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The Value Of Customer Networks

September 1, 2016 by Christopher Koch 31

Traditionally, businesses have always worked for customers. Success depended on the ability to offer great products and services, make the purchasing process easy and enjoyable, and follow up with post-sales treatment that makes buyers want to come back again.

That’s all still true. However, in the digital economy, working with customers has become just as important as working for them. We’re talking about more than focus groups or ethnographic research here. This is about using digital channels to create customer networks that provide information and value to businesses.

Digital startups have created new business models out of customer networks. Crowdsourcing sites – such as Kickstarter and Quirky – that allow communities to rate and invest in ideas for new products wouldn’t exist without customer networks. For sharing economy startups like Airbnb, the customer network is part of the product itself. Hosts and guests sell their time and assets through personal track records and profiles.

Every Business Needs a Customer Network

Every business needs to incorporate customer networks into its strategy. That’s because customers have become more valuable online than offline. Indeed, research by David Rogers, a professor at the Columbia Business School, found that 8 of the 10 most valuable global companies founded since 1994 are digital platforms built around customer networks.

Chalk it up to the network effect, a term that goes back to the early days of the telephone when Alexander Graham Bell wanted to talk to someone else besides Thomas Watson. The more phone lines that were added to the network, the more valuable the network became for the phone company and its customers.

But the value of today’s digital customer networks is more than just the number of participants, argues Michael Schrage, a research fellow of the MIT Initiative on the Digital Economy. Whether it’s browsing product reviews on Amazon or rating movies on Netflix, every customers’ active participation adds new dimensions of value for everyone involved. “The more users participate and the more innovatively they engage, the more value – and valuable data and experiences – that can quickly be generated. In turn, the more value created, the more users – and innovative uses – materialize,” writes Schrage.

In other words, customer networks aren’t just valuable sources of data; they are also breeding grounds for innovation and improved customer experiences.

Customer networks are the breeding grounds for innovation and improved customer experiences.

Three Ways to Take Advantage of Customer Networks 

Of course, traditional brands can’t simply drop their existing business models and become digital platforms. They need to find ways to develop digital customer networks that serve, or at least complement, what they already do.

One way is to make use of existing customer networks like social media, but do it in a way that capitalizes on the value that users create when sharing with one another and with brands. For example, one department store monitors whether its products are trending on Pinterest and features them both in stores and online. Other companies have essentially turned social media into a business platform, where customers can contact customer service or make purchases. In return, decision makers can access valuable feedback to identify new opportunities.

Businesses are also getting their feet wet by funding startups or by partnering with existing digital customer network providers. That way, companies can learn what it takes to run a successful network without disrupting the existing business. It also limits any opposition to the network from the current workplace culture, which may see the new entity as a threat.

The most difficult option is to set up a digital customer network within or alongside the existing business. The new entity will require new skills, new leadership, and a new culture. That means many external hires, which can cause resentment and upheaval among veteran employees who might fear for their jobs.

Indeed, in this case, there is the possibility that the customer network could evolve into a new business that cannibalizes the existing model or, one day, replaces it entirely. But it’s a risk that companies have to take. As R “Ray” Wang, principal analyst and founder at Constellation Research, which helps organizations build digital business models advises, “If you don’t disrupt, someone else will.”

For more on creating moments that matter to customers, anytime and anywhere, see Live Business: Live Customer Experiences for the Digital Economy.

Christopher Koch is the Editorial Director of the SAP Center for Business Insight.

This story originally appeared on The Digitalist Magazine as part of the 10 Weeks of Live Business series.

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