Reports

Social Dollars: The Economic Impact of Customer Participation in a Firm-sponsored Online Community

Puneet Manchanda, Grant Packard, and Adithya Pattabhiramaiah, 2011, 11-115

Many firms operate consumer-centered social networks or “communities” online. This is generally motivated by the belief that consumers who join the community become more engaged with the firm and, as a result, increase their economic activity with the firm. But is operating online communities truly profitable for the firms that operate them? The answer hinges on how the additional revenues generated from these more engaged customers compare to the cost of setting up and operating such a community.

Puneet Manchanda, Grant Packard, and Adithya Pattabhiramaiah employ behavioral data on product purchases and customer interactions in an online community to quantify the incremental revenues for firms arising from increased customer engagement. They label these incremental revenues “social dollars.” They test for the existence and magnitude of social dollars via a difference-in-differences estimator using data from a multi-channel entertainment products retailer that launched an online community. The use of a “control” group in their approach helps the authors control for selection, heterogeneity, and any exogenous market shocks. They find that 19% of the post-launch revenue from community customers can be attributed to their joining the community. These social dollars represent a very significant economic return for the firm.

Notably, social dollars are found to persist over time and affect all product categories of the firm, not only the firm’s core product category which is the focus of most of the user-generated content exchange. Further, social dollars arise in not only the online channel (which facilitates this customer engagement) but also the retail channel – meaning that this increased engagement online also translates to higher in-store expenditures by these community customers. Social dollars are found to arise primarily through more frequent orders rather than increased shopping basket sizes (for a given order).

The authors’ analysis of community data reveals that social connections – the number and importance of friend ties – and interactions – personal page displays – are positively linked to social dollars. This suggests that both the number of community ties and the extent to which a community member is connected to more important (well-connected) friend ties in the network are positively related to increased expenditures at the firm.

The authors illustrate how firms can exploit natural experiments, via the use of simple analysis and the easy availability of internal firm data, to estimate the economic value of increased customer engagement facilitated by online communities. Managers can use the authors’ approach to assess the economic returns of their social media strategies.

Puneet Manchanda is Isadore and Leon Winkelman Professor and Professor of Marketing and Grant Packard and Adithya Pattabhiramaiah are doctoral candidates, all at the Ross School of Business at the University of Michigan.

Acknowledgments
The authors would like to thank Utpal Dholakia, Pete Fader, Ron Goetler, Anja Lambrecht, S. Sriram, Melanie Zaglia, and seminar participants at the University of California, Davis, University of North Carolina, University of Rochester, participants at the 2011 ART Forum, 2010 and 2009 Marketing Science conferences, the 2010 ISMS Practice Conference and the 2010 Marketing Dynamics Conference for valuable feedback and an anonymous firm for providing the data.

Related links

Social Dollars: The Economic Benefits of Online Communities (2012) [Article]

Building the B[r]and: Understanding How Social Media Drives Consumer Engagement and Sales
Yogesh V. Joshi , Liye Ma, William M. Rand, and Louiqa Raschid (2013) [Report]

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