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Communication in a Digital Community
by
Mitsuhiro Tagami

Submitted to the Alfred P. Sloan School of Management on May 11, 2001
in Partial Fulfillment of the Requirements for the Degree of
Master of Science in Management of Technology

Abstract

A customer has needs, which the company tries to satisfy. These needs are continuously evolving. After the evolution of the customer's needs has reached a certain level, and assuming that the company has responded to these needs, it will become increasingly difficult for a company to differentiate its product from its competitor's products. In the case where there is no product differentiation, what can a manager do to satisfy the customer's needs? One way to differentiate a product is to satisfy higher level of needs of the customer. This thesis examines whether and how a customer's belonging and esteem needs can be satisfied by communication in a digital community.

In order to understand the dynamics of a digital community in an on-line store, I examine two assumptions. First, the longer a customer stays in an on-line store the more items the customer will purchase in that store. Second, an on-line community hosted by an on-line store will satisfy customers' belonging and esteem needs, increase customer loyalty to the store and its products, and result in increased revenue.

In this thesis, I analyze data from a major Japanese computer firm's website, which has both shopping and community functions. The data show no clear relationship between the length of time members spend on the website and the amount of money they spend on the website, but does shows a relationship between the customers' role in the community and the amount of money they spend on the web site. Members classified as having a 'mentoring' role are the most likely to buy the company's products, though not necessarily on the company's web site, in addition to being the members most likely to contribute to the community's expansion. I conclude the thesis by a number of managerial implications of my findings.

Thesis Co-Supervisor: JoAnne Yates Sloan Distinguished Professor of Management

Thesis Co-Supervisor: Wanda J. Orlikowski Associate Professor of Information Technologies and Organization Studies


1.	Introduction

Customers communicate with others when exchanging information about products they have purchased. After a customer communicates with a company, which may be selling tangible or intangible products, he/she makes the decision to purchase the product. The customer also talks to his/her friends about the purchase. A customer's opinion about a product is affected not only by his/her direct experiences with the product itself but also with the indirect experience gained through obtaining information about the product. Where does this information come from? The information may be obtained from communication between the company and the customer, such as advertisements, promotions, or customer support services. Another channel through which it may be gathered is word of mouth exchanges with other customers. Although the customer's decision to purchase is influenced by these various avenues of information, the company may not necessarily have a proactive strategy or facility to exploit these channels of communication.

Customer behavior at an on-line store can be broken into three distinct elements: Notice the store, browse the store, and buy at the store. Clever or attractive advertising will increase the number of customers who notice and browse the store. Once into the browsing stage, the existence of easy-to-use features may help increase the number of customers who actually make a purchase. However, with the downturn in the Internet economy, the amount of capital on-line stores have at their disposal for advertising or system features is fairly limited. Hence, on-line stores need to ensure a continuous revenue stream from the store itself.

In order to evaluate the success of an on-line store, it is important to examine the conversion rate, the number of visitors to the on-line site that made actual purchases. However, this may be a shortsighted method of evaluation since it is unclear whether a customer who has made a purchase will return to make future purchases. Where does an on-line store's revenue come from? The source will typically be a frequently returning customer towards whom advertising need not be directed since the customer knows the on-line store already. Such customers tend to have less uncertainty regarding products, unless they have had a bad experience with a previous product and have decided to stop using the on-line store. A frequently returning customer will increase the store's profit so long as the store can make the customer loyal enough to continue purchasing at that on-line store rather than at others.

This thesis will examine how digital communication in an on-line community hosted by an on-line store affects the purchasing decisions of customers at the store. This thesis will argue that the prosperity of a digital community in an on-line store, in terms of its success in locking customers into the store, is another useful measure to evaluate the long-term success of the store.

1.1	Problem statement and Assumption

An on-line store has to consider how to lockin customers to the store to promote repeat purchases. At the same time, a manufacturer of a mature product that has become a commodity must consider how it can differentiate its product from other products.

A customer has needs, which the company tries to satisfy. These needs are continuously evolving. After the evolution of the customer's needs have reached a certain level, and assuming that the company has responded to these needs, it will become increasingly difficult for the company to differentiate its product from its competitors' products. In the case where there is no product differentiation, what can a company do to satisfy the customer? One solution would be to allow the product to be taken over by a disruptive product, i.e., a completely new product that would change the landscape dominated by present products. However, I will argue that an alternative way to differentiate a product is to satisfy a higher level of need of the customer. According to the psychologist Abraham Maslow , humans have a hierarchy of needs (physiological needs, safety needs, belonging needs, esteem needs, and self-actuation), which cannot be satisfied until lower classes of needs have been satisfied. A researcher of human behavior, Paco Underhill, found that "the longer a customer stays in a non-digital retail store, the more the customer purchases in the store. Because the customer, who stays longer in the store, enjoys experiences more to shop around the store, not to just buy products. This suggests that better experiences for customers in retail stores can actually satisfy a higher level of needs, which come from experience, within the hierarchy of needs. Therefore, I argue that furnishing the consumer with better experiences in an on-line retail store will have the secondary result of differentiating a product being sold at the on-line store from a product being sold at a retail store. One of the most effective methods of improving the consumer's on-line experience by addressing higher level of needs is to create a good on-line "community," which facilitates communication among customers. Through providing increased satisfaction of the customers' belonging and esteem needs, the store-hosted on-line community can help increase customer loyalty to the store. However, it is important to consider that an on-line community at the store can be a double-edged sword since it also provides a forum for consumers to exchange and post complaints about problems with the store or faults with a product. Nevertheless, an on-line community has great potential to satisfy customers' needs, and to lockin customers if it ensures that a customer has a positive experience with the store and its products because of the on-line community itself.

