health issues. Motley Fool is a good example of a virtual community in AOL, but there are also hundreds of other emerging communities, both within other proprietary services, on the Internet, and in a vast array of in-depth bulletin board services, such as ESPNet, Amazon.com, and The Cancer Forum.
What incentive do companies have to get into the virtual community business?
Virtual communities are likely to be very threatening to your average company. How many companies want to make it easier for customers to talk to one another about their product or service? But vendors will soon have little choice but to participate. As more and more of their customers join virtual communities, vendors will find themselves in “reverse markets”-markets in which customers seek out vendors and play vendors off of one another, rather than the other way around.
Far-sighted companies will recognize that virtual communities in reality represent a tremendous opportunity to significantly expand their geographic reach at very low cost. Virtual communities also provide companies with the chance to know their customers much better than they ever have before, by giving them the ability to interact with each other and with the company itself. Companies that organize virtual communities can use what they learn to create undreamed of customer loyalty.
Are these opportunities available to all companies?
The ability to organize a virtual community has less to do with the particular business you’re in or the assets you have than with your approach to making money and your appetite for risk. The ability to organize a community is ultimately about being willing to champion your customers-even to the extent of inviting them to do business with your competitors.
Why would any company want to do that?
As customers join virtual communities, they’re going to want the broadest range of information and product choices possible. Customers who are interested in automobiles are not going to join a community organized by GM if they only have the option of buying a GM car there. They’d be much more likely to join an “independent” community that put the buyer’s interest first by offering products and information from all automobile manufacturers. If I’m GM, and the virtual community I organize sells only my products, customers will quickly see that the community exists for my advantage, not theirs, and they’ll migrate to another community that better champions their interests. This ability to play vendors off of one another is one of the things that makes virtual communities so powerful. Vendors who try to restrict that choice will simply be fighting the tide-their customer will go elsewhere.
But haven’t companies already tried to do something like this and failed?
There have been several attempts to build virtual markets on-line that would pit vendors against each other in order to create lower prices for customers. One company developed an agent technology that enabled customers to go on-line and source the lowest price for a particular music CD from different vendors. It didn’t take long for vendors to realize what was happening, and they quickly implemented a blocking technology that prevented the agent from accessing their web sites. They were able to do this because the company offering the agent technology had a very limited customer base (and once the company was blocked from these sites, it had even less chance of enlarging its customer base!). If that company had built a critical mass of customers beforehand then they’d have gotten a much different response from vendors. After all, if your customers have already signed up with a virtual community, you’ll find you can’t afford not to offer your products there.
In contrast to these early attempts, virtual communities are likely to succeed precisely because they are communities, not markets. In their early stages they’re offering value to their members-by providing them with rich information regarding vendors and by allowing them to talk to each other and share experiences about vendors in an engaging and entertaining atmosphere. All of this can be done without the cooperation or participation of the vendors themselves. Then, once a critical mass of customers is in place, the virtual community has much greater negotiating power in dealing with vendors and obtaining their participation and cooperation. In the book, we refer to this as putting community before commerce.
Why is it so dangerous for CEOs to think of their company’s on-line presence-and for that matter the decision to start a virtual community business-as a marketing issue?
A lot of companies still view the World Wide Web as just another channel for their marketing communications. In point of fact, online environments create the potential to create entirely new businesses that extend well beyond the boundaries of current organizations. These environments have different economics, different skill sets, different competitors. Looking at this new world through old lenses can mean missing considerable opportunities - and ignoring potential dangerous threats.
Will anybody make money on-line, and if so, how?
Obviously it’s still early in the game. There are not yet any good examples of robust virtual communities out there, much less of people who are making a lot of money organizing them. But our extensive work with clients that are heading in this direction-combined with computer models we’ve built based on this experience-indicates that virtual communities will have the opportunity to create very substantial economic wealth for organizers. This won’t happen overnight.
First, you’ve got to assemble a critical mass of customers. Then the idea is to use increasing returns economics to “lock them in.” Those communities that accomplish this will be in a highly attractive competitive position as they begin negotiating with vendors that want to be able to offer their services to the community. That’s why we say that the race belongs to the swift. If somebody else locks in your customers before you do, then you’ve got a problem on your hands..
But why? What will prevent customers from switching to a competing community that has a better offering?
Virtual communities will most likely change the game and help companies develop closer ties to their customers. If loyalty is defined in terms of repeat purchases or “coming back for more,” communities are a tremendous vehicle for increasing loyalty to a vendor’s products. This is not because vendors will enjoy monopolies in communities, because communities will offer a full range of competing products. Loyalty will be driven by the relationship a supplier develops one-on-one with customers, through customized advertising, two-way sharing of information, and possibly customized products. It will be reinforced by the fact that communities attract enthusiasts, and these enthusiasts will form virtual “fan clubs” around products and suppliers. Assuming that a vendor has access to the community’s member profiles, it will be alerted sooner than in the off-line world if a customer has stopped purchasing. It will then be able to target marketing efforts at that customer, wooing her back before she has time to accustom herself to a rival product.
