Based on research by Sharad Borle (Rice Business), Utpal Dholakia (Rice Business), René Algesheimer (Universitat Zurich), and Siddharth S. Singh (Indian School of Business)

Key findings:

• Simply mass emailing invitations to customers boosts community participation, making it an effective marketing strategy.
• Customers who act relationally in a community tend to be pre-disposed to such behaviors rather than motivated by participation.
• Though participation actually decreases some types of relational behaviors toward the firm, it has significant educational value for customers.

Customer communities can deliver real marketing value, which helps explain why many firms are investing more of their budgets in building and managing them. The promise is straightforward: bring customers together, deepen relationships and create value that extends beyond individual transactions.

But the promise of value creation raises two practical questions. First, does participation in a customer community actually cause customers to behave in more valuable, relationship-oriented ways toward the sponsoring firm? And second, even if it does, can firms do anything concrete to increase participation in the first place?

According to new research from Rice Business, the answer to the second question is yes. One simple tactic works: send customers an email invitation to join the community.

What happens next, however, is more complicated. While email invitations are effective at jumpstarting participation, participation itself does not always translate into higher value-creating behaviors for the firm. In fact, contrary to what many managers might expect, customer participation can reduce certain types of buying and selling activity.

To understand why, Rice Business professors Sharad Borle and Utpal Dholakia, along with their co-authors, studied nearly 14,000 eBay customers who list, bid on and sell products through the platform.

While as an auction site eBay earns revenue from these activities, the firm also hosts customer communities comprised of buyers and sellers who chat real-time or via discussion boards. Consistent with a sociological definition of community, these online gatherings at eBay are social organizations where customers’ interactions around transactions are often mixed with personal chat, communication of war stories or social support.

During the year-long study, each customer had successfully completed at least one eBay transaction — i.e., won an auction or completed a sale — within three months prior to the research team’s experimental manipulation. But none had participated in an eBay community. 

Roughly half of these customers were invited via email to participate in an eBay community; the remaining customers were not invited to join. The data contained information on customers for 16 months prior to the release of the email invitation, and customers were observed for one year after the email invitations. 

The researchers tracked customers’ bidding behavior (number of bids and monthly spending) and selling behavior (number of listings and monthly revenue), along with demographic and marketing-related variables.

While an initial, cursory analysis indicated that participation was correlated positively with all four bidding and selling behaviors, a second, more detailed analysis revealed otherwise. This second analysis explicitly accounted for the fact that customers might self-select into participation, which could bias the results of the analysis, and was comprised of two empirical models. 

The so-called “participation model” showed that email invitations, along with a couple of reminders, worked. Customers who were invited to participate were associated with a 23 percent higher probability of participation than those who were not invited. The analysis also revealed that firms should pay attention to variables that could profile target customers, because certain variables could be associated with a higher probability of participation.

The so-called “outcome model” revealed an unexpected truth: that customer participation in the community had a negative effect on a selling behavior outcome (number of listings) and a buying behavior outcome (amount spent). 

Specifically, a 10% increase in the propensity to participate, above the median value, corresponded to four fewer listings per month and a spending decrease of about .58 Euros per month. Scaled across eBay’s vast customer base, the negative impact is substantial. 

So, in the end, it seems that customers who act relationally in a community tend to be pre-disposed toward such behaviors rather than motivated to do so by participation.

The researchers suggest that lower spending reflects customers’ increased exposure to community “war stories” about the risks of overspending. At the same time, revenue did not decline despite fewer listings, likely because the community’s educational value helps customers become more efficient sellers over time.

That educational value may translate into longer-term benefits for eBay, including positive word-of-mouth and growth in the community itself. Still, this study focused squarely on participation’s effect on primary value-creating activities — namely, the buying and selling behavior of eBay community members.

When all is said and done, if you want to boost participation in a customer community, don’t just build it. Invite them to come. But be sure to temper your expectations regarding how participation will create immediate value for your firm.

Borle, et al (2010). “The Impact of Customer Community Participation on Customer Behaviors: An Empirical Investigation,” Marketing Science.

Based on research by Wagner Kamakura and Rex Yuxing Du

• During recessions, expenditures on luxury items could be influenced not only by budgets, but also by what others are visibly consuming.
• Spending decreases for visibly consumed, non-essential products because consumers don’t have to spend as much to maintain social status. Everyone has cut spending.
• Managers should understand how and why consumers buy their products and services, especially during economic downturns.

