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The Dollar Payoff from Social Media

Consumers who engage with company sites visit stores more often and spend more.

Title: The Effect of Customers’ Social Media Participation on Customer Visit Frequency and Profitability: An Empirical Investigation  (Fee or subscription required)

Authors: Rishika Rishika (Texas A&M University), Ashish Kumar (Aalto University), Ramkumar Janakiraman (Texas A&M University), and Ram Bezawada (State University of New York, Buffalo)

Publisher: Information Systems Research; vol. 24, no. 1

Date Published: March 2013

Customers who engage with a company’s social media efforts spend more on its products, according to this paper, which confirms that online platforms not only strengthen the bond between consumers and firms, but can also help boost the bottom line. And the payoff is significant: In this study, customers who interacted with a wine retailer’s social media network visited stores 5.2 percent more often and contributed 5.6 percent more revenue than customers who had a similar shopping history at that retailer but no online involvement.

Recent studies suggest that 75 percent of Internet users engage with social media, and companies are increasingly developing a presence on Facebook, Twitter, and similar platforms in an effort to broaden and improve their interactions with customers. Indeed, studies have shown that social technology allows firms to have dialogues with customers that go far beyond traditional types of promotion or advertising.

For companies, however, the right strategies have proven elusive. On the one hand, an article in 2011 reported that 69 percent of small business owners used social media in some way and about 78 percent planned to increase their social media budget. On the other hand, an IBM report from the same year declared that “social media is no longer the adorable baby everyone wants to hold, but the angst-filled adolescent—still immature yet no longer cute—who inspires mixed feelings.”

The question is whether firms can realize a return on their investment in social media. As the authors of this paper write, no study had produced data relating the participation of individual consumers in a firm-hosted site to their purchasing behavior. This study aimed to do just that by examining the impact of social media involvement on the frequency of a customer’s store visits and amount spent.

The authors obtained data from a large specialty firm in the northeastern U.S. that sold wine at its retail locations. In August 2009, the firm created its first webpage on a major social networking platform; it has since invested in the project by regularly updating the site and inviting customers to join and comment. The content is a mix of promotional material, information about community and store events, and advice on wine selection.

The authors began by surveying a large segment of the firm’s customer base in early 2011 to identify who was participating in the firm’s social media initiative—by “following” or becoming a “fan” of the firm, for example. They also gathered data on customers’ demographics and spending habits, including what they bought from other wine shops. Working with the firm, which was tracking its participants on the site, the authors obtained monthly data for a period of more than three years on the social media use and purchases of 394 customers.

Because customers who engage with a firm through social media may be predisposed to buy its products, the authors’ challenge was to create a control group of customers who were very similar to the participants but did not have online interactions. Accordingly, the authors used 82 weeks of data on spending habits and demographics for both types of customers prior to the launch of the social media site to construct a control sample, in line with widely used matching methods. (To be sure, wine is a product that attracts passionate followers who might be expected to engage more actively in communities, online or off. But in using a control group that had similar buying histories yet chose not to be involved in the retailer’s social media efforts, the researchers essentially removed passion as a variable from the equation, making wine a viable surrogate for other products in this type of study. And because wine is something people are indeed particular about, is purchased regularly throughout the year, and comes with a range of prices and options, its sales are easier to study in this context, the authors say, than a car purchase, for example, or generic grocery shopping.)

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