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The Dollar Payoff from Social Media

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

(originally published by Booz & Company)

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.)

The analysis showed that there was no significant difference in the frequency of store visits by the two types of wine customers before the retailer started its site, but the picture changed after the launch. Customers who engaged with the site began to shop at the firm’s stores with greater frequency, and when they did shop, they spent more.

These effects were amplified for certain types of customers: Those who posted more messages tended to buy in larger volumes, preferred special or premium products, and were more loyal to the company. On the other hand, the effects of social media were muted on customers who were more likely to buy products when they were on sale, suggesting that these shoppers might be using social media strictly as a way to find deals and that they were less committed to any one firm. The shopping and purchasing behavior of customers with a narrower focus—in this case, those who typically preferred a particular variety of wine (red, white, or rosé)—was also less affected by their social media use.

The authors point out several implications for managers who may be under pressure, especially in times of economic uncertainty, to defend their promotional budget and prove that their social media spending makes sense. The first recommendation is to nurture customer relationships through social media, to help ensure that the online bond actually translates to a more robust bottom line. In other words, it’s not enough to merely create a Facebook page. Companies should make sure the interface is user-friendly, offer regular updates, send personal messages to specific customers, and encourage users to provide feedback.

But not all customers are the same, the authors warn; nor do they have similar responses to social media networking. The study’s results show the importance of segmenting and targeting customers on the basis of their shopping background, demographics, and history with the firm. “It is vital that managers integrate their knowledge about customers from both offline transactions and online social media sources in order to better serve them,” the authors write.

Finally, companies should create product-specific social media platforms. The findings imply that managers could increase the response to social media efforts by tailoring them to specialized discussion forums or online communities—for example, customers looking to buy premium or unique items.

Bottom Line:
Customers who interact with a firm’s social media site visit its stores more often and spend more when they do, on average, than those with a similar shopping profile but no online relationship with the company. The evidence supports the business value of investing in social media, so long as companies tailor their efforts to specific types of customers and nurture their online presence by providing regular updates and messages.

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