During the Great Recession of 2008, some people lost their jobs or suffered pay cuts, while others proactively trimmed consumption in an effort to boost savings or reduce debt. As the economy expanded in the years after, we observed a persistent and rising gap between the financial “haves and have nots.” Regardless of why budgets differ among consumers, economists rely on an age-old relationship between consumption budgets and spending patterns: Those with small budgets spend the greater share of their money on essentials, such as groceries, while those with deeper pockets tend to spend a greater share of their money on non-essentials, such as jewelry and food away from home.

Economists rely on the “budget effect” to explain the relationship between macroeconomic conditions and shifts in consumer spending for both essentials (products or services that fulfill core needs) and non-essentials (products or services that fulfill “wants” rather than needs). They believe that macroeconomic cycles only change how much we spend on essentials versus non-essentials, not how much utility — a.k.a. enjoyment or usefulness — we get from either type of product.

The “budget effect” certainly makes sense. After all, during the last downturn, when many consumers cut back on their daily “Venti Upside Down Nonfat Caramel Macchiato” at Starbucks, CEO Howard Schultz claims that most didn’t stop patronizing Starbucks altogether. Rather, consumers made fewer visits but continued to experience pre-recession levels of gratification from the Starbucks products and experience. In the same vein, traditional economists argue that during a recession, we spend less on non-essentials only because we have less and not because we find the products less fulfilling.

However, Wagner Kamakura, professor of marketing at Rice Business, and his co-author Rex Yuxing Du, a professor of marketing at Bauer College of Business, knows better than to focus only on the budget effect when attempting to explain how economic cycles affect personal spending. Findings published in an an article he co-authored suggest that the impact of a recession (or expansion) on spending is not simply a matter of capturing the budget effect but also the “positional effect."

In assessing the potential for a positional effect, managers should focus not just on whether a product or service is essential or non-essential, but also on the meaning and social context that often underlies and surrounds consumption behavior. For example, consumption of positional goods or services often is used to signal a consumer’s socio-cultural position to others. To clarify, positional goods are those for which a consumer’s utility and spending level depends on their belief about how much others are spending on them (e.g. jewelry, houses, cars). They often are consumed publicly and, thus, have higher socio-cultural visibility than non-positional goods that are consumed privately (e.g. insurance, safety devices).

The logic behind the positional effect is straightforward when viewed through the lens of an economic downturn. During a recession, signaling social standing via expenditures is costly for everyone. So as total consumption falls across the economy, consumers tend to reduce spending on positional goods and services simply because it takes a lot less spending to either keep up with “The Joneses” or to remain “The Joneses.” Essentially, recession dampens the motivation for “competitive consumption.”

Kamakura and his co-author found strong support for their central hypothesis: In a recession, (a) consumers are likely to spend a smaller share of their budget on visibly consumed non-essentials (positional items) and are likely to spend a greater share of their budget on privately consumed essentials (non-positional items); and (b) the reverse takes place during an economic expansion. They used data made available by the Bureau of Labor Statistics and the National Bureau of Economic Research to assess expenditures for more than 66,000 households, spanning a period including three recessions (1982-2003). Support for their hypothesis was found across a broad assortment of products and services that were classified as either essential or non-essential as well as either positional (i.e. higher-visibility or public consumption) or non-positional (i.e. lower-visibility or private consumption).

Managers should understand how and why consumers buy their products and services, especially when a recession looms. While keeping up with The Joneses would be less costly for consumers during a downturn, firms could suffer the “double whammy” of positional and budget effects for visibly consumed non-essentials (think high-end luxury retailers). However, high-priced items aren’t the only ones for which spending could plummet should the economy take a dip. The management team at Starbucks also should be concerned about a drop in spending for many of their visibly-consumed, specialty drinks. The decline might be steeper than they think.

Wagner Kamakura is the Jesse H. Jones Professor of Marketing at the Jones Graduate School of Business at Rice University.

To learn more, please see: Kamakura, W. A. & Du, R. Y. (2012). How economic contractions and expansions affect expenditure patterns. Journal of Consumer Research, 39(2), 229-247.