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November 25, 2008

Is There Value in the Emerging World of Social Commerce?

From the Archive: Businesses can profit by getting connected to competitors.

Topics: Marketing

In recent years, social commerce — business models that combine social networking with e-commerce — has been an emerging trend in the online world. Such online commerce sites as Amazon and eBay are adding some social networking features, and there has been much speculation about whether social networking giant Facebook could somehow generate revenue from its 100 million active members and become enormously profitable. Social commerce is perhaps the logical next step forward from social shopping, which allow shoppers to post reviews and recommendations. Social commerce sites are networks of sellers, not buyers, connecting individual stores, much like a suburban shopping mall.

Professor Olivier Toubia, with doctoral student Andrew Stephen, analyzed this new business model to find out whether it benefits sellers as well as owners of networks. The premise of social commerce sites is, to some degree, counterintuitive: a shop that connects customers to other shops risks driving business to its competitors.

The researchers obtained data from a sprawling social commerce site that has platforms in Britain, France, Germany and the United States. (The company hosts over 300,000 shops.) In 2006, this site began allowing shops on its platforms to connect to one another, in a similar manner to friends on Facebook. Before 2006, the site did not have a social networking feature; although it had thousands of shops as members, the shops were not linked. By comparing data from before and after the social networking feature was added, the researchers could measure the impact of social networking on revenue, both for individual shops and the owners of the network.

The researchers found that linking sellers increased profits for the marketplace as a whole, but the benefit was very small. One reason for this, the researchers determined, was that some shops on the network had links directed to them but did not link in turn to other shops. (The network did not require reciprocating links between shops.) “A lot of the value of the network is cancelled by these dead ends, or free riders,” Toubia says. “Dead ends limit the browsability of the network, and a frustrated consumer who reaches one might just leave the marketplace.” As its network grows, he says, a social commerce site should impose rules to eliminate dead ends.

Next, the researchers analyzed the network at the shop level. They looked at many factors, including how many links are directed to a shop; the extent of clustering, or interconnected links, among a shop’s neighbors; and how easy it is to reach other shops from a shop (the equivalent, in social networking terms, of the degree of separation between friends).

The researchers found that having a relatively large number of links directed to a shop benefits that shop. They also found, more surprisingly, that linking to other shops has a net positive effect, even though this may increase competition. On average, a shop that links to another shop has a 67 percent chance of receiving a reciprocal link, and the benefit of that reciprocal link outweighs the negative impact of the initial link. “It makes sense to link to other shops, even though you’re sending customers away,” Toubia says. “It helps more than hurts, because in most social networks people link back.”

Conversely, the researchers determined that being part of a cluster — or neighborhood, in network parlance — has a negative effect. Suppose a shop is in a neighborhood of 10 stores, all of which are linked to one another. The only customers who are likely to find the shop are those who stumble upon the neighborhood. Rather than become parts of closely linked neighborhoods, the researchers found, shops should cultivate links from a variety of other shops, spread as far as possible across the network.

The researchers also found that having fewer degrees of separation between a shop and other locations has a negative effect on the shop, because it is easier for customers to leave. At the same time, it benefits shops to be easily reachable from other shops in the network.

Overall, the researchers found that social commerce makes sense as a business model. Stores benefit from connecting to one another, and customers benefit because it is easier to browse among stores. However, given that shops benefit most when they are relatively accessible from other shops but limit accessibility to other sellers, Toubia warns that not all social networking sites are suited for commerce. “On traditional social networking sites, people tend to reciprocate links and tend to cluster,” he says. While reciprocating links increases customer traffic, clustering tends to hurt a seller.

Given these competing factors, sites such as Facebook should proceed cautiously when experimenting with social commerce, Toubia says. “Some of the natural forces that drive social networks can actually work against them if their owners try to turn the community into a network of sellers.”

Olivier Toubia is the David W. Zalaznick Associate Professor of Business in the Marketing Division at Columbia Business School.

Read the Research

Andrew Stephen, Andrew T. Stephen, Olivier Toubia

"Deriving Value from Social Commerce Networks"

View abstract/citation  Download PDF  


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