As virtual communities tip the balance of power in commercial transactions toward the customer, they will provide a powerful vehicle for vendors to deepen and broaden their relationships with the people who buy their goods and services. This is likely to affect the way businesses are run in physical space as well as in the virtual world. The primary effects will be felt by managers in the marketing and sales functions (Exhibit 1), who will find themselves wrestling with new rules for winning customer loyalty. In fact, "ownership" of customer relationships as a whole is likely to be thrown up for grabs by the emergence of virtual communities.

These threats to the status quo will also represent opportunities. Marketers stand to gain, on balance, from the implications of virtual communities, especially those who find ways to leverage this new customer power rather than fight it (Exhibit 2).

Marketing and selling to more powerful customers

The fact that virtual communities are likely to shift power from vendor to customer by reducing or eliminating the information advantages that vendors currently enjoy is not all bad news for marketers. Because virtual communities will actually improve the quality of information about individual customers and give those customers a reason for releasing the information to vendors, virtual communities will allow innovative marketers to move closer to treating customers as "segments of one." Virtual communities will also allow marketers to leverage customers’ ideas in designing and commercializing products and to leverage customers’ voices in promoting them.

Communities will undoubtedly create challenges as well. In this online environment, marketers must rely more on the quality of their product than on the strength of their brand; they must learn how to make advertising sell, not just communicate; and they must adjust their pricing strategies to survive in a world of more efficient markets. Successful marketers could end up enjoying a kind of customer loyalty that they can now only imagine. As a result, salesforces will be able to focus less on selling to customers and more on managing and serving them.

Market to "segments of one"

Marketers long ago mastered the art of mass marketing. But the next frontier—"mass customization"—has proven more difficult to achieve. The concept has intensified marketers’ focus on the objective of identifying, and building relationships with, a company’s current and potential best customers, with the financial goal of having them concentrate a disproportionately high share of their value with that company. An essential factor in meeting this objective is the selection, communication, and delivery of a product value proposition that is tailored to stimulate the most profitable types of transactions with the individual customer. Virtual communities are the mechanism that can bring this vision of relationship-based, individually tailored marketing to reality.

Central to this effort will be the new sources of customer information that virtual communities can provide. If communities are successful—as measured in numbers of participants, amount of time spent in the community, and transaction intensity—the profiles they create on individual customers will yield rich data sets about both individuals and customer segments. These data sets will generate detailed transaction histories, at the level of the individual customer, that can be used to predict future opportunities to transact with that customer. (Firefly, an online agent software put out by Agents, Inc., does this today in the field of consumer entertainment products. It allows users to create profiles of their music and movie preferences, and vendors to use this information to sell products to them individually on the basis of their past preferences.) The data might also be used by vendors—if community members approve—to identify which current and potential customers are more valuable than others.

One effect of this new customer information will be to make the market researcher’s life harder. If that individual’s job is difficult enough today in terms of effectively managing disparate data to enable senior executives to make decisions, it will become exponentially more complex. First, the market researcher must relearn what can and cannot be done to obtain customer information. There are many mechanisms for capturing information on line, and they vary in scope and accuracy. Asking users to register at a site, for example, will not by itself help the market researcher track their activity within the site. (Even registration is complicated, because there are several ways to register online users.)

The researcher must understand which vendors have rights to what data, how to respect customer privacy, and where to go for customer data. At the extreme end of the "reverse market," the model flips over and the individual customer advertises his or her needs rather than releasing profile information. This happens every time a customer sends agent software to look for a particular product. In this case, the market researcher’s role changes profoundly, helping the customer service function to anticipate these product requests.

So as not to sink under the weight of unused data, the market researcher must establish which data on community participants will be the most useful. In some businesses, complete transaction data are simply not available at the level of the individual customer. In this case, communities will plug an important hole in managers’ toolkits. In other businesses, more data is collected on customers than organizations know what to do with. Stacks of information go unread on managers’ desks.

In the online world, the market researcher must follow a middle path, taking advantage of the depth of information available through communities while at the same time bringing focus to the process of data collection and analysis. On line, a plethora of data can be gathered on users’ demographics: the sites they have visited; the ads they have clicked on; and, in some cases, every keystroke they have typed (on line, that is). Marketers must work with researchers to try to identify the important questions that a community alone can answer. (For example, what events or changes in product features trigger certain types of purchase? What products are traded off against one another before a purchase decision is reached?) They must then focus market research efforts on gathering and interpreting that information. If successful, the marketer will gain an advantage in its online markets that can be applied in its offline markets as well.

