Social networking and user-generated content sites are starting to change the face of the web as we know it. It’s the Digital Natives who are leading the way – and in a few years’ time, they’ll be the ones with the disposable income. Tricia Holly Davis reports
‘Know thy customer’ is a well-worn mantra used to remind companies to always keep their customers’ demands top of their minds. Though it may sound like an obvious statement, many a company has failed for not paying close enough attention to what its customers want.
But what happens when what you think you know about your customers is wrong? The answer is quite simply that you either change your business model, or you fail.
Despite the bubble burst of the last decade, the online travel industry has enjoyed enormous success, with millions of new customers logging online everyday. Online travel pioneers such as Expedia and Cheapflights have successfully weathered a number of market storms by consistently answering the demands of their customers.
Expedia’s development earlier this year of its ‘Inspirator’ tool, for example, is a clear response to changing online customers’ demands.
Likewise, Cheapflights has consistently tweaked its offerings and technology to respond to its customers’ needs.
“In terms of design, you need to offer different things to appeal to different people,” says Cheapflights boss David Soskin.
However, Soskin admits that while established online players such as Cheapflights are in a strong position today, they will need to drastically evolve their business models to serve the new generation of digital natives.
In a decade’s time those Digital Natives, who today devote most of their online time to social networking sites like Facebook, will have disposable income of their own to spend on purchases such as holidays, observes Dr Frank Shaw of the Centre for Future Studies. “Established Internet companies will need to respond to this generation, but they can’t just change their strategy. This will require an entirely new portfolio of brands,” says Shaw.
The idea that sites such as Expedia and Cheapflights, which have spent the past decade striving to build brand equity and loyalty, would effectively need to start from scratch may seem a bit radical. But Adam Daum, an analyst with UK-based media research firm Gartner, says a new, radical approach to online retailing is exactly what is needed to serve tomorrow’s generation of wealthy consumers.
“Rebranding is a given. Online companies will need to develop new metrics for a new world,” says Daum.
For the next few years, the majority of online wealth will continue to be controlled by the Baby Boomer generation, which is starting to retire and has a great deal of disposable income and time to spend on holidays, says Shaw.
Today’s balance of power is clearly demonstrated in online demographics. Soskin notes that 28% of Cheapflights’ customers are between the ages of 50 to 64. This is slightly higher than the average across all travel websites, where 24% of online travel customers are over 50, according to Nielsen figures. By comparison, 18-24-year-olds represent only 10% of online travel customers.
But recent research carried out on behalf of Travolution found that the tide is quickly starting to turn, with 31% of 16-24-year-olds booking a holiday online at least once in the past year, compared with 27% of people aged over 55.
Another critical differentiator between the wealth holders of today and those of tomorrow, is what motivates people to go online. Whereas the Baby Boomer generation is motivated to go online to find the best deals, younger people log on to share experiences and get recommendations, says Shaw.
This is not to say that price will not always remain an important influence on choice, but, for younger people, who grew up with the Internet, lower prices are a given, so this generation will expect much more from online providers, says Shaw.
John Delaney, principal analyst at Internet research firm Ovum, says one only needs to look at where young people are spending the majority of their time online today to capture a glimpse of how this generation will want to interact with online service providers in the future. He believes the new battleground for online customers will be fought in the social networking realm.
“Web 2.0 social models are about communicating and interacting with others in an open environment, often on a collaborative basis and on a scale not seen before,” according to Delaney.
Indeed, Travolution’s research concluded that nearly 20% of 16-24-year-olds are greatly influenced by online reviews when making a holiday decision, while 14% consult social networking sites prior to booking a holiday. By comparison, just 2% of over 55s rely on social networking sites for information prior to booking a holiday.
“Just imagine what will happen when the balance of wealth shifts to the younger generation of today,” says Shaw. “They will look for websites that are similar in look and feel to the user review and social networking sites that they use today. The new generation of wealthy consumers will not shop in the same way as the Baby Boomer generation.”
Delaney notes that the problem with the old platform on which established online players’ models were built is that they are not geared to social interaction on the same scale as Web 2.0 sites such as Facebook, and communications are more narrowly defined and controlled.
Recent research carried out by Ovum observes that content models have also changed thanks to Web 2.0, shifting away from content produced by publishers, to ‘me media’ content produced by individuals. “User-generated content is about participation and interactivity – a ‘lean forward’ experience. It is also about sharing that content and making it a form of self-expression, underscoring the interlocking nature of user-generated content and social networking,” according to Ovum.
Daum observes that the real threat to the online travel establishment will be when social networking sites such as Facebook start selling holidays. “Frankly, I’m surprised this hasn’t happened already,” says Daum. Then again, he says it is probably a wise decision to take a cautious approach to migrating into the merchant realm.
