Net Gain: Expanding Markets Through Virtual Communities
Net Gain: Expanding Markets Through Virtual Communities
By John Hagel and Arthur G. Armstrong
"Net Gain" is an excellent resource for anyone interested in establishing a virtual community and the issues they will face when getting their site off the ground. The book examines issues such as establishing the community quickly, finding the critical mass of people to visit the site, and keeping those people around and how to take advantage of the human connection to make money from the community.
The economics of the venture, the authors say, will be key in keeping the site going and there are advantages and disadvantages of when the new community enters the game. Also, the community must be large enough in scope for there to be a broad range of issues and offshoot topics the community can discuss: such as travel but the community organizers must be careful not to expand into territories that are seemingly related but not quite so. They can leave these expansionary topics and groups to other communities with whom they can form strategic alliances and benefit from the combined knowledge of the shared community.
The book is broken up into three logical sections:
These take the reader in a logical pattern from thinking about the virtual community, its benefits and the competitiveness of the market, how to start the community and the issues a community organizer faces, how to equip the community and where the virtual community will go in the future.
The book was well written and easy to understand from a non-information systems approach to the book. It is a good start for anyone considering establishing a virtual community and what to consider if the individual plans on making big bucks off the site. However, it probably could have been half as long as it was. Where the authors did a great job of backing up and following through their initial premise that excellent virtual communities should show characteristics of certain attributes (see Chapter 1 summary), they did a good job of backing up their initial assertions but at times was a bit redundant in following chapters.
Chapter Summaries:
Part I: The Real Value of Virtual Communities
Chapter 1: The race belongs to the swift.
The introduction is based on the old adage that "the early bird gets the worm." Those who want to be successful in a virtual community must establish the community's presence early on. Or, otherwise, it becomes too expensive to get in the game and the players have already gone elsewhere.
It is in this chapter that we are first introduced to the Five Defining Elements of the Virtual Community Business Model:
1. It must have a distinctive focus.
2. It must have the capacity to integrate content and communication
3. There must be an appreciation of member-generated content
4. There must be access to competing publishers and vendors
5. The site must have a commercial orientation.
The authors say that the pending success of a virtual community must be weighed against each of these elements and if these criteria aren't met, the community won't succeed.
While the new customer is the one who benefits from new virtual communities, the authors say, the vendor can benefit as well from:
1. Reduced search costs of finding other businesses and customers. The customers can find you much more easily.
2. There is an increased propensity for customers to buy.
3. There is an enhanced ability to target the message, the product and reach customers.
4. There is the greater ability to add value to existing products by tailoring them to fit customer needs.
5. There is a lower capital investment in an e-commerce site than there is in building a freestanding store.
6. The Internet has broader geographic reach than a traditional store.
7. There exists potential for disintermediation.
Even while creating for the present, the authors say, the virtual community organizer must constantly assess the changing landscape to be ready for the next shift.
Rather than vendors pushing their products to market, in the virtual community, markets are reversed, customers have the upper hand and call "pull" the product onto the market because of greater access to information.
This chapter also asks: Why the need for virtual communities?
The authors give four good reasons why virtual communities can be so successful.
1. Interest — where else can you go to find a place to chat with people from
around the world with specific interests?
2. Relationship — if virtual community visitors are seeking to talk with someone who has recently gone through a tragedy, like the loss of a spouse, they can find someone who has endured a similar situation and talk to them. Whether it's the birth of a child or getting married or just anything — you can find someone online who's already been through the same situation.
3. Fantasy — There are all sorts of interactive sites and games online.
4. Transaction — people can shop online.
The power of virtual communities, the authors say, is in their ability to aggregate people, who are the heart of the community.
Also, whereas the consumer now holds more power, this benefits the vendor because there is not as much vendor surplus and just-in-time inventory systems and tailoring for the customer, are possible.
Chapter 3: The new economic of virtual communities
This chapter deals with the principle of increasing returns. There are three ways of achieving increasing returns:
1. When the initial investment is great but the incremental cost of producing more decreases. For example, a software company where getting the software created is very expensive but making more installation CDs is fairly cheap.
2. The experience curve. Once employees start to get the hang of the task, the cost of production will increase.
3. The more products and services created, the more valuable the company becomes. For example, if you consider a catering company, when the company first begins, it's worth only as much as the food, but, as the caterer gets more jobs, word of mouth and good work makes the company more valuable.
The authors also discuss sources of revenue for the virtual community including:
1. Subscription fees
2. Usage fees
3. Member fees or downloading fees.
The community first must attract its members and build from there. They must turn builders into users and get lurkers (those who don't contribute) to become users who then become buyers.
The authors also include factors that work against those who wait to inter the market:
1. Investment requirements increase
2. Unique assets accumulate
3. Barriers to new allegiances get higher
4. Factor costs increase (i.e. those creating the web sites are charging more)
5. Acquisition becomes very expensive.
Chapter 4: The shape of thing to come: How virtual communities will evolve
1. Virtual villages: Highly fragmented communities but yet they are profitable.
This stage will turn into the next unless hindered by lack of increasing returns.
