Generating Revenue through Social Networks: Part I

submitted by Ken Allard

Many organizations are struggling to understand why they should care about online social networks. They narrowly define them as blogs and message boards and dismiss both their relevance and their potential to generate new revenue. I believe that by failing to directly develop initiatives related to community many companies are missing opportunities to take advantage of the inherent network benefits that online services can offer.

Here are five qualifying questions that companies should ask themselves to see if they have an opportunity to generate revenue by fostering the growth of an online social network:

  1. Do you act as a broker of goods or services?

  2. Do you provide content or advice to a significant percentage of a specific industry or consumer segment?

  3. Are you facing new competitors who generate revenue by aggregating audience around your content or by providing meta-content?

  4. Do you have data or knowledge within your organization that is obscure to your clients?

  5. Do you serve an audience that is highly fragmented?

Any company that answers yes to any of these questions may have an opportunity grow their revenue. In this blog series, I will explore each of these questions and provide case study examples of organizations that have the potential to launch profitable social networking initiatives or those that already have them in place.

Let’s start with the first two questions:

  1. Do you act as a broker of goods or services?

  2. Do you provide content or advice to a significant percentage of a specific industry or consumer segment?

Companies that can answer yes to either or both of these questions have perhaps the richest opportunity to profit from social networking. Fortunately, a wide variety of organizations fit into this category. Let’s look at four different examples:

Wine Spectator – Wine spectator has an offline paid subscriber magazine that includes access to a Website. The magazine’s content includes stories about wine trends, wine auctions, experiences, travel, food, and other lifestyle content. Perhaps the most valuable content that the magazine provides is its expert ratings and tasting notes about wine. Wine Spectator’s wine experts are so respected and revered that their ratings immediately affect the price and the availability of wine.

While the offline magazine is interesting and a useful wine guide, the Web site has transformed the value of the publication. First it is a database of all the tasting notes and ratings for every wine that the magazine has evaluated. Hence, anyone looking for a review of a specific wine before making a purchase, has immediate access to an expert rating that provides valuable information and pricing guidance. If you haven’t yet figured this out, I am a huge wine enthusiast). The Web site takes this benefit a huge step forward, however, by enhancing the recommendations of their experts with the opinions of the entire Wine Spectator community. The Web site also allows each member to build an online inventory of their own wine collection with their own tasting notes and ratings which they can share with all other members.

Wine Spectator Personal Wine Inventory

Member Wine Tasting Notes

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Thus, the publication has greatly expanded the content available to all members and has significantly increased the utility of the Web site. Members share their own entertaining stories about their wine experiences with each bottle, what food they served with it, and their own perspectives about the quality of the wine. This social feature increases the revenue of the site by increasing page impressions (i.e. advertising revenue), engagement, and subscription stickiness. While I do not have access to any proprietary information, I am certain that the renewal rate for members who have entered their entire wine collection online is significantly higher than that of those who are passive readers.

Consumer Reports – Consumer Reports is an enormously respected magazine and Web site, published by the non-profit organization Consumers Union. This organization has been helping consumers make smarter purchases for decades and provides a valuable public protection and public advocacy service. Consumer Reports ratings and rankings of products are distinguished from any other source in that they are independent, objective, and scientific. The organization tests each product with sound, consistent methodologies. (The facilities are amazing. If you are ever in Yonkers, contact the organization to see if you can get a tour of the testing facilities. It is a fascinating experience).

The organization is serious about its mission and the scientific nature of its ratings. Thus, it has chosen to limit and often exclude the product opinions of its readers. Subscribers to the Web site may go to separate forums to discuss product quality, but unlike Wine Spectator or other sites like Amazon.com, member opinions and reviews are not integrated into specific product ratings.

$$$

I believe that the organization is missing an opportunity to increase engagement, page views, and subscription renewals, by limiting the ability of consumers to learn from each other and to participate in the process of evaluating products. On the Web, people want to participate. They want sites to offer utility, convenience, and an integrated experience. Sometimes brands and policies need to evolve to remain relevant.

Reed Construction – Reed Construction is a business to business service that offers content to the entire construction industry, including contractors, architects, and product companies. Contractors and other suppliers seeking work or new sales can gain access to a database of new projects, building plans, and building specifications. This is a high value, premium content service, with paid subscriptions being the primary source of revenue. Reed, however, is failing to address a large part of the potential subscriber market.

$$$

Reed is a kind of non-traditional broker of goods and services. While not directly enabling a transaction between two parties, their information is directly facilitating a transaction. Currently, Reed only provides content to one half of the purchasing dynamic, the suppliers. With the power of a proprietary social network, Reed could also provide information and advice to the businesses and developers who are seeking products and services. By developing some simple Web applications, data capture standards, and analytical frameworks, Reed could rate, rank, and categorize all suppliers of goods and services, relying largely on outcomes data gathered from the developers. Like Amazon and E-bay do with their networks of consumers and independent sellers, Reed has the opportunity to use the social network of professional developers who may be geographically dispersed but who share a common set of experiences with products and service providers to gather outcomes and ratings data that can be valuable in making future purchasing decisions. By failing to monetize their true network, Reed is leaving at least half of the potential market unserved.

