The Value Exchange of the Digital Age | Part 1
Defining the Terms of the Value Exchange
By Anna Jacobson, Hanna Rocks, and Jay Venkata
In today’s media-saturated world, competition for the attention and loyalty of consumers is unprecedented. The digital age has brought new challenges for companies, but it has also created opportunities for new and creative ways of reaching and engaging customers. Carefully designed user experiences have been a very important driver for companies to target, interact with and attract consumers. However, while consumers value the incredible increase in products and services now available at the click of a button, they are often unaware of how companies are able to identify and collect their personal information to achieve mission and revenue goals. Businesses, on the other hand, are constantly navigating the poorly-defined boundary between personal privacy and staying ahead of consumer needs in a time when data is cheap and relatively easy to access. Invading personal privacy can cause long-term damage to a company’s brand, but not offering relevant, innovative products and services can similarly damage the business as a whole. Thus, striking the right balance between privacy and customized user experience is the holy grail for today’s market leaders.
To explore the balance between providing innovative products or services and jeopardizing personal privacy, we selected companies across three industries — Instagram for social media, Fitbit for hardware devices, and Stitch Fix for e-commerce — to see where the privacy boundary lies. We examine the relationships and exchange of money, products, and data among the users, the company, and applicable third parties to analyze how these businesses remain profitable in a time where consumers frequently expect more, for less (or for nothing at all). Figure 1 illustrates our approach to this analysis, which concludes in recommendations for businesses and consumers to successfully navigate an increasingly data-driven world.
The Value Exchange Between Business and Consumer
Businesses across all industries strive for the same goal: provide relevant products or services that customers do not want to live without and thus will continue to use for years to come. This has long been the standard value exchange between business and consumer: the consumer pays for a product or service that is provided by the business. However, in the age of mobile apps, customers increasingly expect services or products for free — some even refusing to pay as little as $0.99 for an app that could be used daily.
To complement the rise in consumer desires for free apps, the software industry has developed to a point where the cost of distribution is negligible and offering free products has become the norm. The combination of these phenomena has fundamentally altered the value exchange between the business and the consumer. Businesses have more options from which they may generate revenue: advertising, premium products, subscriptions, and the users themselves. Companies are leveraging massive user bases to generate additional revenues from advertising or analytics firms, thus introducing a third party to the traditional value exchange. In many cases, the business acts as somewhat of an intermediary between customers and various third parties; however, the customer often has very little information about the third parties behind the scenes. In recent years, we have seen the Federal Trade Commission (FTC) elevate its role of protecting consumers as companies conceal exactly how they are generating revenue from third parties and what customer information they are using to do so.
Social Media: Instagram
Instagram provides a platform for users to upload and share photos and videos, which can be edited with various filters and organized with tags and location information. An Instagram user can choose to post publicly or limit their posts to a group of pre-approved followers. Users can browse other users’ content by tags and locations, as well as view trending content and content organized by topic. Users can “like” and comment on others’ posts, and they can “follow” other users to add their content to their feed. Unlike many other social media platforms, Instagram does not provide its users with a way to re-post others’ content, preventing Instagram content from “going viral”. However, Instagram has a very high level of engagement, with one study finding an average of 29.67 interactions per Instagram post per 1,000 followers (compared to 16.54 for Facebook, 11.90 for LinkedIn, and 6.11 for Twitter).[1] Because of this, it is the most popular platform for “influencers”, individuals who have the power to affect the lifestyle decisions of their followers.
Because lifestyle decisions often include purchasing decisions, Instagram is a very attractive environment for advertisers. Although advertising was not a part of Instagram’s original concept, because it is a visual medium it is a natural platform for image-based, branded advertising. As advertising has evolved into the key to Instagram’s monetization, its implementation has become increasingly sophisticated; one of the features allows advertisers to show slideshows and link to sites outside Instagram, while according to Instagram its carousel ads “allow advertisers to reach their target audience with more than one single piece of media…[allowing them to] share an integrated story, multiple products, or a sequenced narrative.”[2] Using the same business model as its parent company Facebook, Instagram today generates almost all of its revenue from advertising.[3]
In order to target advertising to individual users, Instagram must collect and extract customer insights from the data generated by its users. Figure 2 depicts the flow of information, services, and payments between users, Instagram, and third-party partners. The Facebook Products, including Instagram, have a powerful network of shared analytics information to develop customer profiles based on users’ behaviors on their apps, including what they like, who they follow and interact with, and what they save. By assessing the search preferences and engagement insights from its users, Instagram can identify which users might be most interested in receiving a particular marketing message and sell advertising to companies who want to reach that particular customer profile.[4] Therefore, it can be argued that Instagram’s true product is not its app, but rather the data that it extracts from the app’s users, the analysis that it performs using that data, and the access to its users that it provides to advertisers.
Instagram accounts are free, as is its popular mobile app. Instagram does not offer any “premium” paid services, nor does it collect any financial information from its users.
