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Where everyone becomes an advertiser

With e-mail marketing challenged by spam, search marketing competitive and pricey, and online retailers striving to stand out in a competitive market, a new marketing and selling arena is emerging through social networking. Its formula seems made for the times: With consumers inundated with advertising messages in pop-ups and e-mail, not to mention being bombarded offline, and a generation of young adults and youth brought up on Internet communications, social networks—web sites where people find others with similar interests in activities and consumer products—are attracting attention for their potential as centers of consumer-driven marketing and merchandising—no traditional advertisers or merchandisers allowed.

“The effect of like-minded consumers sharing product information and being able to act on that information and purchase their friend’s recommendations in one destination is explosive,” says Neel Grover, president of Buy.com, which sees social networking as a springboard to the future of retail e-commerce. To claim a stakehold in the new market, Buy.com last fall acquired in a cash-and-stock deal the social networking site Metails.com and has since renamed it Yub.com. Yub, which stands for “young urban buyers” and is, of course, Buy spelled backwards, operates with Buy’s patent-pending method of referring e-commerce sales through hyperlinked words in members’ profiles.

The next big thing

Instead of responding to marketing pitches by retailers, consumer goods manufacturers and other commercial advertisers, consumers— especially today’s under-30 crowd—will flock more to their peers in social networks for recommendations on what to buy, Grover says. “Instead of buying what online stores tell you to buy and then becoming a consumer, Yub flips it, and allows you to hear what friends and consumers say before you buy,” Yub declares on its site.

If Yub works as well as Grover and Buy.com chairman Scott Blum expect, it would become the next big thing in retail, leveraging social networking to the point where Yub had the commerce clout to rival the largest of more conventional retail sites. “Social networking will become a huge force to reckon with,” Blum says.

Grover and Blum are not alone with their expectations of substantial growth in social networking e-commerce. Although still in its infancy, with a limited number of opportunities to purchase something online through a peer’s referral, social networking has surfaced in the minds of many retailers and industry experts as something to consider.

“Social networking is the next wave of the Internet,” asserts Reed Hastings, founder and CEO of Netflix Inc., the online DVD rental service, which expects to boost its number of subscribers with a social networking feature it launched within Netflix.com in late November.

While consumer acceptance remains the great unknown of e-commerce in social networking, analysts are enthusiastic about the marketing approach’s prospects. “E-commerce in social networking is very viable,” says Charlene Li, analyst with Forrester Research Inc. “It’s something that will stick around, especially with younger adults.”

Social auction

Other social networking sites include Friendster.com, which claims 13 million members and sells commercial advertising space, though unlike Yub.com, it doesn’t offer links from member content to product buy pages. Various forms of social networking are also beginning to appear in established commercial sites. While eBay’s system of letting buyers and sellers rate each other has for years served as a form of social networking, Overstock.com launched an auction site last September with personalized pages where customers can post photos and other content.

When Overstock customers bid on an auction, they can trade notes with other customers on a seller’s reputation or see if a seller is a friend of a friend. “It fosters trust and enhances the sense of community,” says Holly MacDonald-Korth, vice president of auctions. “If you know someone, it’s easier to transact with them.”

Every time an Overstock auction user completes a transaction, his or her list of contacts expands, creating a viral marketing effect, because each new contact can have his or her own lists of friends and business contacts. “As these social networks grow, our auction activity will grow too,” MacDonald-Korth says.

Netflix, the pioneer in online DVD rentals, is also getting into social networking as a way to build on its base of more than 2 million subscribers and fend off mounting competition from Wal-Mart Stores Inc.’s Walmart.com, Blockbuster Entertainment Inc. and others, including an expected entrance into the market by Amazon.com Inc., Hastings says. Although Netflix has long posted film reviews written by customers, in November it launched a social networking system, called “Friends,” that organizes reviews and other personal information related to individual subscribers, allowing other subscribers to choose movie reviews and recommendations from people with common interests, he says.

15% growth—a day

“The response has been extraordinary,” Hastings says. “We started with a couple hundred Friends users, and it’s been growing as much as 15% per day. As subscribers start using Friends and invite others into their personal network, including some who are already Friends members and some who aren’t, more people are becoming Netflix subscribers.”