Do you agree with the experts who predict that the future of on-line commerce will be modeled on the broadcast industry, with players like PointCast and Microsoft sending customized programming to the desktop, supported by advertising revenues?
We don’t maintain that virtual communities are the only model for success online. Broadcast may also flourish. But broadcast reduces the opportunity to become much more targeted in terms of advertising and marketing to customers. What the broadcast model misses, is that the primary activity online is people communicating with each other. Broadcast assumes the primary value is in accessing information, not communicating.
How big a business would we be talking about in ten years, and what are likely to be the major expenses?
Our analysis shows that with an initial investment of around $15 million, a virtual community could grow into a nearly $700 million business by year ten, which would represent more than $4 billion in market value. Revenues will come mostly from advertising and from transaction commissions. Of course, these results will differ depending on the focus of the virtual community.
No matter what type of community, the largest expenses starting out will be for member acquisition, but these expenses are really preemptive investments in unique assets. This is because-getting back to the idea of an increasing returns business that we just described-a critical mass of members unleashes a series of other opportunities that, as time goes on, become more and more expensive for your competitors to take advantage of. Projecting the cost structure some years out again depends on the community, but in the example of a consumer travel community that we use in the book, we see expenses in year five evening out so that that particular company will be spending as much on acquiring advertisers, vendors, and non-member-generated content as in acquiring members.
In general, which kinds of companies will survive, and which will flourish in this new world?
Many of the things that companies used to be able to rely on for competitive advantage are going to erode in this new environment. Things like size and brand are going to be worth a lot less. Size becomes less important because less investment is required to create the distribution capability needed to reach your target customers. Brand becomes less important because information is more readily accessible on individual products. You no longer have to rely on brand as a guarantee of quality and value. So, if today you’re relying on scale and brand, it’s time to being rethinking your value proposition.
What will matter in this new environment is the quality and value of individual products and services, rather than having the biggest advertising budget or the most dominant relationship with retailers. If your products can’t stand the intense scrutiny they’ll be subjected to in the virtual community environment, then you’re going to have a problem competing, no matter how big you are. These factors mean virtual communities will help create the opportunity for “piranha economics” to take hold. Piranha economics are where the big fish gets eaten by the smaller fish. For today’s bigger companies, this should be a real source of concern.
What won’t matter in order to compete successfully in the on-line economy is whether your company is technology-based. Contrary to many a CEO’s fear, entering the virtual community business is not a technology play. You don’t have to come up with technological innovation after innovation in this business because what is important is your ability to acquire and understand your community members. For example, in the book we give CEOs guidelines for building a technology strategy that hinges upon using existing technology, keeping away from flashy technology at the customer interface that doesn’t add value, and oustourcing whenever possible.
User Ratings and Reviews
4 Stars A Crystal Ball If I Ever Read One
Originally published in 1997, anyone fortuitous enough to follow the advice of the authors is most likely a major player in the “virtual community” space right now.
This book accurately predicted the future direction of eCommerce community building whose advice if followed would have built formidable barriers to entry for would-be competitors. The concepts presented are solid and have been proven right. While much of the online landscape has changed over the years, I still found the vast majority of this material relevant and useful.
It’s a bit wordy, but I considered that a small price to pay for the information provided. I found the section on “Building a Virtual Community” particularly helpful insomuch as it discusses choosing the proper strategy for constructing the community, generating traffic, concentrating the traffic, and finally locking in the traffic for long-term economic benefit.
As presented, the book crystallizes a clear plan of attack for creating a community by breaking the task into manageable steps. This is a good book to get your thought processes - and project - heading in the right direction.
4 Stars Amazon.com
New cultures have been emerging in the world computer network. Among these cultures are Amazon.com, eBay, Yahoo, and google. Amazon provided a computer communication network allowing members to read other members reviews. Amazon track individual preferences and buying patterns and offerred products appealing to those interests. There are pitfalls in mixing technology with human relationship. Amazon avoids some of the pitfalls by customizing a portal for their members allowing them to create lists, private and public reviews, and a network of friendship. The member has the option to communicate with the outside world or remain semi secluded. Amazon and eBay virtual community services bring enormous leverage to the ordinary citizen at extremely low costs. The latent technology must be used intelligently and deliberately by an informed public. The power of the virtual community is the ability to communicate through a public medium in some sort of dispersed decision making process. Net Gain is about the conceptual framework of this communication medium.
4 Stars A forerunner on how to create profitable on-line communities
Notwithstanding the many new books on on-line communities, I still keep this book on my bookshelf as a useful reminder of the conceptual framework around which many new businesses - failed or otherwise - were subseqently developed.
It has been nearly six years since I attended a seminar organized by the consulting company McKinsey at which the two authors (both McKinsey consultants)presented their book and what seemed, at that time, to be its somewhat radical proposition about profitably developing self-organizing on-line communities around the passionate interests of their memberships.
