Social networking sites want to monetise their offerings, but can it be done without alienating users, asks Trevor Clawson.
What a difference a couple of years makes. Back in 2005, when Rupert Murdoch's News Corporation announced that it was to pay a hefty $580 million for MySpace, social networking was still very much a cult phenomenon.
Yes, millions of teenagers around the world were busily creating profiles, blogging and managing friendship groups, but as far as the wider world was concerned, social networks were, at best, a small and peripheral blip on the internet radar screen.
Since then, social networks have roared into the mainstream. According to research carried out by media agency Universal McCann, around 194 million people worldwide are actively using sites such as MySpace, Bebo and Facebook, with the estimated user base in the UK alone coming in at 4.48 million.
And while the audience remains heavily weighted towards members in their teens and early twenties, the demographic is, slowly but surely, opening up. "It's still true that the majority of users are young," says Tom Smith, a researcher at Universal McCann, "but we are seeing a gradual change - social networks are attracting an older membership."
But, from a sales and marketing perspective, social networks offer a lot more than just a sizeable well of internet-focused eyeballs. Once they've established their online friendship groups, social networkers tend to stay fairly loyal to their chosen sites, returning regularly to manage their relationships.
What's more, as Jay Stevens, European vice-president of operations at MySpace, points out, the very nature of social networking means that network owners gather a huge amount of information on their members - information that can be used to segment the audience and target commercial messages. "We know their age, their gender, their location and their interests," he says. "That means that we can target sections of the audience very accurately."
This has been good news for advertisers but over the past few months we've seen some of the leading social network taking radical if tentative steps towards establishing themselves as e-commerce hubs in their own right. For instance, Bebo has partnered with Apple in a deal that sees iTunes downloads being sold through a third-party site for the first time, while MySpace members can now sell their own music online through software provided by US start-up company Snocap.
The iTunes and Snocap deals are significant because both are examples of so-called decentralised commerce. In the normal scheme of things, the consumer who clicks on a banner advertising iTunes, Amazon or eBay is directed to the e-tailer's own site. Under the decentralised model, the transaction takes place wherever the consumer happens to be at the time. In the case of a social network, a member might be browsing through a musician's pages. If he or she is minded to buy a particular track, the purchase can be made there and then, rather than by clicking through to a third party.
According to Grant Keller, EMEA director of online marketing company Acceleration, this model of selling has the potential to drive more sales from social networking hubs than the traditional banner-through-to-web-site model.
Acceleration's own figures suggest that click-through rates from social networking sites stand at around 0.03 to 0.04 per cent, much lower than the industry average, indicating that members are less than enthusiastic about setting aside what they're doing in order to go somewhere else to make a purchase. In theory at least, if you offer social networkers the opportunity to transact at a time when they want to buy and without the need to go elsewhere, the chances of a sale are higher.
"Push doesn't really work on social networks," says Keller. "It's a bit like a salesman knocking on your door and asking you to come outside and look at products that you don't want to buy. To sell successfully on a social network site, you need to do something different. Rather than the salesman knocking in the door, you need to be the guy who's there with a glass of water when the customer emerges from the desert."
In other words, you need to be there with a relevant product when the customer needs it most.
Instant, relevant transactions can be facilitated either through widgets (small software modules) or larger applications embedded strategically anywhere on a web site. For social network operators, these tools also provide a means to tailor e-commerce offerings to very specific situations, such as a music fan wanting to buy a particular artist's tracks without having to search through a catalogue to find them.
So, in theory at least, social networks could open the door to an era of much more personalised, situation-driven e-commerce. However, we probably shouldn't expect a gold rush. Social network users are logging on to socialise rather than shop, a fact that Mark Charkin, head of information and sales at Bebo, readily acknowledges. He stresses that his company is approaching e-commerce with a certain amount of circumspection. "The key is to introduce e-commerce in a responsible way that enhances the experience of our members," he says.
But what does that mean in practice? Well, Charkin cites the introduction of iTunes to Bebo as an example of an e-commerce partnership that makes sense commercially while dovetailing neatly with the expectations of the network's registered users. Under the terms of the deal, Bebo members can now buy music direct from the profile pages of artists who use the site, and members are also offered one free single a week. Given the importance of music on social networks, Charkin sees the arrival of music retail as a natural development. "People hear about music and talk about music on Bebo," he says. "Now they can talk about music and then make a purchase."
