Community website is NOT a business model unto itself

Has there ever been an Internet buzzword that has been more abused and confused than community?

Remember back in the naive ’90s, when’s stock rose 606 percent on its first day of trading-an IPO record at the time-because it supposedly was the hot place to chat? Or how about GeoCities, which offered free “homesteads” in online subdivisions, complete with street addresses, as if the first thing you’d do after creating your free homepage would be to hop over to the neighbors’ for a cup of digital coffee.

In a $4 billion deal, Yahoo!! paid more than $100 for every piddling dollar of revenue that GeoCities had from its inception in 1996 through the spring of 1999. But does anyone believe these “communities” would fetch any premium today?

Yet there really is something quite powerful and valuable behind the concept of online community, provided it is used to support a real business objective.

Mistakes were made

The mistake such startups made was in believing that community was a business model unto itself. Interactive tools that allow people with common interests to exchange information work as a revenue opportunity only when they are attached to an established business model. When that’s the case, communities can help a real business acquire and retain customers at a lower cost for a longer time.

Take Zagat Survey. The business behind it started more than 20 years ago, when husband and wife Tim and Nina Zagat created a system they called “organized word of mouth” and recruited thousands of reviewers to rate restaurants. The couple compiled the surveys into guidebooks for the world’s top cities and sold millions of copies. Then they expanded their review system to hotels, resorts, and spas, and licensed their content for use on early online services. But it wasn’t until May 1999 and the launch of Zagat’s own Website that the community of reviewers really blossomed.

I’m in that community. On a recent business trip to New York, I found myself headed for SoHo and in the mood for some moderately priced French fare. In less than a minute on I found a highly rated and well-reviewed place that fit the bill. I called and made a reservation (you can also reserve online) and I ended up having a great meal. A few days later, I sent in my rating and my review, praising the restaurant’s “dripping rack of lamb” and calling the place “convivial” and “amusing.”

Zagat will often award prizes for the wittiest comments, and it devotes a special section of the site to reviews that weren’t tasteful enough to make the guidebook. Favorites include “Also known as Ebola Café,” “Wear black and bring Maalox,” “Grandma cooked like this, Grandpa died young,” and “Still sleazy after all these years.” Who wouldn’t want to belong to such a fun-loving community?

Skeptics wondered why Zagat was giving away its content online. But sales of the printed guidebooks increased 70 percent between January and November last year. As a low-cost way to acquire new reviewers, the site boosts the value of the company’s content, which leads to more online visitors in the market for printed guidebooks (and the new Palm and WAP edition). And guidebook owners are more likely to return to the site for updated ratings and to submit reviews. The New York guide remains the No. 1 book in the city (it outsells the Bible), even as site traffic increases about 10 percent each month.

Collaboration aced

In the business-to-business domain, Ace Hardware’s Commercial and Industrial division created an online community so the 325 licensed dealers of its paint, construction, and hardware products could exchange sales tips while ordering products. In one instance, a dealer in Arizona asked peers for advice on selling a new kind of industrial paint that bonds well on metal. The resulting discussion led to new sales of the Ace product totaling $1.7 million, according to the company. So far, Ace has achieved a nearly 600 percent return on its investment in these community tools.

“The Internet has to be about allowing people to collaborate and work better together,” says Alan Warms, CEO and president of, the software company that installed and manages Ace Hardware’s online community as well as similar discussion forums for Cisco Systems, Hewlett-Packard, and E*Trade Securities.

Corporations have invested more than $300 million in setting up and managing online communities, according to a study by The Yankee Group. Yet much of that money is wasted because companies have done a poor job in designing and implementing these tools.

And the mistakes by now are well known. First, community is not an end in itself: Attach it to a working business model and give people a reason to participate. Only if they see a clear benefit will they do it. If it all works as planned, expect your customer acquisition costs to plunge and retention rates to surge.

But for Pete’s sake, don’t stage an IPO just because you think you have a cool community. That would be so ’90s.