Strengthen product strategy

The information generated by members in a community is also valuable for the feedback it provides on the quality of existing products and features. One specialized software developer purchases software packages from a global supplier and tailors them to the needs of customers in the financial services industry. It found that it was not getting responsive service from its supplier. As a result, it helped form something like a small online vertical business community on CompuServe that brought together other customers of the same large software supplier. Whenever software developers had questions, they would post them on the community’s bulletin board.

They found that they were able to give each other more timely and effective support than they had previously received from the supplier. Taking a step further, they started collecting feedback on the products they were purchasing and offered this feedback to the supplier. To its credit, rather than adopting a defensive posture, the supplier acted on many of their recommendations in subsequent versions of the products.

People frequently talk on line about products ranging from golf clubs and restaurants to legal services. This happens whether companies like it or not. Indeed, some companies have attempted to prevent public online discussion of their products by curbing the use of their company names and brands in discussion groups—to no avail. Ironically, though their desire to protect trademarks is understandable, the companies concerned are often market leaders that should have the least to fear from discussions among their customers. On this issue, marketers would do well to follow King Canute in recognizing the futility of trying to resist the tide, and instead seek out ways to harness it to their advantage.

Communities will form live testbeds where marketers can reach regular users in a true market environment

As communities begin to aggregate customers with shared interests and characteristics, they will form live testbeds where marketers can reach the most regular users of their products in a true market environment that no focus groups can match. Here they can learn directly about improving their products or how customers perceive them, and cull ideas for new products. Since many comments on line tend to praise products, communities will also identify the products or features a marketer should think twice about eliminating. The hallmark of the marketers that "get it" will be their establishment of e-mail links allowing community members to communicate with the company and, better still, bulletin boards and online events that facilitate members’ communication with each other.

The secret of success will lie not in ownership of information but in its application

Customer feedback gathered in this way may not be statistically significant in the early years, but it will become so over time as more and more data points are collected. The feedback should generate insights and help target other market research initiatives; it may also point out simple improvements to products or customer service that require no further market research. While this feedback will generally be delivered in public online forums where any competitor can also access it, its real value will be captured only by those who use it to act on the ideas put forward by customers. The secret of success will lie not in ownership of information but in its application.

Capitalize on the community’s inherent capacity for PR

Communities can be highly effective at stimulating word of mouth. The on-line discussions that help strengthen product design can also serve as free PR, since more often than not people on line are quick to enthuse about a product’s benefits. They allow a company to leverage its most effective salesforce: its own customers.

Let’s look at an example of how this is working in practice. Cobra Golf, Inc., is a golf club manufacturer. It has created a space on its site for people to post unedited messages on bulletin boards. Sometimes competing products are described on these boards. But read the exchange about one of Cobra’s own products in Exhibit 3.

The power of this exchange will depend partly on whether the person posting the reply is known and respected by other community members. (In many cases, other bulletin board participants will add comments that corroborate or disagree with earlier responses.) But it is sure to carry at least some weight if the nature of the reply convinces other members that the respondent knows something about golf clubs. To enjoy this type of promotion, a company must create bulletin boards just as Cobra Golf has done, take the risk of allowing members to discuss its own and competitors’ products freely, and analyze the results.

Rely more on the product than the brand

In interactions like the e-mail exchange in Exhibit 3, community members focus less on brand (except as a handle for distinguishing products from one another) and more on product features. As community members come to value what other members think of a vendor’s products, the community starts to take on its own branding power: it begins to assume the "certification" aspects of branding that reassure buyers that their purchase is likely to be one they will be satisfied with.

The value of the Cobra Golf example lies as much in the fact that the question was asked as in the answer. Someone turned to the online community to find out about a specific product. On the one hand, this behavior may seem to undermine the value of a manufacturer’s brand: it is no longer sufficient as a token of product quality. On the other hand, the behavior focuses the manufacturer back on the quality of the product. On line, excellence will be rewarded with its own set of profitable dynamics as satisfied customers promote products they are pleased with, and in turn lead others to become customers.