As Charkin sees it, the same model could be applied to books or movies. However, he accepts that when you look beyond that relatively narrow universe of opportunity, things begin to get trickier. Social network members tend to see their chosen sites as personal space and operators run the risk of alienating users if they introduce storefronts that are perceived as intrusive. "We will look at any potential partners very carefully," he says. "For instance, it probably wouldn't be appropriate for our audience if we offered a financial services sales widget."
At first glance, that seems to place a pretty severe limitation on the e-commerce potential of social network sites. However, Charkin doesn't entirely rule out partnerships in market segments such as financial services, provided the marketers in question have something to offer members. "We are talking to one company about providing a personal finance management tool that would be really useful to our members," he adds.
Charkin stresses that this would not be primarily a sales lever. Instead, it would offer members a set of tools to enable them to keep on top of their finances, while at the same time providing the financial services company with a means to build a long-term relationship. Charkin says this approach to social commerce - engaging members with useful applications - is likely to be a key strategy when it comes to realising the full commercial potential of social networking sites. "You need to provide something that adds value to what users are actually doing," he says.
Stevens agrees. "Over the past few years, we have learned a lot about what does and doesn't work," he says. "What you have to do is give the community something of interest - you have to give people something that they like."
Stevens says there are plenty of examples of how this can be achieved. While e-commerce in the purest sense of the word is still in its infancy on networking sites, brands have been quick to build communities and in some cases provide value-added services to widen and deepen their relationship with consumers. A case in point is Intel.
On the face of it, the US microprocessor manufacturer doesn't appear to be a natural candidate for members of social networks to unite around. However, working in partnership with Universal McCann, the company has created a facility that allows unsigned bands to upload tracks that are then rated by the community. It has proved popular and, as Stevens points out, the exercise has done no harm at all to Intel's reputation. "Intel now has 3,000 friends on MySpace," he says. It's this kind of application that could drive sales in the future.
Interest in the transactional potential of social networking is not confined to the consumer mainstream. Although their public profiles are nowhere close to MySpace proportions, business-focused networking sites such as Linkedin and Viadeo can also count their memberships in millions.
These services attract those who want to make and manage business contacts, recruit key staff and glean advice rather than hang out with friends. Arguably, however, they also have the potential to become thriving e-commerce centres, not least because the businessmen and professionals who use them are likely (at one time or another) to be in the market for business services.
As with the consumer networks, the emphasis is still on raising cash through advertising, but Patrick Crane, vice-president for sales and marketing at Linkedin, sees his company's site as fertile ground for the cultivation of a range of transactional services. "What we are already seeing is communities forming around brands," he says. "For instance, when Apple launched the iPhone, there was a lot of discussion about that."
Furthermore, Crane says there are opportunities for companies that are specifically targeting the business market to establish a presence that goes deeper than a few strategically placed banner ads. For instance, mobile-email provider BlackBerry - a long-time advertiser - now sponsors a section of the site where members pose questions and solicit answers from other members.
The importance of being useful
However, Crane stresses that Linkedin is there for its members. If e-commerce within the network is to be successful, then he believes partner companies need to provide applications and services that are useful to business professionals.
"Our aim is to enable people to find what they want," he says. "What we are working on now is the ability to allow retailers to build applications that will be in tune with what Linkedin is setting out to be achieve." Crane cites the theoretical possibility of a tool that would allow business travellers to research and schedule flight times. This would not only be a useful application in itself but potentially an e-commerce lever for the provider.
The social network concept has also attracted mobile operators who also see e-commerce as an important part of the mix. For instance, global mobile community MyGamma sells ringtones and music to members using its own currency - gamma dollars. However, as KF Lai, chief executive of parent company, Buzzcity, acknowledges, the sales focus is shifting to reflect the buying preferences of the audience. "Sales of music downloads and ringtones have been affected by the fact that members can obtain them free elsewhere," he says.
"However, people are buying items such as virtual clothes and virtual cars. These are items that give people status within the community." It's an example of how e-commerce in the social environment tends to be defined by the interests and requirement of the user group.
Latterly, retailers have also been putting their own spin on web 2.0, with Mothercare and Saga among those who are establishing social networks for their own customer base.