2. Concentrated constellations: There exists a concentration of core communities
This stage will evolve to the next if there are limited economies of scope.
3. Cosmic coalitions: Similar communities join forces because of complementary topic areas.
4. Then the virtual communities shift to integrated infomediaries. Sites that work together to provide the visitor with what they need.
Part III: Building a Virtual Community
Chapter 5: Choosing a way in
Before getting the site off the ground, the following points should be considered:
The community developer must first consider the size of the potential community and what percentage of these people will have the opportunity to be online?
What are the relative costs of getting these people online, what is the cost to the consumer, and could they find the information they seek cheaper someplace else?
What are the benefits of being associated in this virtual community? What is the potential for commerce and revenues?
What is the fractal depth (the authors define fractal depth as the degree to which the community can be segmented) of the community?
The community must be able to grow but by how much and into which areas?
The more the community can be segmented, the greater the likelihood of success.
What type of community do you want to create?
Types of communities:
1. Consumer-focused:
- geographic
- demographic
- topical
2. Business-to-business
- vertical industry communities
- functional communities
- geographic communities
- business category
Community builders must also be aware of indicators of long-term expansion.
A critical mass of audience must first be obtained but also, the more fractal depth and entry vectors a site has (topics that can form sub-communities) the more likely the site can achieve long-term and sustained growth.
Resources are necessary for the success of the site as well. Such as:
Chapter 6: Laying the Foundation
Before commerce can ever begin, the community must first be in place.
Stage I: Site must generate traffic
The site must have members and people that visit in order to chat and get others to stop.
The site must be established quickly.
The site should encourage people to pass through to generate traffic and should link through other similar sites.
Should survey the Internet to find resources that may be lacking on other, similar sites and thus provide these also to the customer.
Stage II: Concentrating traffic
The site must engage the members to interact and evaluate their usage and how long they spend on the site.
Members should become contributors and not just "lurkers" at this point.
This can be achieved by enhancing the site’s offerings by adding features that aren’t presently offered.
Must be able to extract value from the consumer by exploiting their collective knowledge.
Stage III: Locking in traffic
Must foster relationships between the members and encourage them to interact.
The site must accumulate and organize the information the members have generated.
Improve the functionality of the site by asking for user feedback.
Tailor the resources of the site to fit individual member needs.
Chapter 7: The gardener’s touch, managing organic growth.
This chapter encourages the community developer to both:
1. provide scalability for the site by letting the site grow without losing the "community appeal" that brought people to the site.
2. but the developer must also "let go" and allow the community to grow by itself.
The community developer can "let go" by creating "franchises" by letting other subcommunities to be born and empowering members to give feedback as to how the community should grow and change from here.
This chapter examines the "organic management model," which assumes that not always are the best laid plans actually the best. Sometimes, you must let nature take its course and let the community be involved in its own growth. But, with this change comes new responsibilities:
There will need to be someone in charge of:
- member acquisition
- monitor of member usage
There will also be the need for a(n):
- archivist of member-generated material
- community editor
- customer service manager
- information systems manager
- community developer
- community architect
- information analyst
- community merchandiser
Chapter 8: Equipping the community
Some principles to consider when determining underlying technology strategy:
1. Use proven technologies
2. Use technology to capture information
3. Be creative when creating the environments in which the community will be formed.
4. Avoid in-house technology development.
The key to this chapter is that it’s the people in the community that make a good site, not the technology.
Some considerations, though, when choosing the technology used to create the community:
The community must be prepared to offer some overlay technologies as well if it plans on doing commerce such as:
1. payment technology
2. data collection software
3. integration technology: how to combine communication and content
4. Graphics and animation software
5. "streaming" content delivery
Part III: Positioning to win the broader game
Chapter 9: Rethinking functional management
The growth of virtual communities gives marketers' new challenges as well as new opportunities because the target market becomes a "segment of one."
Instead of mass-marketing products, now, with greater information available for the consumer and about the consumer as well, businesses can greater tailor the product for individual customers.
There exist greater opportunities for marketing and promotion of the site by affiliation, placement and promotion by using customer feedback (through email, etc.) to promote the site elsewhere.
The sites must pass along cost savings to the consumer in order to make shopping on the Internet more appealing and to give them a reason to not buy the product in traditional methods.
The marketers, as in all business, must also stay highly aware of the threat of potential competitors.
Chapter 10: Reshaping markets and organizations
The establishment of virtual communities offers new opportunities economically and these opportunities spread across all boundaries. The reach is limited only by those who do not have access to computers.
There are also opportunities to generate awareness and buying potential that might have otherwise taken a longer time to create. For example, if a person not interested in gardening links to the HGTV site from another site, then becomes interested enough in gardening to purchase a tool online, this has created value for the initial site, the HGTV site and the advertiser who was offering the opportunity to buy the tools online.
Big business must be aware, however, of "piranha economics" because, although it would seem a small fish couldn’t eat the big fish, the impact of the Internet may have a greater effect than ever expected on traditional retailers.