Advertise to sell, not just communicate

Word of mouth is generally accepted as the most effective form of advertising. Given the difficulty of stimulating enough word of mouth to influence mass markets, vendors have turned to advertising to create and sustain a brand’s image. If we assert that communities may erode the power of this brand, what role is left for advertising?

Communities will actually increase the role and power of advertising. There will still be value in promoting brands and raising brand awareness. Brands are not on the verge of extinction. As long as there are competing products in a marketplace, brands are needed—at a minimum, to distinguish similar products in customers’ minds. Communities may actually help to build excitement over brands that revolve around image, such as fashionable or high-ticket items. But a far more potent role will emerge for advertising as the front end of a transaction.

On line, an individual can see an advertisement, click on it to obtain more information, and either ask for material to be sent to an e-mail box or, in many cases, order immediately on line. Add in what’s particular to a community—namely, that people are discussing products with each other—and the result is an environment in which the gap between advertising and selling can be minimized and the transition from ad to sale accelerated. Communities should stimulate impulse buying.

This changes the definition of successful advertising. The objective shifts from stimulating recall to keeping the user engaged for long enough to ask for more information or make a purchase. At the very least, the purpose of the advertisement will be to generate information about potential customers: who they are and how interested they appear to be in the product, judging by how deeply they go into the site. In expensive categories, such as homes, cars, or aircraft engines, the goal will be to establish a dialogue with a potential customer rather than to complete a transaction.

Alternatively, in keeping with the notion of reverse markets, advertisements might be placed by customers who want to make their needs known to vendors. Roles are reversed, and customers can put their needs out to bid.

Online merchandising will exploit the interactive nature of the technology to make itself exciting to the viewer

As the role of advertising changes, its placement and design must also change. The skills required by online advertising will be different from those required by existing media. Online merchandising should stimulate a purchase right there and then. It will exploit the interactive nature of the technology to make itself exciting to the viewer. It must offer relevant information quickly (within three clicks is the rule) and make online ordering easy. Thoughtlessly to digitize an existing advertisement is unforgivable, not only because the ad will appear dull in an online context, but also because it sacrifices the opportunity to engage the customer actively.

Finally, advertisers must remember that advertising in a virtual community, far from being perceived as a nuisance that interrupts sports events or the flow of a magazine article, may be seen as having intrinsic value. It may even be a reason for community membership: many people will see their communities as places where they know they can find the products they seek. This makes placement even more crucial. If a customer is looking for an advertisement, it is all the more important that he or she can find it easily.

Marketers who are quick to catch on to the potential of online advertising—advertising that is designed to stimulate sales directly and that is placed in the right context within the right community—stand to improve the effectiveness of their marketing programs overall.

Make use of the new "efficient" pricing

Virtual communities create pricing challenges. Electronic commerce in general may lead markets to become more efficient as community members track down the cheapest prices offered by vendors, or set software tools to work to do this for them, or put their orders out to bid. Customers will begin to capture some of the economic surplus that suppliers have traditionally been able to claim because of customers’ lack of perfect pricing information in most markets. Virtual communities make pricing more efficient, as members of consumer or business communities tell each other about excellent deals on offer from a particular supplier.

This has several implications for vendors. Higher-priced vendors are probably the most affected. They must justify their price differential through genuine product advantages and effective communication of these benefits.

On the bright side, virtual communities give marketers an opportunity to experiment with pricing. A vendor might, for example, learn enough about the needs of a community’s members to be able to develop pricing packages to suit different market segments. Or it might experiment with different pricing levels at different times to test how pricing affects volume. This brings us back to the notion of mass customization; one way to tailor a product to customer needs is to test different product features—including price—constantly to establish the optimum for both customer and vendor. Aggressive marketers will use the virtual community to improve the effectiveness of their pricing strategies.

Leverage communities to create true customer loyalty

Customers in many markets are searching for value, not stability; price, not relationship. In the food industry, even marquee brands have found it hard to protect their market share against retailers’ competing private-label products, which have been developed almost overnight by retail chains such as Sainsbury’s in Britain, Loblaws in Canada, and A&P in the United States. In the wholesale banking industry, "relationship banking" is being challenged: in some of the more competitive financial markets, banks must win every next piece of business from their commercial customers. Elsewhere, price reductions masquerade as loyalty programs, raising suspicions that they are simply shifting value to customers without yielding discernible long-term benefits for the producers or service providers.

