How Do Virtual Communities Create a Value Exchange Proposition for e-businesses

With the emergence of Internet technology, many businesses are struggling to survive the new environment created. Gurton (2001, p14) states,

“All organisations want to effectively select, attract, retain and grow their customers, but the e-world requires a different degree of openness than traditional sales and business channels.”

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The Internet has become a vital component in the changing and evolving global environment. As the Internet has created the service revolution into the information service revolution, information has become the most valuable exchange between the business and the consumer (Rust and Lemon 2001). According to Davis et al. (1999), the key area of importance by marketing and IT researchers concerns how the Internet can be used to create marketing strategies that build relationships and strengthen customer motivation to electronic commerce service offerings. As technology continues to progress, advanced economies are realising the importance of service over goods (Rust and Lemon 2001).

The Internet has created many changes to the traditional communication and distribution channels. Through the virtual environment, different types of relationships are emerging, including customer-to-customer, as customers are demanding more control and empowerment from the Internet (Gurton 2001). This greater customer power is making e-service (electronic services offered by e-businesses) and customer self service (CSS) more valuable. According to Rust and Lemon (2001), “$6.1 billion in potential Web sales were lost in 1999 due to inadequate e-service,” (p.85). With intense failure rates of e-businesses, it is evident that gap exists in creating value to fulfil more complex customer demands; therefore, it is important to clarify how e-businesses can create a competitive advantage to survive. To create a competitive advantage, Porter (2001) believes e-businesses must create differentiation rather than compete solely by price.

As marketing has evolved to becoming more customer-focused, competitive advantages have been attempted through building and maintaining mutually beneficial relationships. The interest of this subject reflects whether customer-to-customer relationships through virtual communities create a value exchange proposition that fulfils customer demands and creates business value.

The product-focused marketing approach is known as traditional or transactional marketing. Although many approaches to marketing were developed (i.e. by Weld 1917; Copeland 1923; Reilly 1931; Duddy and Revzan 1947; Alderson 1950; Mickwitz 1959; and Fisk 1967), the universally accepted approach is the marketing mix model (Mickwitz 1959; Gronroos 1997). Originally developed as twelve elements by Neil Borden in the 1950’s, the marketing mix model was simplified into the four Ps (Price, Place, Product, and Promotion) by McCarthy (Gronroos 1997). This model focuses on structure and function rather than process and has led to the American Marketing Association (1985) definition of marketing,

‘Marketing is the process of planning and executing the conception, pricing, promotion and distribution of ideas, goods and services to create exchange and satisfy individual and organisational objectives.’

With the environment continually changing, many argue this approach is too simplistic, allows no integration and is no longer appropriate.

Whereas traditional marketing focuses on functions, selling products, gaining new customers, and short-term profits, modern marketing is more process, and customer/ market oriented (Jaworski and Kohli 1993; Gronroos 1997; and Chaffey et al. 2000). In order for modern marketing to be effective and efficient, it must be the guiding philosophy and the focus throughout the whole organisation (Valentin 1996; and Chaffey et al. 2000). Through process enhancements from modern marketing and the realisation that retaining customers is more profitable than gaining new ones (Bhote 1996; and Dubois 2000), Relationship Marketing (RM) emerged (for differences between traditional marketing and RM, refer to Table 2.1).

RM is about creating mutually beneficial relationships (Morgan and Hunt 1994; Ravald and Gronroos 1996; Peck et al. 1999; Gummesson 1999; Zineldin 2000; and Gummesson 2002). According to Christopher (in Batt 1990), RM is comprised of marketing, quality, and customer service, which enables long-term relationships, customer satisfaction, and total quality management (refer to Figure 2.1).

To illustrate the importance of long-term relationships with customers and other internal and external markets, Cravens and Piercy (1994) place the customer in the middle of ‘Six Market Model’ (refer to Figure 2.2). This version of the Six Market Model suggests RM’s main purpose is ‘the creation of customer value, satisfaction and loyalty, leading to improved profitability in the longer term,’ (Peck et al. 1999, p6). This pressing emphasis on customers has led to Customer Relationship Management (CRM) and loyalty.

