This is a short review of Net Gain : Expanding Markets Through Virtual Communities by J. Hagel III and A.G. Armstrong (Harvard Business School Press, 1997, 239 pages). The authors are at McKinsey & Company, where this material was developed and is being applied in the Multimedia Practice (which Hagel leads) and various consulting engagements in the virtual community/e-commerce arena. This book can be ordered from Amazon.Com at 30% off list: http://www.amazon.com/exec/obidos/ISBN=0875847595/ . This URL also contains several reviews.
What follows is a very brief summary of the book’s contents salted with some of my opinions usually but not always in square brackets. Page numbers refer to the book. My section headings are: Importance of Virtual Communities, 5 Defining Properties of a Virtual Community, Types of Virtual Communities, Value of Virtual Communities to Members, Building a Successful Virtual Community, and The Future.
Note: I read this book because the Director of
the Office of Publications at Association
for Computing Machinery told the INFORMS
Board at its August 1997 meeting that this book is their new bible and
that they are moving strongly to recast ACM as a collection of virtual
communities of this type corresponding roughly to their journals and meetings.
When I first read the book it was with an eye to my responsibilities as
an officer of INFORMS, but subsequently I have realized its great relevance
to electronic commerce. I recommend this book with enthusiasm --
and also with some reservations -- to ambitious people in charge of almost
any Web site, and to those with a serious interest in communities with
a presence on the Net, whether for profit or otherwise.
Importance of Virtual Communities
Virtual communities (VCs) as defined in this book are a newly emerging form of "life" on the Net that the book claims will be hugely influential within a few years. It predicts that VCs will result in "an unprecedented shift in power from vendors of goods and services to the customers who buy them" and that the economic returns will be extremely attractive (p. 2). [These claims, or at least their timing, strain credibility given the progress of electronic commerce to date. This book is, after all, from a large consulting firm with much to gain from promulgating such a view. Yet a shift in this direction clearly is occurring.]
These high returns will be the result of an economic paradigm called "increasing returns" first exemplified by Microsoft. Details are given in Chapter 3, and dramatic sample results from "an extensive computer model developed for use with clients" are given. [Unfortunately, little is said about the internal logic of this model.] See also W. B. Arthur’s "Increasing Returns and the New World of Business," HBR, July-August 1996.
5 Defining Properties of a Virtual Community
The particular business model developed in this book has 5 defining properties (p. 8 ff.):
One must distinguish between VCs for consumers and business-to-business VCs (pp. 118-123).
Consumer-based VCs tend to define themselves in one of three ways: as geographic (catering to a particular physical location or region), as demographic (catering to a particular gender or life stage or ethnic origin), or as topical (catering to a particular topic of interest).
Business-to-business VCs tend to define themselves vertically by industry (this includes professional "industries", as exemplified by emerging VCs for lawyers and physicians), by management function, by geographical region served, or by business category (e.g., small businesses).
Value of Virtual Communities to Members
The book claims that, in this context, people have "four basic needs: interest, relationship, fantasy, and transaction" (p. 18). [This list seems arbitrary.]
Interests can be personal or professional, but obviously we are concerned mainly with professional interests here. Different VCs will cater to different interests, and rationalizing the VC membership market is the reason for defining property 1 above.
People seek meaningful relationships with others for many reasons, including the sharing of mutual interests and stage/position in life. Defining property 3, and also 2 to some extent, cater to this need.
[The need for fantasy is not very pertinent in our context, although educational or business games and simulations can be appealing for this reason. It might be more useful to replace "fantasy" by "entertainment".]
Transaction refers not only to purchases, but also to trading information. All of the defining properties cater to this need. Notice that, with a sufficient level of information exchange among customers and potential customers, substandard and overpriced products and services will be exposed for what they are. A VC should make almost all of its revenue from advertising and transaction fees (p. 47); subscription fees, member fees, and usage fees should be avoided because they will slow the acquisition of members. [Scholarly and professional associations historically have collected their member fees separately from their VCs, but this might change in the future.] In the longer term, a very successful VC may acquire sufficient scale to negotiate price breaks on behalf of its members and may even become an instrument of disintermediation -- capturing for itself some of the economic value previously captured by the intermediaries it displaces (pp. 68-69). [For a professional society VC, such a scale might be on the order of 5-10 thousand members.]