As I become more familiar with Amazon and how it is organizing the community through which you are reading this and other reviews, I am reminded about the fundamental concepts that Hagel and Armstrong laid out in their book regarding the economics of virtual communities. Amazon attracts member-generated content which is a key part of its business model which uses the passionate interests of its own customer base to increase its business value. Many doubted the vailidity of this proposition when this book came out, but the evidence does appear to increasingly support it.
Arguably, many might now say that this book is dated, on-line businesses having mushroomed and failed since this book appeared, yielding new lessons that this book could not have foreseen. Many of its claims now seem overhyped.
While this and other criticims may all be well and true, I suspect that this book will come to be regarded in future business histories of the on-line business as one of the seminal pieces of strategic business thinking in the late 1990s. I shall keep it for posterity, if not profitability. In any case, there must now be enough second-hand copies for you not to have to make the investment at the full original cost!
5 Stars Prospering in the Virtual Community - Where Are We Going?
Both authors are from the esteemed McKinsey & Company. Even though released in 1997, this book has pretty much mapped out where we are now, and possibly to where the web will evolve regarding Virtual Communities. A community is started with an initial investment - a learning curve investment - then receives the positve network effects. The web is used for three basic purposes, to find content, to interact and to complete transactions. They discuss the ‘critical mass’ of memebers that a community must acheive before it becomes self-sustaining. They project a curve of this new web envirinoment of villages, constellations, coalitions, to finally infomediaries (a state yet to be achieved).
There are four factors of initial growth: the size of the potential community, the value of being online, the intensity of commerce, and the fractal depth of the community. The fractal depth is the number of possible sub-communities that can be developed through time.
Consumer-based communites are either geographical, demographic or topical. Business-focused communites are either vertical (same industry), functional, geographical, or in a particular business category that meets the needs of other businesses. The authors discuss the virtues of each of these.
A fast start-up would be aided by a strong brand name, established customer relationships, or content to keep browsers interested. Skills to get and retain members are key.
The first emphasis is on generating traffic, then concentrating traffic - convincing the browsers to spend time there - you must always be expanding the offerings and creating excitement through participation. One must then lock-in traffic. This can be done by fostering a relationship between members, improving community functions, and tayloring resources to individual members. Keep the sub-communities small. Give them resources to start additional sub-communites.
Sounds like they are right on track.
Five Stars
5 Stars Virtual Communities = Real Prosperity
Hagel has co-authored two especially important books (with Arthur G. Armstrong III and Marc Singer, respectively), the other being Net Worth “which builds on a number of the themes originally developed” in this volume. As Hagel and Armstrong point out, Net.Gain “systematically [analyzes] the economic drivers for value creation that exist on networks. It [uses] one particular business model — the virtual community — to illustrate the unique capabilities of digital networks and how these might be harnessed to create a substantial business with very attractive economics.” The material is carefully organized within three Parts: The Real Value of Virtual Communities, Building a Virtual Community, and Positioning to Win the Broader Game. Hagel and Armstrong also provide a “Management Agenda”, followed by excellent suggestions for further reading.
In the Preface, Hagel and Armstrong acknowledge three inevitable limitations in writing Net.Gain: “The first arises from the profound uncertainties associated with evolving electronic networks and the myriad business models emerging in the primordial brew known as cycberspace….Second, the need to be concise has led us to make some generalizations about the likely evolution of virtual communities and the key principles for success….Third, we do not expect virtual communities to be the only ‘form of life’ on public networks. Indeed, many other commercial and non-commercial formats (including dictionaries, market spaces, ‘web’zines,’ corporate sites and game areas) will thrive on these networks as well.” Working within these limitations, Hagel and Armstrong succeed admirably when describing the power and potential of the virtual community concept. Also, when explaining (a) how to target the kind of community to start-up; (b) the principles of a successful entry strategy, emphasizing the need to generate, engage, and lock in traffic over time; (c) characteristics of community organizations; and (d) criteria by which to select the right technology. Then in Part Three, Hagel and Armstrong shift their attention to explaining the fundamental ways in which the emergence and spread of virtual communities will alter traditional business.
My strong recommendation is that this book be read first, then Net Worth. My further recommendation is that both books be used to formulate the agenda for a workshop or what is generally referred to as an “executive retreat” (preferably for two days and located offsite) with all participants required to read both books in advance. In their Epilogue, Hagel and Armstrong suggest that “the most radical potential impact of the virtual community may well be its impact on the way individuals manage their lives and companies manage themselves. Communities will serve to connect, much like the postage system and telephone before them. But they will go several steps further than the telephone or fax, as they help the individual to seek out and find. Souls in search of relationship, colleagues in search of teamwork,, customers in search of products, suppliers in search of markets: the virtual community might have a place for them after all.” Those who share my high regard for Hagel’s two books (co-authored with Armstrong and Singer, respectively) are urged to check out Peter Senge’s The Fifth Discipline as well as O’Dell and Grayson’s If Only We Knew What We Know. Both can also help with the planning and implementing of the off-site workshop recommended earlier.
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