Customer Relationship Management

CRM is about creating win-win relationships through mutual trust and commitment with individual customers (Gummesson 1999; and Kavali et al. 1999). This relationship enables valuable customer knowledge to be gained, which allows businesses to more effectively meet customer needs and add value (Peppers and Rogers 1999; McDonald 2000; and HMU 2000). The CRM process is illustrated in Figure 2.3. Bray 2000 (in Egan 2001) states, CRM is ‘learning as much as you can about each of your customers in order to serve them better and keep their custom in an increasingly fickle world.’ This leads to the importance of loyalty in RM.

Loyalty

As modern marketing and RM are becoming more recognised, so is the importance of loyalty. Loyalty marketing is often interchanged with the term relationship marketing, as neither could be achieved without the other (Egan 2001). Singh and Sirdeshmukh (2000) state, loyalty ‘is emerging as the marketplace currency for the 21st century,’ (p.150). This is due to relationship building and loyalty leading to customer commitment, knowledge and retention. Whereas the aim of modern marketing and RM is to reach the highest level of loyalty, traditional marketing focuses on gaining new customers (refer to Figure 2.4).

The three main types of loyalty and non-loyalty behaviour are switching, promiscuous, and polygamous (Uncles 1994). Promiscuity and polygamy are the more usual types (Uncles 1994; Barnard and Ehrenberg 1997; and Kandampully and Duddy 1999), as most consumers are multi-brand buyers and merely one tenth of all buyers are 100% loyal (Barnard and Ehrenberg 1997). Loyalty is developed from either softer dimensions or hard dimensions (Dick and Basu 1994; Christopher 1996; and Egan 2001). Softer dimensions rely on emotion and satisfaction influencing attitude towards a decision (Dick and Basu 1994; refer to Figure 2.5). Hard dimensions rely on value for money, convenience, reliability, safety and functionality (Christopher 1996; refer to Figure 2.6). Whereas hard dimensions tend to be temporal, as ‘everyone has a price,’ softer dimensions are more long-term and beneficial for the business, as they are influenced by society, situations and experiences, which create bonds between attitude and repeat support (Egan 2001).

For a more complex analysis about loyalty, refer to Appendix 1.

As marketing continues to change and evolve with the surrounding environment, the Internet has created the necessity for further marketing adaptations. The next section focuses on how the Internet has impacted marketing.

The Internet is a powerful marketing communications medium that has created electronic-commerce environments (ECEs). In ECEs, the relationship between retailer and consumer is based on information via computer networks with minimal physical interaction; therefore, real-virtual interaction and relationships are created (Gronroos 1996; and Davis et al. 1999). In order to create effective two-way relationships in these ECEs, relationships must be trust-based (Rao and Reukert 1994; Moore and Andradi 1996; and Davis et al. 1999).

The Internet has become a fundamental element of the modern marketing concept (Davis et al. 1999; and Chaffey et al. 2000). Gurton (2001) believes the main goal of every business is to select, attract, retain and develop their customers; however, e-businesses have a more difficult task as electronic sales and business channels (e-commerce) create a new degree of openness. These new channels are creating new types of relationships (discussed further in Section 2.3) and increasing customer demands (Mitchell 2000; and Gurton 2001). Due to these elements, e-businesses must not merely compete on price, but create unique means of differentiation (Porter 2001). According to Rust and Lemon (2001), differentiation and value are created through information, as the Internet has created the service revolution into the information service revolution. For further details on the impact of the Internet and ECE’s on marketing, refer to Appendix 2.

The ‘New Economy’, as Gummesson (2002) terms the changing economic life and business of the 21st century, has led to the emergence of virtual communities in order to capture the new types of real-virtual relationships to increase trust and loyalty.

Virtual communities are ‘social aggregations that emerge from the Net where enough people carry on those public discussions long enough, with sufficient human feeling, to form webs of personal relationships in cyberspace,’ (Rheingold 1993, p5). Virtual communities emerged in late 1990 as information intermediaries sought to add value and facilitate an information exchange by bringing people and resources together onto a network (Lovelock 2000).

Virtual communities create a real-virtual environment, as they add a real element to the Internet by instigating social gatherings, personal relationships and human feelings through discussions, interaction and involvement (Stone 1991; Rheingold 1993; Gronroos 1996; Davis et al. 1999; and Egan 2000). The four main categories of virtual community are illustrated in Figure 2.7 (Hardaker and Graham 2001).