“Social networking sites that are building strong loyalty with today’s younger generation are perfectly positioned to capture the future wealth of this demographic,” says Daum. With the exception of Google, Daum observes that most websites struggle to build customer loyalty, because the very nature of the web is about transparency and choice. Consumers’ promiscuous online tendencies explain the rocketing success of meta-search engines, for example.
By vast contrast, social networking sites have millions of loyal members who rely on these sites for everything from chatting with their friends, to finding a job, to getting advice on how to spend their free time. This kind of loyalty flies in the face of everything companies thought they knew about consumers’ online behaviour, says Daum.
Social networking, like the Internet itself, is much more than a phenomenon. It is literally changing the way people interact with each other and companies. Take the recent protests organised by students on Facebook in response to HSBC’s proposal to do away with interest-free overdrafts, says Daum. “This clearly demonstrates the power of social networking sites. They’re about a lot more than just chatting to your friends.”
But having the right ingredients (ie millions of loyal members) to shift into the online travel marketplace, does not mean it will work. “Social networking sites need to be careful that their raison d’etre is not polluted,” says Daum. “MySpace, for instance, risks alienating its customer base because of its ownership by NewsCorp, a very mainstream media company.”
Likewise, Ovum’s research observes that: “Social networking providers have a delicate balance to maintain. Unless they give users enough control to feel a sense of ownership of their space, their sites will not appeal to the majority of users.”
The commercialisation of user-generated content and social networks is already well underway in terms of advertising, so the real challenge for these sites going forward is to discover their limits.
“There is a danger of over-commercialisation, when advertising is too intrusive and perceived as undermining the spirit and independence of the social network. When this point is reached there will be a backlash, or users will simply decamp to a social network that they feel has more integrity,” according to Ovum.
Another real challenge for the social network and user-generated content providers, which may eventually want to expand into other areas such as online travel, is that in order to develop their business, they need to keep big and ideally get bigger. But there will only be enough room for a few, really big social networks in the market. “This will mean that going forward we will see a handful of big horizontal networks dominate, and then a mass of smaller, more vertical networks alongside,” according to Ovum.
The firm predicts there will be more overlap between social networking and other Internet services. Matt Tuson, vice-president of vertical programmes for Right Now Technology, a customer relationship management service provider, agrees that online travel providers will increasingly expand their networking capabilities and user-generated content, either through partnerships with established players in this market – like TUI and TripAdvisor – or by creating their own networks.
“Young people are interacting with the web in a different way than their parents’ generation. They want recommendations and to share their experiences online,” says Tuson. “Online travel providers must learn more about these people if they are to succeed in the future. Travel is a commodity, so what will differentiate one firm from the next is the experience.”
Tuson says he is consistently baffled by how few online travel companies recognise this and fail to understand the needs of their customers.
Tuson points to his recent experience with Purple Parking to illustrate his point. “I recently booked on Purple Parking, but it did not offer me valet service, which I would’ve bought, thus spending more,” says Tuson. He says this highlights the difference between the role price and service will play on influencing customers’ relationship with certain brands. “Price is important, but service is the key.”
His message to the online travel establishment of today who want to capture the consumer wealth of tomorrow is simply, ‘know thy customer’. “The new competitive battleground is about customer service and about recommendations. The online giants of today can serve the customers of tomorrow, but they must understand what motivates this generation.”
Shaw agrees. “The online marketplace is changing quickly and companies must understand the lifetime value of their customers. Failing to do so is writing your own obituary.”
Capturing tomorrow’s wealth
Social networks and user-review sites are increasingly influencing consumers’ purchasing decisions, according to recent research carried out on behalf of Travolution.
This is particularly true of the younger demographic, which is devoting the majority of its online time to social networking.
Further analysis tells us that, as this younger generation grows up, they will continue to seek out websites where they can share recommendations and experiences.
Therefore, online travel service providers considering how the next generation of wealth holders is likely to interact with travel suppliers must begin to consider what social networking means for their companies.
Ovum Research advises service providers to base their assessment on two fundamental characteristics of social networks.
Firstly, social networks generate a large amount of network traffic. Secondly, they attract a large number of regular visitors, who can be targeted by advertising.
“Service providers whose business model can derive actual or potential benefit from these characteristics should be exploring partnerships with social networks, and the addition of social networking to their own existing services,” according to Ovum.
Future trends of social networks and user-generated content
Ovum predicts user-generated content and social networking will mutate. Some of the future trends will include:
- Enhanced user-generated content services that draw more on mapping and location, plus developments around what users can do with photos and how they share them.
- More ‘Second Life’-type social networks will appear. This virtual 3D world is displaying rapid growth and is bound to be copied.
- More selective, invitation-only specialist sites will develop alongside the horizontal giants.
- The addition of mobile features to social networks.
- A shift towards revenue sharing. Talented amateurs in particular will increasingly expect to be paid for what they create, which will introduce new business dynamics and revenue models for user-generated content.