ATTEMPT ALL QUESTIONS IN THIS CASE STUDY. YOUR ANSWER SHOULD CARRY AN INTRODUCTION AND A CONCLUSION (30 MARKS).

Virtual online communities and network effects

The concept of the virtual online community stems from the idea of moving a community from the physical marketplace to the digital market space in order to create network effects among participants. To illustrate what a virtual online community is and what it looks like, we need to determine what purposes a community serves in the real world. Communities aggregate groups of people who have some kind of common interest (e.g. sports, cars, diseases, etc.). Communities in the physical world can be organized into clubs or teams, or they can be a loosely connected group of people. The common thread is, however, that people are drawn to communities because the latter provide an engaging environment in which one can connect with others and interact on specific interests.

The four essential purposes of communities are:

(1) communication, (2) information, (3) entertainment and (4) transaction.

The Internet can fulfil some, albeit not all, of these purposes as well as or even better than communities in the physical world. Building on these different purposes, it is possible to distinguish the following community types that focus on individual purposes:

_ Communities of interest and relationship focus mainly on communication between users and sharing information. Users interact regularly on many different topics about their personal lives.

Tesco.com, for instance, partners with iVillage (www.ivillage.co.uk), the online community for women, which offers discussion forums on topics such as pregnancy, baby care, parenting, diet, fitness and relationships. (For more details, see the Tesco.com case study, p.000).

_ Communities of fantasy focus mainly on providing entertainment. In these communities, users, who in most cases are not aware of each others identity, relate in a purely fictional setting while playing mult-user, Internet-based video games.

_ Electronic communities of transaction are not communities in the traditional social sense; instead, they are focused primarily on selling and buying. eBay is the premier example of a transaction-centred community. Nordeas Solo marketplace, which brings together merchants from different fields, also has its main focus on transactions.

Virtual online communities have been trying to incorporate as much as possible from the above listed community types into their own community, primarily to create a strong bond of loyalty between the community and its members. The underlying hope is that customers who see many of their needs met in a specific virtual online community are likely to build a high level of loyalty and to keep visiting this community over and over again.

The value of online communities depends primarily on the number of users visiting the website.

Therefore, network effects are of utmost importance in the context of online communities. A firm that enters the market early can achieve a competitive advantage, since it has a head-start in building a critical mass of community members. The latter provide the following benefits:

_ User-generated content. By posting through the website classified ads and opinions on bulletin boards, community members can create a significant amount of user-generated content. The book reviews that customers write at Amazon.com provide additional information for other customers searching for books. Furthermore, the possibility of evaluating the quality of reviews by other further increases the value of user-generated content.

_ Data-mining. Analyzing user activities provides insights about community members needs, which in turn helps to refine offerings accordingly. eBay is constantly scanning the events and activities in its virtual communities, and adapts offerings and services accordingly.

_ Commercial content. The larger the membership base of a community, the more attractive it becomes for advertisers as well as for product and service providers. The latter can place advertisements and hypertext links on the Web page and offer discounted prices to community members.

The above features make a given community even more attractive for prospective members, who, upon joining in, add to this cycle of self-reinforcement. As always, creating value for customers is just one side of the equation. In addition, it is also essential to find ways to capture part of that value by charging customers (or other parties) for benefiting from online communities. Revenues in virtual communities are typically generated from the following sources:

_ Advertising was the most popular source of revenues during the Internet boom days, since many firms were willing to invest heavily in online advertising. Many of these firms received vast amounts of capital from venture capitalists or through their initial public offerings (IPOs). Since their main aspiration was growth, they spent a large part of their budget on marketing and online advertising. Furthermore, although the effectiveness of Internet-based advertising had not been studied closely, its popularity, especially among online communities, was due to the inflated estimates of its impact. However, when the stock market collapsed and more detailed research showed that online advertising did not live up to its promise, the importance of advertising as a source of revenue declined significantly in comparison with other sources.

QUESTION 1

Describe the essential purposes of an online virtual community you are familiar with (state the name of this community).

QUESTION TWO

Discuss how online virtual communities are able to create and build a high level of loyalty and a critical mass of community members who visits continuously.

QUESTION THREE

Describe what an online virtual community is and the various sources available to them to generate revenue.