Through virtual communities, buyers and sellers are brought together electronically, creating ‘virtual exchanges,'(Mitchell 2000). Mitchell (2000) believes these ‘virtual exchanges’ change typical types of relationships (refer to Figure 2.8).

The main relationships created through virtual interactions are marketer-to-customer, agent-to-customer, marketer-to-marketer, and customer-to-customer (Mitchell 2000). With these new relationships, the main challenge facing web users and developers is the need to move towards a real-time environment, offering interactive communication (i.e. chat rooms to create immediate responses) rather than a more static traditional approach (Kannan et al. 2000). This virtual community must be the central intermediary in Internet-based transactions (Kannan et al. 2000; and Hardaker and Graham 2001; refer to Figure 2.9).

Through customer-to-customer interaction in virtual communities, CRM processes (HMU 2000) are enhanced as interaction increases, allowing greater customisation and added customer value. As the Internet continues to distinguish the ‘tyranny of distance,’ there is less price discrimination, which means these new types of relationships and member-generated content are a source of differentiation (Lovelock 2000). The next section focuses on how virtual communities create a value exchange proposition through providing customer value, which leads to increased loyalty and business value.

A value exchange proposition is created when a business provides value to customers, which then gives value back to the business. Abela and Sacconaghi (1997) believe the main task of consumer-marketing companies is to find online value exchange propositions to capture consumer information and build stronger relationships. This section provides the main focal theory on how the customer value virtual communities create (Peck et al. 1999; and Lovelock 2000) increases loyalty and ultimately business value. This section contributes to the development and analysis of the propositions in Chapters 4 and 5 and the Value Exchange model in Chapter 6.

Customer Value

Virtual communities provide customer value by providing an environment for like-minded people to visit and interact in order to satisfy their various information needs (Hoey 1998). Community features allow greater customer-focus through member-generated content and provide an alternative to the regular product/company-driven corporate Web site (Armstrong and Hagel 1996; and Lovelock 2000). Not only do virtual communities congregate potential buyers, they provide great amounts of information than most customers would generally have convenient and cost effective access to.

Cumby and Barnes (1998) state that closer ties and frequent communication strategies associated with RM would be especially useful for reducing cognitive dissonance in high risk and salient situations. In these situations, they argue that customers have specific expectations and intense emotions. Through virtual communities, potential customers seek non-biased (non-company related) reassurance from other members in real-time (with an immediate response), which reduces cognitive dissonance and makes them feel more confident about purchasing. Virtual communities allow people to gather vast amounts of information, network, and discuss common interests. Many advocates of virtual communities argue that they give customers more power through greater information and interaction advantages (Lovelock 2000). As customers are becoming more empowered and in control because of the Internet (Gurton 2001), these advantages create customer value, as customers are in control and can more effectively satisfy their information needs. The customer value that virtual communities create is further discussed in Section 4.2 for the development of P1. This customer value leads to loyalty.

Loyalty

Although loyalty has been discussed above, this section intends to provide literature on how the value virtual communities add creates loyalty in a virtual environment. This literature is expanded in Section 4.3 for the development of P2.

Bhote (1996) argues, retaining a customer (loyalty) is more cost effective and profitable than gaining a new customer. As virtual communities gain great customer knowledge, e-businesses understand customers better enabling customised added value to increase loyalty. According to Hagel and Armstrong (1997, p32), ‘Companies that organise virtual communities can use what they learn to create undreamed-of customer loyalty.’

To build relationships and gain loyalty, trust is a prerequisite, especially over the Internet (Gronroos 1994; Gummesson 1994; Morgan and Hunt 1994; Webster 1994; Buttle 1996; Nelson and Cooprider 1996; Reichheld and Schefter 2000; and Egan 2000). To gain trust in a real-virtual environment, Costabile (1998; in Egan 2000) argues that customers must have overall satisfaction, which is created when the actual-real service (customer perceptions) are greater than the expected-virtual experience (customer expectations), (refer to Figure 2.10). In the long-term, this satisfaction and trust enhances consumer motivation towards the real-virtual environment and leads to loyalty. Although customer satisfaction and dissatisfaction do not always lead to retention and defection respectively, satisfaction is needed before loyalty and retention can be achieved (Egan 2000). According to Peck et al. (1999, p3), ‘Customer satisfaction and loyalty are built through the creation of superior value for the customer, and that value is created throughout the organisation and beyond.’ Virtual communities create internal and external value, as customers interact and contribute content to the e-business community site.

