Turning Value on Its Head: The Active, Networked Individuals Are the Ones to Watch


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Business is a lot like the natural sciences. Not in its use of the scientific method—that would be too much to hope for—but, rather, in how business models continue largely unchanged for a long time until a revolutionary “paradigm shift” occurs. Then, suddenly, business models are all changed. We are currently in the middle of such a paradigm shift, as we recognize that customers are not individuals making decisions in isolation from those around them but, instead, members of multiple social networks that individually and collectively influence their decisions.

One of the more significant implications of this paradigm shift is how we value customers and their social networks. By this, I don’t mean how we value online social networks like MySpace, Facebook or LinkedIn but, rather, how we value the social influence of our customers on each other, of communities of interest they are members of and the markets they participate in. Fortunately, although this is still largely unchartered territory, we are starting to understand how to value customer social networks.

Despite not having any direct value, the additional customer’s indirect value … was $550, versus $500 for the direct value of an additional buyer.

The simplest level that customer social networks work on is the value of individual social customers. Traditional customer lifetime value models look at the customer only as a solitary individual. But as countless studies have shown, the most often used and most influential sources of information used by customers are the opinions of other customers. And just as some customers are more valuable as solitary individuals than others, some customers are more valuable as referral sources than others. A recent study by Kumar, et. al. (How Valuable Is Word of Mouth?) looked at the referral value of financial services and mobile telecoms customers. Perhaps surprisingly, the researchers found that the customers with the highest individual value didn’t necessarily have the highest referral value. Indeed, they found that customers could have up to four times the referral value as their individual value. The message is loud and clear: Customer lifetime value must incorporate referral value as well as individual value if it is to be useful for making customer investment decisions.


The next level that customer social networks work on is the value of the communities that customers are members of. Although not so much work has been done on customer communities themselves, studies by Cross, et. Al. (The Ties That Bind: Driving Financial Return Through Networks) on communities within organizations show the potential value of collaborative customer communities. One of the insights from Cross’ work is learning from and replicating the networks of high-performing individuals and teams. The top 5 percent of fundraisers in one not-for profit accounted for 25 percent of all the connections in the fundraising community and raised 23 percent of all funds. The connections they had with donors were broader, deeper and of higher quality those of their less-successful peers and took longer to develop. But they were also much more likely to result in large donations of $50,000 or more (in U.S. dollars). The same high quality connections were also to be found in their connections within the fundraising community. The message here is equally clear: Not all customers in customer communities are as influential as each other, but adhering to tried-and-tested community-building rules can improve everyone’s collaborative skills and, thus, network value.

The final level that customer social networks work on is the value of markets in which customers participate. This is relatively straightforward for the common kind of one-sided market we are used to; the value of customers is their individual lifetime value plus their referral value. But what about multisided markets like eBay, Amazon and coalition loyalty programs like Loyalty Partner’s PAYBACK, which provide a platform for thousands of buyers to come together to trade with millions of customers? A recent study by Gupta, et. al.
(The Value of a Free Customer) looked at the value of additional customers at an auction house where, typically, only the seller pays a fee. The buyer pays nothing and, thus, has no direct value to the auction house. The buyer’s value comes in attracting other buyers in large volumes. Despite not having any direct value, the additional customer’s indirect value, Gupta found, was $550, versus $500 for the direct value of an additional buyer. This counter-intuitive result is very important for the future of customer social networks. As they morph from being single-sided markets controlled entirely by the network provider to multisided markets enabled by the provider—but offering a plethora of products and services from third-parties to customers—customer valuation models will need to change to keep pace with the changing business models.

The world we live in has always been characterized by social networks. In the past, they were local, physical ones driven by face-to-face contact. But today, these networks are enhanced by global, virtual ones driven by online social networks. In the future, they will be driven by mobile social networks on your already-capable mobile telephone. This brave new world requires new thinking about the value of customers and the social networks they are members of. Are you ready for the challenge?

Graham Hill (Dr G)
Business Troubleshooter | Questioning | Thoughtful | Industrious | Opinions my own | Connect with me on LinkedIn https://www.linkedin.com/in/grahamhill/


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