Yet when companies talk about "loyalty," they often have a one-way street in mind—and it goes their way. Companies want to know in detail about their customers, gather information about them assiduously, and sell it on to anyone willing to pay for it—but get nervous if customers share information among themselves about them and their products. Companies want customers to be loyal, but it is economics that determines their decisions to continue making a product or to continue selling to a particular group of customers. Companies want loyalty, but have rarely been able to cultivate one-on-one relationships with their customers, particularly in consumer markets.

The lack of relationships is not surprising when your customer base numbers millions. But communities might change the game and help companies develop closer ties to their customers. Through member profiles and interactions on bulletin boards, communities allow companies to understand their customers better. Through a combination of bulletin boards sponsored by companies, e-mail connections back to companies, and online events hosted by company representatives, communities also allow companies to interact personally with customers. And they allow companies to demonstrate their responsiveness to customers by acting on specific suggestions and feedback and communicating the impact of these actions back to community members.

If loyalty is defined in terms of repeat purchases, or "coming back for more," communities are a tremendous vehicle for increasing loyalty to a vendor’s products. This is not because vendors will enjoy monopolies in communities. Far from it: we believe communities will offer a full range of competing products. Loyalty will be driven by the relationship a supplier develops one-on-one with customers and developed through customized advertising, two-way sharing of information, and possibly customized products. It will be reinforced by the fact that communities attract enthusiasts, who will form virtual fan clubs around products and suppliers.

In addition, if a vendor has access to a community’s member profiles, it will be alerted sooner than in the offline world if a customer has stopped purchasing. It will then be able to target marketing efforts at that customer, wooing her back before she has time to accustom herself to a rival product.

Vendors should take advantage of communities not only to improve their understanding of individual key customers, but also to build a track record of good service and responsiveness to their needs. The loyalty they create in this way will be based on performance, not brand, but it will serve to build up brand value.

Refocus the sales function on customer management

Across many industries, the heart of the sales function has not changed materially in the past forty years. There continues to be an emphasis on the sales manager as the person pounding the sidewalk, pounding on tables, or pounding on brokers and distributors. The sales manager is seldom seen as a customer manager. Virtual communities will go some way toward changing that.

In a virtual community, the selling function is shared by several different players. Advertisements can expand to include a selling function. Chat hosts on bulletin boards may become discreet salespeople, pointing members toward areas where they can buy what they are looking for. If there is any selling left to do in the community, the members will debate the pros and cons of different products among themselves. It is not that salespeople will be made redundant by communities; they will still be needed to sell through physical channels. One or two of the best may go on line to sell products, but, in general, the salesperson’s role in the online world will be different.

Team up with marketing. The interaction of the sales and marketing functions can be difficult. But in a virtual community, where the lines between marketing and selling are blurred, it is important for the two to interact seamlessly. Now that advertising takes on a selling role, the sales function should have input into the design of advertising and other online marketing efforts, where they can offer insights on what selling tactics might be effective with online customers. This interaction should go both ways. Sales should be willing to get feedback from marketers on sales pitches that appear to work in the online arena and might have applications in the offline world—and those that don’t work.

Emphasize customer management. The detailed customer profiles and tailored marketing programs made possible by the virtual community will call for improvements in a company’s ability to manage customer profitability. Tailoring products and advertising to the wrong customers could be an expensive mistake. The sales function must therefore be equipped (in terms of skills and analytical tools) to perform this customer management role, assuming it is not performed by marketing. It may include the development of "bidding" strategies aimed at winning the business of certain customers or segments in the event that reverse markets materialize and customers do indeed start putting their orders out to bid.

Communities can change the rules of the game and allow smaller players to turn the tables on larger ones

Watch out for new competitors. The advent of virtual communities may lead to the emergence of new competitors. Salespeople need to keep an eye on the virtual marketplace to make sure they know who they are selling against. Communities can change the rules of the game and allow smaller players to turn the tables on larger ones. They can also affect a company’s competitiveness, if, for example, one company offers product descriptions, electronic ordering capabilities, package delivery tracking, and customer service on line, while another does not. All four of these activities can be found on line today. Salespeople must keep abreast of these developments, know how to sell against them in the offline world, respond where appropriate, and keep marketing informed about new competitive threats. An aggressive salesforce will, of course, take the lead in offering such services to its key customers.