Loyalty is especially important in high-risk and more complex purchases (Egan 2000). With virtual communities, ‘real-time’ communication is provided, which allows immediate reassurance and confidence from non-bias, non-company generated content and responses (Lovelock 2000). According to Reichheld and Schefter (2000, p106) ‘Most of today’s on-line customers exhibit a clear proclivity toward loyalty, and Web technologies, used correctly, reinforce that inherent loyalty.’ Theory suggests virtual communities are an appropriate use of Web technology to add value and create loyalty. Whereas this section focuses on the importance of loyalty and how it is influenced, the next section focuses on how loyalty leads to business value.

Business value

Business value must be created in order for a business to survive. This section focuses on how loyalty leads to business value, and is discussed further in Section 4.4 for the development of P3.

For e-businesses to gain value, loyalty is essential, as ‘without the glue of loyalty, even the best-designed e-business model will collapse,’ (Reichheld and Schefter 2000, p106). Armstrong and Hagel (1996) believe early organisers of virtual communities will have an enduring competitive advantage through the development of a large member base of loyal customers. As virtual communities provide customers with control and power, individual information needs can be satisfied and associations developed (Hagel and Armstrong 1997; and Lovelock 2000). Business value is created as these associations and the ‘power of skin’ (familiarity among people) increase loyalty and provide an opportunity for customers to continue through electronic relations (Gomez 1998).

According to Reichheld and Schefter (2000, p106), ‘loyalty is still about earning the trust of the right kinds of customers- customers for whom you can deliver such a consistently superior experience that they will want to do all their business with you.’ Reichheld and Schefter (2000) found that through loyalty, long-term increased profits and retention lead to greater profitability and less costs, especially for e-businesses. In traditional businesses, when customer retention increases by 5%, profits increase between 25-95%. As attaining new customers on the Internet costs between 20-40% more than for traditional retailers, early losses followed by increasing profits are exaggerated in an e-commerce sector. However, in the long-term, profits accelerate at a greater rate, as repeat customers spend more than twice as much after being with the e-business for twenty-four to thirty months than in their first six months (Reichheld and Schefter 2000).

Loyalty also creates business value through increased referrals, especially over the Internet, as ‘word of mouse spreads faster than word of mouth’ (Reichheld and Schefter 2000). With technology allowing Web sites to automate the referral process, customers are able to send recommendations without having to leave the site. Since referred customers cost so little to acquire, because other customers are marketing for the business, profits are generated much earlier in their life cycles than non-referred customers (Hardaker and Graham 2001; and Reichheld and Schefter 2000).

As the Internet provides competition ‘just a click away,’ loyalty is even more important for ECEs than in the physical/traditional world (Reichheld and Schefter 2000; Agrawal et al. 2001). Therefore, Reichheld and Schefter (2000, p106) state, ‘if executives don’t quickly gain the loyalty of their most profitable existing customers and acquire the right new customers, they will face a dismal future catering to the whims of only the most price-sensitive buyers.’ In order to sustain this loyalty, business value must continually be re-invested to increase customer value.

Section 2.3.1 has identified how virtual communities create a value exchange proposition through adding customer value, which leads to loyalty and ultimately business value. This cycle will be further explored and developed into a model in Chapter 6.

The evolution of marketing introduced this chapter to illustrate how marketing has changed from being product to customer focused. Through the increasing importance of customers and influence from the Internet, it is evident that differentiation is imperative for e-businesses rather than solely focusing on price incentives. Although many academics have explored virtual communities, the impact customer-to-customer relationships have on creating differentiation is a new and evolving area. The gap in literature, therefore, lies in how virtual communities create a value exchange proposition (differentiation) to reinforce loyalty when competition is just a click away over the Internet. The literature identifies relationships between virtual communities, customer value, loyalty, and business value. These relationships will be further explored in the Discussion in an attempt to fill the gap. Chapter 3 focuses on the methods and concepts used during the research process.