Hamptons Real Estate Online – Hamptons Real Estate Online is the leading source of listings information for anyone looking to buy or rent a house on the east end of Long Island. It is not all that different from any other real estate site except that it is not specific to any specific broker and it offers and extremely easy to use interface and set of search and browse utilities. It is also a little different in that it serves a very specific regional community and its database of rentals and properties for sale is quite comprehensive. In effect, it is the one place to go to for this information. The site makes money by collecting listing fees. It is essentially a new form of a newspaper classifieds.

$$$

Hamptons Real Estate Online is missing a revenue opportunity by failing to fully recognize that it is serving a distinct community. The collection of towns and villages that comprise the Hamptons is essentially a large, linked resort community. People buy and sell houses repeatedly. They often rent a different property every year. Real Estate is a hobby of sorts and the mass of people that returns to the Hamptons each year needs services that are specific to their property rentals or purchases. Yet, the Web site (unlike others that cater to a people seeking information about rentals, e.g. http://www.vacationrentals.com) does not capture any feedback from previous renters about the quality of the property. It also does not present any advertising or classified information about the services that renters or new home buyers often need such as cleaning, landscaping, pool service, or contractors. Essentially, the site is failing to monetize its community. The site could also greatly add utility to its site by presenting additional information about the homes that are listed (e.g. previous sale price and ownership history all of which is publicly available but fragmented) and allowing users to register and maintain information.

Three Basic Social Networking Strategies

There are three basic approaches that these companies have pursued or should pursue to generate new revenue.

  1. Add value to existing content by gaining audience feedback or additional user-generated content. (e.g. Wine Spectator)
  2. Capture data about how your community interacts with its suppliers or service providers and about the transaction itself to inform or advise future product development, marketing, or purchasing decisions. (Hamptons Real Estate Online, Reed Construction )
  3. Add content to your offering to extend your services beyond your core service. (Consumer Reports)

In the next post in this series I will address opportunities related to question number three:

3.  Are you facing new competitors who generate revenue by aggregating audience around your content or by providing meta-content?

7 thoughts on “Generating Revenue through Social Networks: Part I

  1. Uh, no one is pays attention to offers and advertising in social media. Friendster, EZBoards, MySpace, Facebook….

    So I would focus on other efforts.

  2. I agree that generic run of site ads on social networks are not really all that useful. However, all of the examples that I provided are quite different from that. In some cases (e.g. Wine Spectator, Consumer Reports), I am really focused on how companies can use social networks to add value to their existing content and hence amplify their existing revenue models, subscriptions and advertising to a well-qualified self-selecting audience. In the Reed example, I am trying to illustrate how a social network (along with an expert analytical framework) can create an entirely new premium subscription product for a new market. The last example, hreo.com, is the only one that I am really suggesting that advertising is the primary opportunity, but in that case, I still hold that the self-selecting audience of home buyers and annual renters would be a quite lucrative community to advertise to.

    What do you think?

  3. Ken,

    In reference to the part of your blog referring to REED Construction, I could not agree with you more. My colleagues and I work at Western Water Constructors, a $60,000,000 a year public works general engineering contractor. We use REED for most of our project leads. We have also built a professional networking website for the construction industry that we feel would partner well with a company like REED or other on-line project, plan and specification providers. Check out our site, Construction Exchange at http://www.constructionexchange.com Let me know what you think.

  4. Ken,

    We are currently trying to fill the gap that Reed Construction seems to be looking over as you have mentioned in your post. We are a General Engineering Contractor out of Santa Rosa, CA and we have developed Construction Exchange (www.constructionexchange.com).

    We believe as you do that social networking is very important to any industry. What we are up against is getting new members to sign up. Reed Construction has thousands of subscribers and a social networking site for them would be highly valuable. However, they may be too big of an organization to make that next step into the social networking arena, too much bureaucracy perhaps. I’ve heard they have tried in the past but it didn’t work out.

    Your post was very informative. I look forward to your next post.

  5. Eli,

    Thanks a lot for your post. I am glad to hear that you are pursuing the opportunity to provide services to the owners of construction projects. It is one of my favorite business ideas. I have a question for you. How have you gotten the project owners to join the network and provide feedback? What kind of incentives are you providing them?

    Thanks,
    Ken

  6. Ken,

    So far, members who have joined Construction Exchange have given us great feedback. They say that the site is very easy to navigate and is less intimidating than sites like LinkedIn for the less computer savvy user. We are finding that several of our members have never used social networking sites and they are very excited about networking with others in the construction industry.

    In order to get members signed up, we first sent out emails to all of our contacts in the construction industry. We are a small-medium sized general contracting firm in northern California and we have several thousand contacts in California alone. It’s somewhat of a grassroots approach. We’ve also joined sites like LinkedIn and Twitter to find users who might be interested in a more concentrated networking site. We are also pursuing college age members. Recently we presented the site to five different classes at the College of Architecture at Cal Poly, San Luis Obispo, California. Several of the creators, myself included, are Cal Poly alumni.

    The site is completely free which is helping attract members. The incentive we are providing is a free site for anyone in the construction industry to share information about themselves and the companies they work for. We Beta launched the site in August 2008 and we’ve seen a lot of interest. We’re hoping the site gains momentum over the next several months as the stimulus package kicks in.

    Regards,

    Eli

  7. Pingback: Hospital and Health Provider Web 2.0 Trends and Opportunities « Edgewater Technology Weblog

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