Study: Branded communities boost sales by 20%

The University of Michigan finds 'social dollars' really exist -- but they're rarely spent by brands' biggest customers

Study: Branded communities boost sales by 20%

Building a strong online community may win points with the CMO, but does it translate to higher sales for the brand? The answer is yes, a new study says — by as much as 20%.

But there is a catch: Joining a brand’s community is least likely to increase purchases among brands’ biggest-spending groups, suggesting a limit to these communities’ effectiveness. In the study, growth occurred mostly among the bottom 25% of existing customers. 

The study, published in the journal Marketing Science, is among the first to link branded online communities with higher sales. 

 "When customers join an online community, does it really lead them to spend more with the particular brand?" asked Puneet Manchanda, a professor of marketing at the University of Michigan and co-author of the study. "There’s very little evidence actually documenting the existence of these ‘social dollars.’  We think we are the first to provide some fairly robust results that these social dollars do exist."

To conduct the study, the researchers observed the behavior of consumers for 15 months before and after they joined the online community of an American retailer of books, music and movies (the researchers aren’t saying which one). They then compared that with the behavior of a group of the brand’s customers who didn’t join. The communities allowed users to engage with one another over shared product interests, as well as create "friend" connections and send messages to one another.

What they found was that customers who joined the community spent on average 20% more than those who did not. The key to the additional spending was not necessarily exposure to the brand, said the researchers, but the ability to engage with others over their affection for it.

"The general belief is that these online customer communities are there to build loyalty and engagement, but the missing piece has been to translate this loyalty and engagement to revenues," said Manchanda.  "What we were able to show was that the more engaged the customer is, the more the customer participates in the community, the higher the returns."

Of course, customers who care enough to join a brand’s community can be expected to spend more than those who don’t. But the authors say they controlled for that, adjusting their findings based on consumer activity before and after they joined. In fact, they found that the most loyal customers — those in the top-spending 25% — increased their spending the least once they became members of the community, whereas the bottom 25% increased their spending the most.

"It says that there’s a ceiling," said Grant Packard, a professor of marketing at Wilfrid Laurier University and co-author of the study. "People who are loyal can only grow so much."

Establishing a brand-specific community costs money, particularly compared with hosting a page on an existing social network, such as Facebook. But the retailer in the study recouped its investment within four months of launching its community, the researchers said.

"There is an economic benefit to hosting your own communities, there’s also the benefit of information that you collect by watching the customer and what they do. So overall we think it’s a win-win for customers and for firms to host their own online communities."