Social networking’s appeal extends to merchants of all sizes. “It’s something I’ll probably want to look into,” says Ron Henderson, CEO and co-owner of Auntie’s Beads Inc., a Grapevine, Texas-based web and store retailer of beads and other materials to people who like to make their own jewelry.

Because social networking sites let participants search for people as well as products according to particular interests, it could serve as an important tool for niche retailers like Auntie’s Beads or outdoor sports gear merchant Altrec.com that cater to groups of consumers who share a passion for a particular kind of product or activity. “There’s a growing buzz about social networking,” says Greg Toledo, manager of business development at Altrec, which is already planning to build the beginnings of a quasi social network on its site by adding customer-submitted content that could include recommended products that link to Altrec buy pages.

But just how far social networking will take off combined with e-commerce sales is yet to be proven, placing uncertainty over Grover’s and Blum’s expectations for Yub.com. If nothing else, Yub’s social networking-driven e-commerce may need to wait for more 20-something consumers to populate its pages.

A review of Yub finds many of its sections with scant listings of members. But search for an iPod, Apple Computer Inc.’s handheld digital music player that has become popular among young people, and Yub serves up a long list of profiled members with extensive editorial content for a shopper looking for an iPod recommendation.

Building the critical mass

The major challenge facing Yub, says Forrester’s Li, is to build a critical mass of users. But there are at least two ways to do that, she adds. The most obvious is to leverage the traffic of Buy.com by informing regular Buy customers of the opportunity to earn referral commissions while learning about what other consumers think about products. Buy.com had average monthly traffic of more than 12 million visitors last year, including nearly 7 million unique visitors, according to comScore Networks Inc. data in Internet Retailer’s Top 300 Guide to online retailers.

Another way to build mass, Li adds, is to build up the number of product and service categories for which members write reviews and make recommendations. That not only provides more opportunities for members to earn commissions, but it also provides more content to attract a broader number of users, whether they come directly from Buy.com or through Internet search. “It creates a lot of content a site can use to attract more people,” she says. Someone searching for the Finding Nemo CD, for instance, might come to Yub to read a review of the movie written by a parent who had watched with a child, she adds. “Yub is very much a media business, rather than a retail business,” she adds.

Altrec will take a gradual approach toward building social networking, Toledo says. It’s planning to add a “community element” to the editorial content it already offers on outdoor activities by letting customers insert their own stories and images. “Customers could compare stories, check out reports of trips others have made,” he says.

That functionality isn’t a whole lot different from the vaunted communities that many retail e-commerce sites experimented with in the early days of online retailing. But while Altrec has not made any plans to add an e-commerce function to its customer-driven content, the company wants to head toward hyperlinking product words in customers’ stories to let readers click to an Altrec buy page, Toledo says. “Customers could recommend products; we would love to have them do that,” he says. “That is where we’d like to go.”

But before Altrec introduces e-commerce links to customers’ content, it wants to develop its site’s community environment as a place where visitors see the value of simply sharing information. “We want them to be comfortable sharing their stories before we add e-commerce links,” Toledo says.

Setting the pace

Blum says he expects Yub to set the pace for social networking e-commerce since, for now, it appears to be the only site offering to pay commissions to members whose product referrals lead to purchases on Buy.com or other retailers Buy intends to introduce as Yub partners. So far, however, it has not announced any retail partners.

Yub is designed so that when a visitor clicks on and purchases a product linked from a Yub profiled member’s content page, the member and the purchaser split a reward, such as a coupon valued at 2-5% of the friend’s purchase.

Blum says he also expects Buy.com to play a central role in helping other retailers to launch their own social networks based on the Yub e-commerce model, by providing its technology platform.

Although social networking and Yub may still need to mature as an e-commerce model before other retailers follow Yub’s lead, some say the move to some form of social networking is inevitable as consumers become more comfortable with getting commercial information from one another. “We’re just scratching the surface,” says Hastings of Netflix. Li adds that Buy.com is minimizing Yub’s startup risk by not over-extending it with the kind of excessive marketing common in the early dot-com days.

Adds Altrec’s Toledo: “The power is moving to the customer. And ultimately the customers will become the marketplace.”

 

Paul Demery, InternetRetailer.com. January 2005

Copyright © 2005 Vertical Web Media. All rights reserved.