This thesis examines two assumptions:

(1) The longer a customer stays in an on-line store the more the customer purchases in the store because the customer not only wants to purchase a product but also wants to enjoy the experience in the store.

and

(2) An on-line community hosted by an on-line store satisfies customers' belonging and esteem needs, increasing customer loyalty to the store and its products. As a result, an on-line community tends to positively influence the purchasing decisions of customers visiting the on-line stores, and the influence leads increasing revenue to the on-line stores.



1.2	Methodology

To test my assumptions, I analyzed data from an on-line store established by a major Japanese firm, which manufactures and sells computer equipment. The on-line store is part of the company's website designed to introduce their consumer products. The website hosts a digital community, using a bulletin board system, to encourage the sharing of information about the company's products among consumers. In analyzing the data, I examined the relationship between customers' behavior in a digital community hosted by an on-line store and the customers purchasing decisions at the on-line store itself. I used a segmentation method, attempting to identify the various characteristics of customers' behavior. The segments are defined along two axes. The first is "the role in the community," which consists of five classifications: Mentor, Informer, Questioner, Visitor*, Non-member** (Appendix 1: Rules for Mentor-Informer-Questioner Classification). The second is "the place to buy a product," which consists of two classifications: Buy at an on-line store, or buy at other than an on-line store (see chapter 6.3: Segmentation). Based on the data obtained from the on-line store, customers' information (such as biographic information, behavioral information, purchasing history that is collected by the company's website and the on-line store) is related to the segment to which the customer belongs. The data used provides evidence from which to examine the assumptions.

2. Human Needs as Purchasing Needs
2.1 Psychological human needs
Abraham Maslow (1908-1970), who was chair of the psychology department at Brandeisies University in the 1950s, developed a theory of the hierarchy of needs (Figure 2.1). In addition to air, water, food, and sex, Maslow laid out five broader layers of needs in the following order: physiological needs, needs for safety and security, needs for love and belonging, needs for esteem, and needs to actualize the self. According to the theory, upper level needs cannot be satisfied until lower level needs have been satisfied.

In most instances, satisfying customers' physiological needs is no longer an area of competition for most retail stores because of the high availability of products. In that situation, the last way for retail stores to differentiate products is to reduce the selling price. There is no doubt that, ceteris paribus, lower prices can attract customers. However, even in the case of some on-line stores, pricing itself will move to universal pricing due to new pricing business models like auctions, demand aggregation, and comparison engines. Satisfying customers' safety needs is also not an area of competition for major retail stores since there are almost no uncertainties of security in major retail stores. Customers know major stores do not cheat customers since those stores do not want to lose their market reputation because of customers' complaints over trivial matters, and also because customers know these stores readily accept and deal with customers' complaints. Where is the current stage of competition? Major retail stores are now competing at the stage of belonging needs, in other words, how can the store attract customers by providing good experiences in the store, and how can it make customers feel a close relationship with the store. The ultimate goal is to make the individual customer feel that he/she is almost part of the company itself. For example, Intuit, a major accounting software company, focuses on communicating with customers by making free support a first priority. Every employee in the company, including the CEO, participates to varying degrees in telephone customer service support. By communicating with customers directly, the company can understand the customers' real needs, solve their problems, and improve the company's own products. And, ideally, the customer, because of this relationship of trust, may feel as if he/she is almost part of the company. Essentially, the company provides a good experience for the customers by facilitating communication with them, thus helping to satisfy belonging needs.

2.2 The Experience economy

In considering customers' behavior in terms of the move to the upper level of needs, as described in Maslow's hierarchy of needs, it is extremely important to provide experience to the customer. B. Joseph Pine II and James H. Gilmore in "Welcome to the Experience Economy" explain the progression of economic value, and how customers' values have been changing. The article describes an example of an experience economy using the story of a birthday cake.

"The entire history of economic progress can be recapitulated in the four-stage evolution of the birthday cake. In the beginning of the economy, mothers made birthday cakes from scratch, mixing farm commodities (flour, sugar, butter, and eggs) that together cost mere dimes. As the goods-based industrial economy advanced, mothers paid a dollar or two for pre-mixed ingredients. Later, when the service economy took hold, busy parents ordered cakes from the bakery or grocery store, which, at $10 or $15, cost ten times as much as the packaged ingredients. And now, parents neither make the birthday cake nor even throw the party. Instead, they spend $100 or more to "outsource" the entire event to companies that stage a memorable event for the kids."

Customers' determination of value changes according to this progression. A company has to notice this progression of customers' needs, and shift its business field toward the experience economy, in which a customer can have memorable experiences (key differences between "experience economy" and others are described in Table 2.1). Using Maslow's pyramid of needs, the experience economy can help satisfy customers' belonging or esteem needs. Customers' needs and the economy around them have been growing in a pattern of ongoing interaction. No sooner has one need been satisfied than another need appears.

A company has to find the ways to stimulate and satisfy customers' belonging and esteem needs, which bring customers satisfactory experiences. This is the way ,
to since it's the way to differentiate the company's products from other company's products.

Economy	Agrarian	Industrial	Service	Experience
Economic Offering	Commodities	Goods	Services	Experiences
Nature of Offering	Fungible	Tangible	Intangible	Memorable
Key Attribute	Natural	Standardized	Customized	Personal
Seller	Trader	Manufacturer	Provider	Stager
Buyer	Market	User	Client	Guest
Factor of Demand	Characteristics	Features	Benefits	Sensations