Reinvigorating other functions

The virtual community can help to improve the performance of functions other than marketing and sales by offering them a combination of wider options, better information, and broader access to people and markets. Some of the functions that stand to benefit most are discussed below.

Strategic planning

Most large corporations develop strategic plans with long time horizons, and many use a scenario-based approach to planning. Virtual communities open up a new range of possible scenarios. Trying at this early stage in the game to develop a radical yet reasonable scenario represents a challenge. But playing out the business dynamics that might arise from the successful emergence of virtual communities can be a useful exercise that challenges ingrained notions about a particular industry and its structure. Indeed, it may force major players to rethink their approach to serving their markets. It may also encourage smaller players to consider ways to expand their market presence by trying to establish a strong competitive position in the new channels created by virtual communities.

The need to understand the possible threats posed by virtual communities may prove to be the most compelling argument for near-term entry

In the nearer term, if a business decides to organize a virtual community, its strategic planners must contend with forecasting the economics of that community. Initially, this will be difficult. The cost structure will be unusual for most companies, and revenues will be not only hard to predict but also, because of increasing returns dynamics, complex to model. Communicating the challenges, urgency, and payoffs of entering the community-organizing business will be all the harder if there is a need for a shift in mindset on the part of top managers, especially given the relatively long ramp-up period before revenues start to take off. The low up-front investment should mitigate some of these difficulties and may persuade senior managers to endorse the richer set of competitive options that communities can provide. Realistically, the need to understand the possible threats posed by virtual communities may prove to be the most compelling argument for near-term entry.

Information systems management

If virtual communities become a permanent feature of their business, information systems managers will have a heavier workload. The challenges will mainly lie on the software rather than the hardware side. While some of the software functions involved in organizing a community are likely to be outsourced, IS managers will still have to understand these functions well enough to know which are important and who has the skills to perform them. Software-related functions will include designing the look and feel of the community, creating the information architectures that allow member-generated content to be accessed effectively, and building systems to capture and manage member profiles.

IS managers must understand these new public-network environments and be able to advise senior managers on how to perform the necessary technological balancing act.

The upside lies in the development of virtual communities designed to meet the needs of IS professionals. As such communities emerge, IS professionals should take advantage of them so as to stay informed about their rapidly changing industry and to enhance the network of peers to whom they can turn for advice on technical issues, new products, and service providers.

Human resource management

The 1990s have kept the human resource manager busy with retrench-

ments, downsizings, and mergers. Yet, as with sales, many core HR functions—such as labor relations, hiring, evaluation and career-track management, compensation, and benefits management—have changed little over the past ten or even twenty years. Major corporations still require many of the same skills. This may change in industries where virtual communities emerge in force.

Organizing virtual communities requires the creation of new roles. An HR manager must have a perspective on what these roles are and whether they should be outsourced, or how they can be developed in house. Community organizing will also require existing functions to acquire new skills and a new mindset. If larger organizations are to adapt, HR managers must play a role in ensuring that these new skills are understood and acquired.

This will mean training existing managers to break out of their mindset and address the opportunities of the technology creatively. It will also mean motivating organizations to accept more uncertainty. In many cases this will be difficult, because people tend to shy away from technology if they do not understand it—senior managers especially. HR managers alone cannot be held responsible for making sure that corporate cultures adapt to change, but they can help. They should make sure that a few of the right people are in powerful enough positions to steer the company in new directions and create the evaluation and compensation mechanisms to support risk-takers. If virtual communities are to be an opportunity and not a threat, the HR manager must understand them conceptually and anticipate them organizationally.

On the recruitment front, communities are providing a new channel for the labor market. There are numerous areas on the Internet where people can post job listings or place their résumé. Often these take the form of bulletin boards within a broader site. Cal Law, for example, has an area called Cal Law Legal Classifieds, where California law firms can post job descriptions for attorneys, paralegals, and secretaries. In addition, like IS managers, HR managers across many industries can benefit from the virtual community in terms of its networking potential—in their industry and their profession—and its capacity to help them better understand the labor markets in which they operate.