Building a Successful Virtual Community
The book argues (p. 76 ff.) that early entry – preferably now -- is very important because what is now a low barrier to business entry is "almost certain" to become "insurmountable barriers to entry over the next five years" owing to "unique assets accumulated by early entrants, switching barriers for members, factor cost increases, and scale and scope economies." [Such barriers may not be so high in the non-profit world, but the fairly recent appearance of the elaborate ISWorld Net site (see http://www.isworld.org/isworld.html ) shows that competition could indeed become difficult for late entrants.]
Don’t think of a VC as a monolith, but rather as a collection (or potential collection) of subcommunities and subsubcommunities to any depth, each of which enhances intimacy and focal specificity for its members without falling below a critical mass of active members. The neologism "fractal depth" is used for this idea (p. 117). A subcommunity might cater to some aspect of the VC’s distinctive focus, or it might retain the original focus but be segmented either geographically or demographically. The more subcommunities the better, subject of course to maintaining the critical mass of each, because this will tend to increase participation rates. For some VCs, the book makes the [startling and perhaps dubious] claim that an adroit use of subcommunities will enable membership to grow into the millions.
Building a successful VC requires special skills of its developers, especially the ability to attract members, to serve them well enough to retain them for a reasonable period, and to encourage them to make transactions (p. 129). Chapter 6 discusses in some detail a 3-stage view of how to build a new VC. The first stage, "Generating Traffic", is about attracting visitors and generating awareness among potential members. The second stage, "Concentrating Traffic", is about engaging the interest of members, building an understanding of their needs and turning this understanding into better features and services, and extracting value through advertising and transactions driven by judiciously exploited profiles of member on-line activities. The third stage, "Locking in Traffic", is about fostering personal relationships among members (especially by expertly hosting bulletin board and chat areas), accumulating member-generated content and organizing it for easy retrieval, improving VC functionality, and tailoring VC services for individual members based on records of their past behavior. The authors present numerous details and ideas on each of the stages [although one receives the impression that they do not have much personal experience building VCs and hence underestimate the difficulties].
Once a VC becomes viable and acquires some momentum, the challenge becomes to manage its growth with a "gardener’s touch": seed it, feed it, and weed it. This leads to the "organic" management model of Chapter 7. [As an aside, the general philosophy of this model is popular among senior administrators in many research universities.] See the book for numerous details and ideas, but I will briefly sketch the surprisingly elaborate suggested organizational structure for an established VC. Here is an indented list rendering of the diagram on p. 158:
Chapter 8 discusses technological choices [but not in as much specific detail as one would like]. I’ll offer just this one important quote (p. 177) on the topic of "metering and data collection software" [a weak point of many Web sites]: "… community organizers must be able to identify which members access their community, what content areas they visit, how much time they spend there, and what transactions they conduct. Technologies that supply this information will be vital in billing members, in attracting advertisers eager to know who the audience is and what members do while visiting the community, and in attracting vendors eager to target members with the right kind of transaction profile."
Chapter 9 argues that VCs "will irrevocably alter the way large companies market and sell to customers in their core businesses" and that "These changes will demand new ways of thinking about and approaching the marketing and sales functions". [Since marketing is one of the management sciences, OR/MS should have something to contribute to the marketing aspects of VCs.] This chapter offers brief comments on a few other management functions as well.
An appendix gives a quite specific agenda for senior managers interested in launching a virtual community.
The Future
Chapter 4 sketches an evolutionary path of four main stages for virtual communities as a new business model: so called virtual villages (VCs are highly fragmented but profitable), concentrated constellations (smaller VCs tend to cluster in groups around larger "core" VCs in pursuit of still greater increasing returns effects), cosmic coalitions (complementary core VCs tend to form alliances), and integrated "infomediaries" that act still more strongly as agents for members.
These developments are sufficiently speculative that one probably need not be very concerned with them for the next couple of years. I close with a quote from the introduction to the last chapter: