ryan sengara - [social media - legacy effect need not apply]

7/28/2019 Ryan Sengara - [Social Media - Legacy Effect Need Not Apply]

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Social Media: Legacy Effect Need Not Apply

Ryan Sengara



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Abstract

The purpose of this paper is to explore the applicability of Reichheld’s theories regarding

customer loyalty and defections on social networks as they apply to unconventional business

models. Utilizing surveys to obtain the opinions of social media subject matter experts, as well as

the opinions of social media users, in tandem with secondary research, this paper seeks to

establish if social media websites conform with Reichheld’s description of companies which

should experience significant year over year growth. Subsequently, the paper will explore the

relationship between defections, loyalty and profitability as well as the relationship between user

behaviour and profitability.

The data obtained as a part of this research indicates that the relationship between

defections, growth and per user profitability is uncertain at best. Instead of year over year

growth, over the last five years, social networks have experienced extreme variability in their

financial results swinging between significant losses and meagre profits. Of particular note was

the observation that profit growth is being exceeded by user growth suggesting a decreasing

ability for websites to monetize their users efficiently and additionally, reduced participation in

revenue generating activities. In essence, attitudinal and behavioural loyalty expressed in terms

of participation in revenue generating activities is the governing factor in profitability, rather

than Reichheld’s conventionally defined loyalty and zero defections.

In order to hedge against the variability social media websites should engage in increase

transparency, enhance their referral tools and explore changing their business model.



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Table of Contents

Abstract ........................................................................................................................................... 2 Table of Contents ............................................................................................................................ 3 Table of Figures .............................................................................................................................. 4 Introduction ..................................................................................................................................... 5 Method ............................................................................................................................................ 8

Primary Research ........................................................................................................................ 8 Subject Matter Experts Survey ................................................................................................... 8 Social Media User Feedback ...................................................................................................... 9 Results ....................................................................................................................................... 10 Analysis..................................................................................................................................... 10 Other Sources ............................................................................................................................ 10 Limitations and Shortcomings of Methods ............................................................................... 11

Results of Primary and Literature Research ................................................................................. 12 Social Media Growth Rate Results ........................................................................................... 12 Social Media Defection Rate Results ....................................................................................... 13 Social Media Profitability Results ............................................................................................ 14 The Business Structure of Social Media ................................................................................... 15 Changing Attitudes towards Social Media ............................................................................... 16

Discussion ..................................................................................................................................... 19 Results Analysis ........................................................................................................................ 20 Verification of Conformity ....................................................................................................... 20 Financial Analysis ..................................................................................................................... 21

Recommendations ..................................................................................................................... 25

Conclusion .................................................................................................................................... 27 References ..................................................................................................................................... 29 Appendixes ................................................................................................................................... 33



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Table of Figures

Figure 1. SME Questionnaire Response: Are social networks experiencing user growth? ......... 12 Figure 2: User responses to personal social media use trends. ..................................................... 13 Figure 3 - Revenue models, revenue drivers and implications for social networking sites. ......... 15 Figure 4 - Social networking user habits over the last 12 month period ...................................... 16 Figure 5 - Social network user engagement rate statistics ............................................................ 17 Figure 6 - Social network user profile data and content generation trends .................................. 18



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Facebook, LinkedIn and RenRen launched their pursuit to become publicly traded

companies during a period of strong metrics which, according to Reichheld and Sasser’s theories

the Loyalty Effect and Zero Defection Strategy, are indicative of future profitability (1990).

These metrics included strong, consistent user growth, low customer defections and account

closures. For the purposes of this research paper it is important to note that a defector chooses to

no longer engage in an exchange of goods or services with a company. Reichheld (2000) argues

that companies which experience explosive growth and high customer retention will experience

significant profit per user growth within twelve months and that this trend should continue to

increase over time. Under the guise of perceived inevitable profitability investors made frantic

bids for LinkedIn, Facebook and RenRen stock upon the day they became available to the public.

On the private stage, major acquisitions of existing social media websites such as MySpace were

made under the belief that social networking would become immensely profitable in the short

term. The question, however, remains as to whether this exuberance was warranted.

Despite the rush to invest in social media, a shroud of mystery surrounds the business of

social networking and whether existing business theories are applicable on e-commerce with

unconventional business models. The dot-com bust of 2000 serves as a reminder of our inability

to assess unconventional businesses. As such, the applicability of Reichheld and Sasser’s

theories as basis for an evaluation tool is extremely important to explore. Investors rely upon

Reichheld and Sasser’s theories as a bellweather tool and means for determining future

profitability, a core factor in assessing suitability for investment. Should the core tenets of

Reichheld and Sasser’s Legacy Theory and Zero Defections Strategy fail to apply to social media



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websites, investors may receive “false positives” which would result in the misleading signal of

certain future profitability. A failure to determine the validity indicator could result in investors

inappropriately investing in social networking companies, and could cause another dot-com

crash.

Little research has been performed by Reichheld, Sasser or others to determine whether the

Loyalty Effect or Zero Defection theories hold water for companies who employ unconventional

revenue sources as a means for driving profit. Because of this, there is significant debate as to

whether the Legacy Effect and Zero Defections Strategy are applicable to social networking

companies. As such, the purpose of this research study is to establish whether Reichheld and

Sasser’s theories apply to social networking companies. The paper will first seek to determine

which social networking companies have experienced a low defection rate and significant growth

in accordance with Reichhald and Sasser’s theory, and then establish if those same sites have

experienced a growth in profit per user as hypothesized in the Loyalty Effect and Zero Defection

Strategy theories. For the purposes of this research project, corporate user growth is excluded

because corporate growth is ultimately contingent and dependent on consumer growth. The

paper will also explore the relationship between user activity on company profitability. We

hypothesize that the Legacy Effect and Zero Defections strategy are not universalizable, and that

while social networks may experience explosive growth and low defections they may not

experience growth in profit per user. We believe that this is due to social networking company’s

unconventional business model; user activity is a better determinant of future profitability than

loyalty.



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Method

Primary Research

The purpose of our primary research was to establish the trend of user behaviour as well

as growth patterns as they pertain to social networking websites. The data collected was integral

to addressing whether social networks are growing in order to establish whether social networks

satisfy the conditions of Reichheld and Sasser’s theory, and to establish whether there is a

relationship between user behaviour and social network profitability. For the purposes

In order to establish these trends, two independent groups were queried for their opinions.

SurveyMonkey, an online data collection tool, was selected because it provides a simple means

of collective, tabulating and analysing data. A questionnaire was designed for each group. The

questionnaire was distributed via web link to all of the recipients. For the social networking

growth trends questionnaire, links were emailed specifically to each subject matter expert,

whereas the social media usage habits questionnaire was broadcasted across social media over a

series of weeks, as well as email lists indiscriminately. For the latter questionnaire, respondents

were invited to volunteer their time to fill out the survey. There was no compensation offered to

either party if they responded to the survey.

Subject Matter Experts Survey

For social networking growth trends questionnaire, several qualified subject matter

experts were queried. Each individual who was queried is either directly employed in social

media software development, or is involved marketing which heavily utilizes social media and as

such are informed on social media trends. The blast was sent out to several suitable candidates,

five responses were received. The questionnaire designed for our subject matter experts



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employed a combination of qualitative and quantitative responses. The questionnaire contained a

series 6 questions which focused on the growth of social media in commercial and consumer

spaces, as well as the perceived value of social media campaigns for businesses, and whether

they felt that there would be continued investment in social media by businesses. Each question

was given a series of five answers, ranging from very positive to neutral, and decreasing to very

negative. Three questions had “additional comment boxes” for questions which respondents felt

required a more detailed answer. This particular method of data collection was selected because

a high degree of specificity was not required given the plethora of secondary research available

on the topic.

Social Media User Feedback

For the social media usage habits questionnaire, the questionnaire was distributed

indiscriminately across social media as well as via email list to a diverse cross-section of

recipients. Thirty respondents were presented with five questions in a quantitative format which

discussed their social media usage habits, specifically whether they used social media, and if so,

whether their use has declined or increased, how frequently they access, update, and engage in

revenue generating activities such as clicking on sponsored stories or banner advertisements. For

the purposes of this paper, respondents were asked to exclude mobile usage and visual updates

(profile/cover photo updates) from their survey reporting. Respondents were presented with a

diverse set of responses which ranged from often/increased significantly to not often/decreased

significantly. This particular method of data collection was selected because a high degree of

specificity was not required given the plethora of secondary research available on the topic.



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Results

Upon completion of the survey, the results were automatically collected, stored, compiled

and tabulated using SurveyMonkey’s secure automated website. Once the survey was complete,

the candidate’s selections could not be altered. The results were then exported to excel for

evaluation and analysis.

Analysis

No particular mathematical analysis was used on the questionnaire results. Rather a

descriptive holistic interpretive approach was employed. The data was analysed for distributions

which would indicate skewness and general trends to act as a guide to indicate and confirm

whether our hypothesis was realistic. The data was also used as a guide and indicator for

supplementary secondary research.

Other Sources

To supplement our primary research, we sourced out relevant supplementary secondary

sources. These sources were used compensate for the small sample size of the primary research

and to validate and support general trends indicated in that same primary research. Academic

resources were obtained through academic resources made available through Kwantlen

Polytechnic University’s academic journal subscription services. Databases searched include but

were not limited to Books 24x7, Academic Source Premier, Sage Premier. Non-academic articles

sources were selected on the basis individual merit and the reputation of the publisher and

relevancy. Examples of sources for non-academic articles include but are not limited to

Mashable and TechCrunch, specialists in social media research and analysis, the Wall Street

Journal, Forbes and MarketWatch.



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Limitations and Shortcomings of Methods

There were several issues with the primary research methods employed for the purposes

of this research. Included below are the potential limitations of our primary research and the

steps we took to mitigate their impact on our research results.

Firstly, there is a statistically small sample for both subject matter experts and

respondents for the social media usage survey; because of this the results of the survey may

change significantly over a larger sample. This issue has been addressed by using secondary

sources to verify

Secondly, the questionnaire does not allow for changes in trends over time and lacks

specificity. If a trend increased significantly, but is slowing, there is a possibility for a

miscategorised response and impreciseness. This has been addressed by adding time frames to

the responses to certain questions and by adding “additional comment boxes” for respondents to

add additional detail.

Thirdly, there is the issue of a relative interpretation of measurement. The definition of

“extremely often” is defined on an individual basis. This has been addressed by adding

definitions, such as equating “extremely often” as 10 or more times per day.

Fourthly, there is a potential sample and selection bias amongst social media usage

questionnaire respondents. As social media such as Facebook was a primary vehicle of soliciting

responses for the social media usage habits, the responses are biased towards active Facebook

users. To hedge against this bias, responses were solicited through other avenues including via

email and in person and data was compared against secondary sources.



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Results of Primary and Literature Research

The purpose of the methodology was to determine whether social media companies meet

the conditions outlined by Reichheld and Sasser’s Legacy Effect and Zero Defections Theories

which certify them as companies which should experience increased profit growth per user over

time. After verifying that social media websites met these criteria, the purpose of our research

was to determine if social media websites are profitable, but more importantly, if they experience

growing profit per user over time as hypothesized by Reichheld and Sasser. The second

component of our research was to examine whether user habits and activity are impactful on

profitability. Our results revealed that social networking sites have experienced growth and low

defections, but overall profitability and profitability per user is uncertain. Social media

subscribers are also using their accounts less and are failing to engage in activities which create

profit for social networking companies.

Social Media Growth Rate Results

Figure 1. SME Questionnaire Response: Are social networks experiencing user growth?

In your expert opinion, has social media experienced anincrease in consumer subscriptions over the last 5 years?

Yes,significantgrowth.

Yes,somegrowth.

Socialmediasubscriptionshavestayedsteady.

No,somenegativegrowth.

No,significantnegativegrowth.



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Key result: According to the subject matter experts queried for this report, 80% of

respondents reported that social networks have experienced significant growth in consumer

subscriptions. 20% reported that social networks have seen some growth.

2007 2008 2009 2010 2011 CAGR

LinkedIn 15,000,000 33,000,000 50,000,000 75,000,000 135,000,000 73.21

Facebook 50,000,000 100,000,000 350,000,000 600,000,000 800,000,000 100

RenRen N/A 33,000,000 83,000,000 110,000,000 117,000,000 52.48

Twitter 750,000 5,000,000 75,000,000 145,000,000 300,000,000 347.21

Table 1 - User growth and cumulative aggregate growth rates for social networks.

Data collected from: (White, 2011) (Lukoff, 2011)(Wee, 2011)

Key result: Social media networks have experienced significant user growth between

2007-2012 according to annual user counts and cumulative aggregate growth rate calculations.

Social Media Defection Rate Results

Personal Account Defection (Closure) Rates

Figure 2: User responses to personal social media use trends.

Please select the response that most reflects your use of socialmedia.

Ihavecurrentlyclosedallmysocialmediaaccountspermanently.

Mysocialmediaaccountsaredeactivated,Idonotplantoactivatethemagaininthefuture.

Mysocialmediaaccountsaretemporarilydeactivated,butIhaveusedmysocialmedia

accountwithinthelast30days.Iactivelyusesocialmediawebsitesonaregularbasis.



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Key result: Social media users maintain their accounts rather than close them upon

cessation of use. This trend is confirmed Signature9 (2011) which states that only 55% of total

registered accounts for Facebook are active. Social media websites experience low defections

rates in terms of account closures.

Social Media Profitability Results

Reported Annual Profits/Losses

2007 2008 2009 2010 2011

LinkedIn $328,000 -$4,520,000 -$3,970,000 $15,390,000 $11,910,000

Facebook -$138,000,000 -$56,000,000 $229,000,000 $606,000,000 $1,000,000,000

RenRen Not available $1,080,000 -$84,630,000 -$73,420,000 $41,250,000Twitter Not available Not available Not available -$67,800,000 -$103,200,000

Table 2 - Annual profits and losses reported by social media networks

(Marketwatch, 2012)

Key result: Social networking websites are enjoying a period of overall profit growth

with the notable exception of Twitter. According to Ramsay (2010), increased profitability is not

always the result of loyalty and low defections.

Annual Profit/Losses per User

Using data collected from Marketwatch (2011), White (2011), Lukoff (2011) and Wee

(2011) profit per user was calculated.

2007 2008 2009 2010 2011

LinkedIn $.02 -$0.14 -$0.08 $0.20 $0.09

Facebook *-$2.76/-$1.52 *-$0.56/-$0.31 *$0.65/$0.36 *$1.01/$0.55 *$1.20/$0.69

RenRen Not available $0.027 -$1.02 -$0.68 $.35Twitter Not available Not available Not available -$.047 -$0.34

Table 3 - Profit per user for social networking sites

Key result: Research indicates mixed degrees of profitability amongst social networking

sites. While Facebook has begun to turn a consistent profit per user, which contradicts our



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hypothesis, LinkedIn and RenRen have experienced significant variation between profits and

losses per user over the last five years. Twitter has only experienced losses per user. Social

media websites which satisfy Reichheld and Sasser’s criteria for growth and low defections do

not universally experience consistent growth per user.

*Note: The calculations for Facebook are within a range. Facebook only reports their

monthly active users, unlike Twitter, LinkedIn and RenRen which reports total registrants.

Signature9 (2011) states monthly active users are only 55% of total registered users. As a result,

two sets of figures are provided for Facebook. The first figure is calculated using monthly active

users. The second figure is calculated using estimated total registrants.

The Business Structure of Social Media

Figure 3 - Enders's revenue models, revenue drivers and implications for social networking sites.

(Enders, 2008)



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According to Enders (2008), social networking websites which employ an advertising

model are highly dependent upon its number of users in order to drive revenue. This is because

websites such as Facebook, LinkedIn, Twitter and RenRen which employ the advertising model

receive their revenue from commissions and referral fees from actions undertaken by its users

(Enders, 2008). As such, continued revenue generation is contingent upon users engaging in

activities such as clicking banner ads, content generation, and joining business pages. This

argument is enhanced by Clemons (2008) who suggests that online advertising and social

networks are most likely to flourish when they enhance participation. According to Yan (2011),

the ability for companies to advertise on social media is be able to engage their consumers.

Key result: The ability of social networking websites to drive revenue is contingent upon

increasing quantities of users, as well as high participation and engagement in revenue

generating activities such as profile updates, content generation, and advertising click throughs.

Changing Attitudes towards Social Media

Social Media Account Usage

Figure 4 - Social networking user habits over the last 12 month period

Has your use of social media increased or decreased overthe last 12 months?

Increasedsignificantly.Increasedslightly.

Stayedthesame.

Decreasedslightly.

Decreasedsignificantly.Ihavedeactivatedmyaccount.



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Key result: A majority of respondents indicated a trend of declining social media use.

50% of respondents stated that they have deactivated or significantly reduced their social media

use. Alternatively 30% of users have increased their use which suggests a trend of polarization in

social media use. This is in agreement with Murphy (2012) who states 35% of Facebook users

are spending less time on Facebook than the previous six months while a mere 20% are spending

more time on Facebook. Additionally Murphy (2012) states that Facebook’s IPO made 44% of

survey respondents feel less favourable to the Facebook service.

Aversion to Revenue Generating Activities

Figure 5 - Social network user engagement rate statistics

Key result: A majority of social media users do not engage in advertising activities

which generate profit for social media websites. This is indicative of a trend elaborated upon by

Indvik (2012) who states advertising engagement has decreased by 53% since March 1st 2012.

According to Smith (2010) this is because “people are not [on social networks] to read ads. They

are there to talk to each other.”

Have you ever clicked on a social networking advertisement(e.g. sponsored stories, banner ads, pay-per-use services

etc.)?

Extremelyoften(10+timesperday)Veryoften(2-9timesperday)Moderatelyoften(Onceaday)Slightlyoften(Onceaweek)Notatalloften(Onceorlesstimespermonth)Never.



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Limited Profile and User Data Updates

Figure 6 - Social network user profile data and content generation trends

Content generation, a key revenue driver for social networking websites has plateaued or

declined. According to Van Grove (2010) social media users are beginning to take a passive

approach to social networking, with content creators dropping from 24% of all social media

users in 2009 to 23% in 2010.

Key result: While the use of social media continues to grow, activities content

generation (and as a by-product user data), which are key revenue drivers for advertising based

social media sites are on the decline.

How often do you update your social media accounts?

Extremelyoften(10+times

perday)Veryoften(2-9timesperday)Moderatelyoften(Onceaday)Slightlyoften(Onceaweek)Notatalloften(Onceorlesstimespermonth)Myaccountisdeactivated-Ineverupdatemyprofile.



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Discussion

The Loyalty Effect and Zero Defections Strategy

In Reichheld’s journal article, Zero Defections (1990), he states that under specific

circumstances companies will experience exponential profit per user growth. In another journal

article titled “E-Loyalty” (2000), Reichheld and Schefter address the differences between e-

businesses and conventional brick and mortar businesses. The main difference being that profit

per customer for e-businesses should increase at a far more rapid rate than conventional business

in part due to the reduced cost of online operations. Despite the differences between

conventional businesses and e-businesses he stated that “when it comes to [e-]customer loyalty,

the old rules are as vital as ever” (p. 106). That is customer loyalty is still the basis for value

creation (Reichheld & Teal, 1996) and previous research arguments in regards to the effect

customer loyalty still apply and that that defections are an indicator of where profits are headed

(1990). Reichheld (1990) argues that companies which experience high customer loyalty,

experience low defections will experience significant year over year profit growth per customer

within one year. Reichheld and Schefter (2000) state that this is due to the declining costs

associated with servicing new clients and that “in later years, relationships will generate big

returns” (p. 106) ranging from 25-95%. To that end, according to Reichheld and Schefter (2001)

customer loyalty facilitates superior long-term growth and infers that as a relationship between a

customer and a company endures, the profitability of each interaction should increase.



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Results Analysis

The purpose of our research was to determine if social networks satisfy Reichheld’s

description of companies which should exponential profit growth. As a part of his theories

Reichheld provides very specific barometers by which to judge the validity of his arguments.

Companies which have low defection rates and a high rate of growth should experience

exponential growth in profits.

Verification of Conformity

Social Media Growth

Feedback from social media experts indicates a strong belief that social media website’s

user bases have grown over the past five years. Their responses suggest that has steadily

increased at a rate ranging from very significant to significant and that respondents feel that

social media growth exceeds a normal rate. Given existing research, this result was expected and

is consistent with existing secondary research. In his article Social Media Growth 2006-2011

(2011), D. Steven White provides figures for Facebook, LinkedIn and Twitter’s annual user

growth. Kai Lukoff, (2011) provides statistics that suggest RenRen seeing explosive user growth.

For precise figures please see Table 1. Based upon these figures cumulative aggregate growth

rate figures were calculated which confirmed significant growth. Secondary data suggests a

strong growth trend across all popular social networking websites over a prolonged period of

time. According to D. Steven White (2011) “globally, the total number of people using social

media continues to rise.” We can conclude that social media websites are experiencing

significant growth in their user base and that that social media companies do comply with



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Reichheld’s first precondition for exponential year over year profit per user growth. For further

figures surrounding corporate and user growth please see Appendix F & Appendix C.

Defection Rates

Data collected suggests that users are not defecting away from social networking services

and indicate a trend of active use, or account suspension (either temporary or permanent) and an

aversion than account closure even if users will never use their account again. In the broader

scope of our research project, this will be discussed in more length in the usage habits results

section. Social networks do not release account closure data, thus this data is not verifiable.

However, if we operate under the assumption that our sample is indicative of the larger

population, these results indicate that social media websites maintain a low defection rate, thus

they satisfy Reichheld’s second precondition for exponential year over year profit per user

growth.

Primary research conducted suggests that LinkedIn, Facebook, RenRen and Twitter

comply with Reichheld’s preconditions required for exponential profit growth.

Financial Analysis

Secondary research suggests that LinkedIn, Facebook, Twitter and RenRen have

experienced varying degrees of success in terms of attaining profitability. While Facebook,

LinkedIn and RenRen have generated a positive net income, they have not been able to achieve

this goal on a consistent basis. Twitter has completely failed to become profitable completely.



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When evaluating the profitability of social networks on a per user basis, data suggests

that per user profitability changes at a highly variable rate or is completely stagnant with no

discernable pattern. Despite constant user growth all of the social networking companies

examined are experiencing a negative average profit per user, not exceeding the company’s all-

time high for average profit per user earnings,

Of particular note is the apparent non-existent relationship between low defections, user

growth and per user profitability. Although all social networking websites have experienced

strong year over year user growth, their net incomes have alternated erratically alternated

between losses and profits. Additionally, it appears that user growth is exceeding net income

growth, resulting in the erosion or stagnation of per user profit. Facebook, the only social

network which has had a sustained period of profitability, is currently experiencing stagnant per

user profitability due to these circumstances and suggests decreasing monetization efficiency and

diminishing return on user growth. This suggests that there is no relationship between defection

rates, growth and profitability and that growth, and low defections are not a determinant in per

user profitability. This sentiment is echoed by Ramsay (2010) who suggests that loyalty

initiatives do not necessarily result in profitability for online services. The question remains, if

social media websites have experienced growth and low defections, why have they not

experienced exponential profit per user growth as theorized by Reichheld?

Unconventional Business Models: An Emphasis on Attitudinal and Behavioural

Loyalty

Enders highlights a key component of social networks which Reichheld has failed to

consider. According to Enders (2008) social networks which employ an advertising oriented

model are highly dependent upon user interaction and engagement as a means of driving



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revenues and profits. Thus, loyalty and zero defections have little or no impact on driving per

user profitability as customers may maintain a relationship and consume the services offered by

social networks without engaging in any profit generating activities. Enders (2008) states that

users must engage in revenue generating activities such clicking on banner advertisements in lieu

of paying subscription fees. Alternatively, social media users must engage in other revenue

generating activities such as content generation, or providing user data which social networks

can sell to advertisers. Clemons (2008) states social networks flourish when they foster high

degrees of participation in part due to their financial dependence on user participation and

Kaplan and Heinlein (2010) state that social media is about sharing and interaction. According to

Ghezzi, Nogueira & Renga, 77% of all social networking sites have adopted this advertising

model. As such the social networking industry is sensitive to changes in user’s behavioural and

attitudinal tendencies in regards to revenue (thus profit) generating activities. As a result

attitudinal and behavioural loyalties, in respect to engaging in profit generating activities, rather

than conventionally defined loyalty by continuing to consume goods from a particular company,

are determinants in profitability. The success of social networks depends on users engaging in

revenue generating activities.

The Problem: Changing Behavioural Attitudes

Data regarding social media usage suggests a polarizing trend in regards to the use of

social networks. While some users are keeping their social network usage habits constant, a

majority are changing their social networking habits significantly. Primary research suggests that

the number of users increasing their social media usage is outnumbered by those who are

reducing their use of social networking sites. This suggests a growing aversion towards social



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networking. These sentiments are echoed by Murphy (2012) who indicates a diverging trend of

social media usage and that social media use has declined by 35% this year.

There also appears to be a trend towards declining participation in revenue generating

activities. The data provided by respondents suggests an aversion away from revenue generating

engagements such as clicking on sponsored stories, banner ads, or other pay-per-user services,

which are integral to social network profitability. Smith (2010) states that this is due to the nature

of social network, that is, social networks were designed as means to interact, not as advertising

platforms. According to Indvik (2012) social media engagement has decreased by 53% since

March 21st of 2012.

Additional data suggests that users are not generating content or supplying user data,

depriving social networks of a critical revenue source. Primary research suggests that very few

users create content, or edit their profile on a frequent basis. This observation is supported by

Van Grove (2010) who states that social media content creators have decreased from 24% in

2009 to 23% in 2010. This suggests that social networks will have challenging time monetizing

their user base and generating revenue and thus profit when their consumers are not attitudinally

and behaviourally loyal and aligned with the objectives of the corporation.

Data regarding changing behavioural attitudes towards social networking may explain

why social networking websites are not experiencing a rapid growth in profit. While it is true

that customers are loyal in terms of consuming social networking services, ultimately the

profitability of these services is being limited by their user’s willingness to engage in optional

profit generating activities.



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According to Owyang (2008) and Porter (2008) social media networks are encountering

difficulties becoming profitable because of their dependence upon optional attitudinal and

behaviour loyalty. This optional engagement has created significant challenges for social

networking companies in regards in mobilizing and monetizing their user base. They suggest a

variety of reasons as basis for why social networking websites may be having challenges

monetizing their user bases including, privacy concerns, and an inability to create profit

generating activities for users to engage in using their mobile devices and user flight or declining

user activity. Additionally Porter (2008) states that social media companies must address a core

challenge of their business, namely social networking sites, by definition, are not advertising

platforms and users do not go to these websites to seek out goods.

Discussion Summary

It is clear that there appears to be no relationship between loyalty, growth and per user

profitability for social networking websites. Instead, it appears that behavioural and attitudinal

loyalty expressed by engaging in revenue generating acts is a better indicator of future

profitability. That is, the more engaged a social network’s user base is the more revenue

generating activities will occur. As such, engagement as well as attitudinal and behavioural

loyalty is limiting factors in a company’s overall prof it, as well as profit per user.

Recommendations

Social networking websites need to adjust their strategies in regard to monetizing social

networking. Because primary revenue drivers on the part of their consumers are optional, social

media companies must find a way to reverse the trend of declining user engagement and increase

user participation in revenue driving activities in order to increase profit per user. Additionally,



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social networking websites can increase overall net income by taking steps to grow their user

base.

Trust

According to Enders (2008) a certain level of trust is necessary for an advertising based

business model to succeed. Without trust user engagement will decline. According to Maesin,

Mansor, Nayan, Osman and Shafie, users of social media are concerned about their privacy.

36% of survey respondents state they do not trust social networking websites will not use their

personal information for any other purpose, and 26% of survey respondents state that they do not

feel their personal information is protected. A lack of trust is a detriment to user growth and user

engagement.

As such we recommend transparency and clarity in regards to social media’s websites

user data and privacy policies. Social media companies should strive to provide understandable

terms and conditions which are easy for users to read. Additionally, social networks should

refrain from engaging in activities which might compromise user’s trust.

Enhance Referral Tools

While the relationship between growth, defections and per user profitability is uncertain,

user growth has resulted in an increase in net income. Thus social networks should take steps to

enhance tools which would result in further growth in their user base. According to Porter (2008)

intuitive and easy referral tools should be provided to allow recommendations and referrals from

existing users, and that existing users should be compensated for inviting others in order to

promote referrals. This strategy is echoed by Enders (2008) who suggests that by offering



27SOCIAL MEDIA

incentives, social networks will benefit by attracting more users. A particular strategy Enders

(2008) suggests is employing “country managers”, who are individuals with high numbers of

friends who are paid to recommend the social networking service to others.

Change Business Model

According to Bersin (2012) both LinkedIn and Facebook generate roughly $3.40 in

revenue per user. Though Ender suggests an increasing aversion towards pay for content

services, a decline from 45% in 2000 to 42% in 2002, it might be worth exploring if social media

customers would be willing to adopt a mixed subscription/advertising revenue structure with, or

alternatively an exclusively subscription based model with a subscription fee exceeding $3.40

per year. This strategy would hedge against changing user habits and declining engagement in

optional revenue generating activities. According to Owyang (2008) this may be challenging due

to intense competition in the social networking industry.

Conclusion

Many questions remain surrounding the viability of social networks. Despite Reichheld’s

hypothesis that all businesses, e-business or brick and mortar, should experience year over year

profit per user growth, our research has indicated that this relationship is in fact, uncertain. Data

suggests that even though social networks have experienced significant user growth, and

experienced low defection rates, social networking websites have experienced varying degrees of

success in becoming profitable. Thus our hypothesis is proven to be true, companies which

experience low defections and high growth will not always experience growth in profit per user.



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While websites such as Facebook have become profitable, their profit per user growth has

stagnated in part due to the fact that their user growth exceeds their income growth suggesting

decreasing monetization efficiency. LinkedIn and RenRen have swung between profits and

lossess, and Twitter has yet to make a profit. Reichheld’s theories fail to include a crucial vital

factor for companies which employ an alternative style business models – user interaction as

well as attitudinal and behavioural loyalty. The research contained within this academic paper

highlights the importance of user engagement over conventional loyalty for non-traditional

business models. It is these factors, rather than conventionally defined loyalty which act as a

catalyst and governor of profit per user growth. Should the trend of decreasing user engagement

continue, profit per user will continue to decrease. It is worth exploring the direct relationship

between user engagement and profitability.



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Appendixes

Appendix A – Social Media Usage Habits Survey

1. Please select the response that most reflects your use of social media.I have currently closed all my social media accounts permanently.

My social media accounts are deactivated, I do not plan to activate them again in the future.

My social media accounts are temporarily deactivated, but I have used my social mediaaccount within the last 30 days.

I actively use social media websites on a regular basis.

2. If you responded that you do maintain an account (active or temporarily inactive), how oftendo you access your social media accounts? Notes: Please do not include accessing social mediathrough your mobile device.

Very often (2-9 times per day)

Moderately often (Once a day)

Slightly often (Once a week)

Not at all often (Once or less times per month)

My account is deactivated - I never check my accounts.

3. Has your use of social media increased or decreased over the last 12 months?

Increased slightly.

Stayed the same.

Decreased slightly.

Decreased significantly.

I have deactivated my account.

4. Have you ever clicked on a social networking advertisement (e.g. sponsored stories, banner ads, pay-per-use services etc.)?





Never.

5. How often do you edit your social media profile? (Exclude uploading photos, profile pictureupdates, include "likes" of commercial profiles/photos.)



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My account is deactivated - I never edit my profile.

Appendix B – Responses to Social Media Usage Habits Survey

Please select the response that most reflects your use of social media.

Answer OptionsResponse

PercentResponse

Count

Ihavecurrentlyclosedallmysocialmediaaccountspermanently.

3.3% 1

Mysocialmediaaccountsaredeactivated,Idonotplantoactivatethemagaininthefuture. 10.0% 3

Mysocialmediaaccountsaretemporarilydeactivated,butIhaveusedmysocialmediaaccountwithinthelast30days.

16.7% 5

Iactivelyusesocialmediawebsitesonaregularbasis.

70.0% 21

answered question 30

skipped question 0

If you responded that you do maintain an account (active or temporarily inactive), howoften do you access your social media accounts? Notes: Please do not include

accessing social media through your mobile device.


PercentResponse

Count

Extremelyoften(10+timesperday) 20.0% 6

Veryoften(2-9timesperday) 13.3% 4

Moderatelyoften(Onceaday) 26.7% 8

Slightlyoften(Onceaweek) 10.0% 3

Notatalloften(Onceorlesstimespermonth) 16.7% 5

Myaccountisdeactivated-Inevercheckmyaccounts.

13.3% 4


skipped question 0



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Has your use of social media increased or decreased over the last 12 months?


PercentResponse

Count

Increasedsignificantly. 16.7% 5

Increasedslightly. 13.3% 4

Stayedthesame. 20.0% 6

Decreasedslightly. 23.3% 7

Decreasedsignificantly. 13.3% 4

Ihavedeactivatedmyaccount. 13.3% 4


skipped question 0

Have you ever clicked on a social networking advertisement (e.g. sponsored stories,

banner ads, pay-per-use services etc.)?


PercentResponse

Count






Never. 16.7% 5


skipped question 0

How often do you edit your social media profile? (Exclude uploading photos, profilepicture updates, include "likes" of commercial profiles/photos.)


PercentResponse

Count






Myaccountisdeactivated-Ineverupdatemyprofile. 13.3% 4

answered question 30skipped question 0



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Appendix C – Additional Charts from Social Media Usage Habits Survey

Appendix D – Social Media Subject Matter Experts Survey

1. In your expert opinion, has social media experienced an increase in consumer subscriptionsover the last 5 years?

In your expert opinion, has social media experienced an increase in consumer subscriptionsover the last 5 years? Yes, significant growth.

Yes, some growth.

Social media subscriptions have stayed steady.

No, some negative growth.

No, significant negative growth.

Additional comments?

2. In your expert opinion, have social media websites experienced a growth in corporatesubscriptions?

Yes, significant growth.

Yes, some growth.

Corporate social media subscriptions have stayed steady.



If you responded that you do maintain an account (active or temporarily

inactive), how often do you access your social media accounts? Notes: Pleasedo not include accessing social media through your mobile device.

Extremelyoften(10+timesperday)

Veryoften(2-9timesperday)

Moderatelyoften(Onceaday)

Slightlyoften(Onceaweek)

Notatalloften(Onceorlesstimespermonth)

Myaccountisdeactivated-Inevercheckmyaccounts.



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Additional comments?

3. To follow up on the previous question, in your experience, have social networking sites seenan increase in advertising spending on Social Media by companies?

Yes, significant

Yes, some growth.

Social media advertising investment has remained steady.



4. Given your client experience, has creating a corporate profile on Facebook generally had a positive or negative impact on their business?

Very positive

Slightly positive

Results uncertain/Negligible

Slightly negative

Very negativeOther (please specify)

5. In your expert experience, what kind of return on investment has social media advertising andcorporate profiles offered for companies?

Very positive.

Slightly positive.

Negligible or none.

Slightly negative.

Very negative.

6. In your expert experience, how many of your clients have terminated or do not maintain their social media campaigns?

50-100%

25-50%

10-25%

5-10%

<5%



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Appendix E – Responses to Social Media Subject Matter Experts Survey

In your expert opinion, has social media experienced an increase in consumersubscriptions over the last 5 years?


PercentResponse

Count

Yes,significantgrowth. 80.0% 4

Yes,somegrowth. 20.0% 1

Socialmediasubscriptionshavestayedsteady. 0.0% 0

No,somenegativegrowth. 0.0% 0

No,significantnegativegrowth. 0.0% 0

Additionalcomments? 3

answered question 5

skipped question 0

In your expert opinion, have social media websites experienced a growth in corporatesubscriptions?


PercentResponse

Count

Yes,significantgrowth. 40.0% 2


Corporatesocialmediasubscriptionshavestayedsteady.

0.0% 0



Additionalcomments? 5

answered question 5

skipped question 0

To follow up on the previous question, in your experience, have social networking sitesseen an increase in advertising spending on Social Media by companies?


PercentResponse

Count

Yes,significant 40.0% 2


Socialmediaadvertisinginvestmenthasremainedsteady.

0.0% 0



answered question 5

skipped question 0



39SOCIAL MEDIA

Given your client experience, has creating a corporate profile on Facebook generallyhad a positive or negative impact on their business?


PercentResponse

Count

Verypositive 20.0% 1

Slightlypositive 40.0% 2

Resultsuncertain/Negligible 40.0% 2

Slightlynegative 0.0% 0

Verynegative 0.0% 0

Other(pleasespecify) 3

answered question 5

skipped question 0

In your expert experience, what kind of return on investment has social media

advertising and corporate profiles offered for companies?


PercentResponse

Count

Verypositive. 20.0% 1

Slightlypositive. 60.0% 3

Negligibleornone. 20.0% 1

Slightlynegative. 0.0% 0

Verynegative. 0.0% 0

answered question 5

skipped question 0

In your expert experience, how many of your clients have terminated or do not maintaintheir social media campaigns?


PercentResponse

Count

50-100% 0.0% 0

25-50% 0.0% 0

10-25% 40.0% 2

5-10% 20.0% 1

<5% 40.0% 2

answered question 5

skipped question 0



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Appendix F – Additional Charts from Social Media Subject Matter Experts Survey

In your expert experience, how many of your clients have terminated or do not

maintain their social media campaigns?

50-100%

25-50%

10-25%

5-10%

<5%

In your expert experience, what kind of return on investment has social mediaadvertising and corporate profiles offered for companies?

Verypositive.

Slightlypositive.

Negligibleornone.

Slightlynegative.

Verynegative.



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Given your client experience, has creating a corporate profile on Facebookgenerally had a positive or negative impact on their business?

Verypositive

Slightlypositive

Resultsuncertain/Negligible

Slightlynegative

Verynegative

To follow up on the previous question, in your experience, have socialnetworking sites seen an increase in advertising spending on Social Media by

companies?

Yes,significant

Yes,somegrowth.

Socialmediaadvertisinginvestmenthasremainedsteady.





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In your expert opinion, have social media websites experienced a growth incorporate subscriptions?

Yes,significantgrowth.

Yes,somegrowth.

Corporatesocialmediasubscriptionshavestayedsteady.



ryan sengara - [social media - legacy effect need not apply]

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