Academic journal article The McKinsey Quarterly

Real Profits from Virtual Communities

Academic journal article The McKinsey Quarterly

Real Profits from Virtual Communities

Article excerpt

Critical mass is now in place

Who will control communities with the right mix of content, fantasy, chatter, and commerce?

From product manager to executive producer

You will need to be brave in these new worlds

Who will win the coming online battle? Will it be the Internet, or the large commercial gateways - Prodigy, America Online, CompuServe, and now Microsoft? It's a question that many industry participants have been asking. In most respects, however, it is the wrong question because electronic communities will emerge in the next 12 to 18 months to revolutionize online services. The real questions are: What will these communities look like? How will they create value? Who will organize and own them?

All companies marketing goods and services to consumers or businesses, and particularly those involved in direct marketing, should be concerned about these issues. (This article focuses on the consumer arena, but the principles apply equally to business.) Electronic communities are set to transform the structure of many industries, and the role and scope of the marketing function within them.


Millions of individuals have begun to participate in the online arena in the past three years. Conservative estimates cite 7 million users of proprietary services such as America Online, Prodigy, and CompuServe, and 5 million private users of the Internet, in the US. These users have reached the critical mass and balanced demographics that will allow electronic communities to form. The necessary technology is widely available and now affordable to a mass market.

Over the past decade, the personal computer has become a fixture in many homes: over 30 percent of US households are now equipped with PCs, and 45 percent of these have modems. Technological advances have given PCs a capacity and power unimaginable ten years ago. Software development has kept pace with hardware, making it possible to combine many previously separate activities - voice communications, entertainment, information, and transactions - in a single package. Developers are becoming skilled in making online facilities attractive and easy to use.

This gathering momentum will accelerate technological progress. Cable companies are currently exploring plans to equip homes with cable modems, which would eliminate at a stroke perhaps the single greatest drawback of online services - the frustration of waiting for graphics to unscroll on the screen.

Communication and community

Communication is at the heart of today's online services. The ARPANET, from which the Internet later sprang, was funded by the US Department of Defense, but driven by a group of scientists who had a vision of communicating with one another electronically. The expansion of the Internet, funded by the National Science Foundation, was also fueled by academic communities.

Today, bulletin boards and chat lines are popular and growing: there are about 8,000 topic areas in Internet Relay Chat (IRC), for example. Such facilities also seem to play a vital role in encouraging users of commercial services to spend time online. Since the large gateways count marketing as a major expense and suffer from high churn rates, the development of loyal communities is in their strategic interest.

Electronic communities have actually existed for many years. Groups like The Well have spawned strong relationships and developed their own norms and sense of history. Countless mini-communities are forming on and off the Internet, although most remain small.

In general, however, these communities are noncommercial. Communication, entertainment, and information are their reasons for being, and contracts tend to be in barter form. Financial transactions are rare, and often resisted. We believe, though, that new kinds of community that are more commercially focused will emerge soon.

Consumers will demand such a shift. …

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