The upshot is that in the world of social networking, experiencing-enhancing applications and widgets are the new black. Earlier this year, Facebook announced that was to open its application programme interface (API) to outside developers, a move that effectively allows anyone to develop programmes that will run in the Facebook environment. It was indication of the importance that social network operators place on maintaining a competitive edge by encouraging the development of value-added services.
Whether or not all this preparatory activity will create a new model for decentralised e-commerce remains to be seen. Mark Beyer, sales and marketing director at hosting and e-commerce solutions provider Pipex, has his doubts. "I don't think social networks will become the new shopfronts," he says. "People will still go to sites such as Amazon when they want to make a purchase." However, Beyer does see an increasing role for widget-driven commerce. "People will upload their profiles into a widget as a means to search the web for the best deals," he says.
Others question whether social networking sites have the skill-sets to exploit the customer information they have. Philip Wilkinson founded price-comparison site Kelkoo and is chief executive of e-tail recommendation site Crowdstorm. He argues that just because social networks are having great success, it doesn't mean they have the ability to maximise the transactional potential of web 2.0. "The social sites have built up a lot of trust - but you need more than that. E-commerce works at a higher level. You need a lot of knowledge," he says.
Wilkinson is banking on the fact that a variation on the social networking theme can be a lubricant for online sales. Crowdstorm is the latest site to offer consumers a chance to come together to rate and recommend products. The soon-to-be-launched operation offers not only product reviews and assessments from journalists and experts, but also recommendations from ordinary users who post their opinions on a wide range of products. "Crowdstorm will not only tell you what the prices are, it will also tell you what the crowd is buying," he says.
The launch of Crowdstorm illustrates that just as social networks are considering ways to leverage e-commerce opportunities, e-tailers are cherry-picking elements of web 2.0 as a means to attract more customers to their sites. The strategies range from the relatively modest and long-established practice of enabling customer reviews, through to the kind of communities, blogs and discussion forums that we currently see on eBay. According to Beyer, there will be more to come. "Everyone is looking at this," he says. "But the really successful e-tailers such as Amazon haven't really got going yet.
As things stand, social commerce is a compelling idea that has yet to be fully exploited. If it is to take off, e-tailers and network operators will need to do more than simply duplicate existing e-commerce models. According to Keller, the key to getting it right is to adhere to the philosophy of web 2.0. "You have to be respectful of the fact that in the customer is in charge," he says.
TRENDS IN SOCIAL COMMERCE
Social networks are still largely funded by advertising but there is deepening interest in the potential of social commerce.
Much of this has been driven by widgets - software applications that can be embedded on web pages. These can be used to allow internet users to carry out transactions anywhere on the web rather than by clicking through to third-party sites.
So far the focus has been on music. MySpace members can sell their music from their own pages via widgets provided by Snocap, a venture from by Napster founder Sean Fanning. Snocap has also attracted the attention of music giant EMI, which recently announced its intention to sell its own artists' music through widgets.
Widgets and larger software applications are increasingly seen by network operators as a means of providing added-value services that are of interest to members, while also having the potential to facilitate e-commerce. Facebook has recently opened up its API programming environment to allow any third-party developer to create applications that could be used on the network.
The creation of communities around brands has enabled marketers to engage directly with consumers. These not only provide companies with feedback about their products, they also enable marketers to identify brand evangelists who will take the message to the wider community.
SOCIAL COMMERCE TIPS
- Be creative. Social networking is not just about managing friendships - it is also about creating content. Brands seeking to engage with social networkers should also be prepared to be create content that is genuinely interesting and/or useful. This may involve creating applications that will enhance the user's experience, such as Intel's music upload site for new bands.
- Be relevant. Social network members don't necessarily want to spend time browsing through a third-party e-commerce site. E-commerce on social network sites should be targeted at specific communities or situations.
- Think global/act local. Social networks provide global brands with an opportunity to reach a worldwide audience. However, messages can be targeted to national and regional audiences through the information the networks hold on their users.
- Interact with the audience. Social networking is all about interacting. The various communities that have been built around brands on the major sites have demonstrated the ability of social networks to widen and deepen the relationship with consumers.
However, the communication shouldn't be all one way. At the community level, not all comment will be positive, but rather than censoring the negative, brands and their evangelists should engage with and answer criticism.
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