Find a bargain and brand near you courtesy social media

Once little more than an electronic plaything, the entire landscape of online communication has evolved into a powerful marketing tool.

Social media has morphed into a high-speed, instantaneous consumer guide for companies. Tom Pennington / AFP

E-mails are old hat; SMSs passé. Tweeting, blogging, and posting on "walls" are no longer the domain of just the under-30s. They have become a staple for how many people in the world communicate today. Even Fortune 100 companies are using such methods to reach out to customers.

Social media has spawned a whole new support industry. Companies such as Trender and Attentio monitor and analyse data retrieved from electronic transactions such as messages and purchases. Groupon and LivingSocial integrate social media on behalf of merchants, taking a percentage of the revenues. And others use global positioning to tweet you bargains at a store near where you happen to be at that moment.

"Spending on this kind of marketing could hit US$3 billion [Dh11.01bn] a year by 2013-2014," says Andrew Stephen, the assistant professor of marketing at INSEAD business school. "What we're seeing today is an effort on the part of retailers to keep their customers engaged."

Robin Burton, the founder of i-wave, an electronic media marketing agency based in the UK, is in agreement. "Branding awareness is accelerated through social media," he says. "The public can really affect the brand, and in a short period of time."

But such influence is not always for the good, says Frederic Winckler, the chief executive of the global media agency JWT's Paris office. "The bad news is that the people have the power now, and many companies are not prepared for this shift."

Often it is a question of harnessing that power to achieve marketing objectives. "Consumers can also help you define your brand," says Patou Nuytemans, the chief digital officer of the Ogilvy group in Europe, Africa and the Middle East.

"You're not trusting the brand; you're trusting people and their opinions," says Sebastien Badault, the director of sales for Google in France. "Tweeters can become gurus."

That translates directly to consumer spending. Mr Stephen's own research into the habits of luxury goods customers shows that "websites and social media are about educating the consumer. Consumers do online research as to price, options and then even bring the printout to the shop with them".

Social media have begun to find their niche in the luxury sector, despite the typical customer profile indicating someone older and less likely to tweet. The big brands such as Hermes and LVMH are developing their own strategies, but it remains a challenge. "When you talk, for example, of luxury brand watches you see a price point for the medium range at about $5,000. That may be the most that people are willing to spend online," says Frederic Godart, a researcher at INSEAD who specialises in the luxury goods sector.

He thinks the luxury business has embraced a mix of social media as a way to showcase its brands. But it has not been easy. "LVMH had a website about 10 years ago," recalls Mr Godart. "It was called E-luxury, and they closed it down recently. It's now been redeployed across the brands, but they no longer sell at the group level."

The customer is now more likely to be drawn to a Dior or Luis Vuitton handbag, rather than the holding company.

In the business world, aside from being a direct sales platform, social media has morphed into a high-speed, instantaneous consumer guide. The problem is the information isn't necessarily vetted and the risk of spreading misinformation is rampant. "Everyone is his own journalist," says Lutz Finger, the founder and chief executive of Fisheye Analytics. "Propagating rumours through social media is harder to manage than the days when we just had gossip and telephones."

And then there's the question of privacy. "If the government asked us for all the personal information most people voluntarily put up on Facebook, we'd be in the streets demonstrating," says Mr Burton.

While placing values on celebrity endorsers is a risky business, the same holds true for companies whose values, like celebrities, rely heavily on perception. In 2008, Bebo was Britain's leading social networking website, more popular than Facebook. It was purchased by AOL for $850 million. AOL was hoping to use the acquisition to gain a better foothold in the global market. But less than two years later, the market had completely changed and Bebo had fallen far behind its competitors. AOL unloaded it for reportedly less than $10m to a little-known private investment firm.

It was an expensive lesson to learn in a market in which, according to Annet Aris, adjunct professor of strategy at Insead, it is too soon to put price tags on the industry. "We all know there's a lot of value in all the information, of all the loyalty of all these consumers on Facebook - these enormous growth rates. There is some thinking in the direction of where the revenue might come from, but it's not very concrete yet."

Ms Aris worked on a case study in conjunction with the Wharton business school, analysing how companies such as Facebook are valued. "It's not about having the best product, or the most engineered product. It's really about hitting the specific nerves of what consumers really value and being very good at that one single thing and then you can add bits and pieces."

Like the search engine Google, which started out fifth in its market before rising to the top, Ms Aris points out that Facebook started far behind the competition. "The amazing thing is when I taught my class two or three years ago, we didn't even mention Facebook," says Ms Aris, adding that "everyone was already convinced that we know now who the giants in the internet industry are". They could not have been more wrong. By understanding and addressing the needs of its customers, Facebook was able to far surpass the rest of the field. "Facebook just did it better than companies like Friendster, which turned out to be too over-engineered."

Facebook, valued at $15bn, was able to hang on long enough to become the undisputed leader in its field. "Once you get a certain critical mass, it gets really difficult to beat that company because the value increases exponentially," she explains.

Facebook has already filled the basic needs of its customers, so there is neither the need nor the room for new competition. "I don't see a major need fulfilment model coming into the market at the moment," says Ms Aris. "The advertising network from Google and the consumer network from Facebook is a barrier to entry."

The authors Cyndi Babski and Shellie Karabel work at INSEAD Knowledge.