Hardware Devices: Fitbit
Fitbit generates substantially all of its revenue from the sale of its connected health and fitness devices and accessories. It also generates a small portion of revenue from subscription-based premium services, “Fitbit Coach” and “Fitbit Care”. Together with the Fitbit app, the company’s devices are capable of collecting a multitude of health data — steps, heart rate, GPS data, weight, sleep patterns, body mass index, menstrual cycles, and diet, to name a few. In return for sharing all of this information with Fitbit, users can easily monitor and improve their fitness routines, track progress towards weight loss, or experience guided breathing sessions to reduce stress.
As such, the driving force for continued operations and success lies in the exchange between Fitbit and its customers. As stated in the business’ most recent annual report, “[o]ur success depends on our ability to anticipate and satisfy consumer preferences in a timely manner.”[5] Note that it does not depend on Fitbit’s ability to harvest and sell customer information. Fitbit is committed to transparent and consensual use of customer information and aims to primarily derive revenues from the sale of devices and premium services. In reviewing Fitbit’s business activity with third parties, we discovered that the company has entered into an agreement to “exchange inventory for advertising credits and cash”.[6] This action could be viewed as a sign of Fitbit’s integrity in identifying creative transactions to increase liquidity without compromising the valuable health data about their customers.
To maintain utility and popularity amongst customers, Fitbit has an open API which allows any number of third parties to develop apps that can interact with the Fitbit platform and access user data. However, this does not strongly affect the value exchange between Fitbit and its consumers, rather it introduces an entirely new exchange directly between the consumer and the third party. The value exchange stemming from Fitbit is shown in Figure 3. Users must actively choose to download the third-party app and allow Fitbit to share user data with that app. In this way, the business is able to protect the trust and value that actively flows between Fitbit and its customers.
e-Commerce: Stitch Fix
Stitch Fix’s business model is simple: employ “human in the loop” algorithms to further the capabilities of the company and the satisfaction of its customers. Stitch Fix is extremely transparent in their use of data science to achieve these goals — the Chief Algorithms Officer is listed second behind Founder and CEO on the company’s website. Honest customer feedback is critical to these algorithms producing successful recommendations, so it is equally critical that customers feel that the data they provide to Stitch Fix is adequately protected.
Stitch Fix offers its customers a unique online shopping experience. For a small fee (which may be applied to any item the customer decides to purchase), a stylist compiles a box of clothing and accessories that will likely appeal to the user, based upon information the user provided when setting up his or her profile. Stitch Fix is able to offer this “personalized” experience with the help of a sophisticated algorithm enabling its over 3,000 stylists to serve over three million customers. By eliminating the hassle of going to a department store, spending hours trying on different items, and experiencing pressure from a salesperson to buy clothes that you don’t really love, Stitch Fix has disrupted an age-old market for apparel and accessories — starting with just a $20 styling fee.
While the value exchange between Stitch Fix and its users is clear, there is some value transfer behind-the-scenes between Stitch Fix and third-party partners (detailed in Figure 4). Stitch Fix shares aggregate data with marketing and analytics companies to support targeted advertising campaigns, as most e-commerce businesses do. Where Stitch Fix differs, however, is in the company’s goal of providing trend data back to their partner brands and clothing suppliers. Stitch Fix is very open about the possibility of using data science to identify demand trends in the industry and feed aggregated, anonymized data back to different clothing lines to allow these brands to sell smarter and minimize excess inventory.
Contextual Integrity in the Value Exchange
Each of the above case studies demonstrates how established or emerging industries approach the critical relationship with consumers to achieve profitability in an increasingly competitive marketplace. Whether a company is transparent about its methods or not, it must eventually find reliable streams of revenue to support future growth. As the value exchange shifts from purely “cash for product”, consumers and app users lose awareness of what role they play in the value exchange, particularly what valuable asset they are relinquishing for access to personalized products or services.
The user is left to evaluate these transactions with what Helen Nissenbaum describes as contextual integrity[7] — what comparable scenario, with established rules or guidelines, best applies to the transaction at hand? For a company such as Stitch Fix, the comparable scenario is relatively easy to identify. When a shopper enters a store looking for clothing, he assumes that his measurements and preferences will not be shared with the public or the clothing suppliers. Perhaps the salesperson will gain an idea of trends through multiple interactions with customers, but not in such a way that the identity of those customers is at risk. Looking at Fitbit, we again can easily compare using this product to visiting a trainer in a gym or going to the doctor. The expectation in these scenarios is that the related information is not shared with others unless the individual decides to do so. Fitbit appears to have modeled its privacy policies after this, requiring active, explicit user consent before sharing identifiable data except in situations where there is a legal request from government agencies. These readily available contextual comparisons align the user and company on what is shared through the related value exchange, without making explicit statements (for example, by publishing an easy-to-interpret graphic online).
Instagram presents a challenge to contextual integrity. Social media is a new frontier brought about in the digital revolution and as such, it is difficult to identify a comparable context and leverage pre-determined social norms about information-sharing. Even after reading Instagram’s privacy policy, users may be largely unaware of exactly what they are giving up in exchange for the ability to share photos online. Due to the lack of a well-established context, Instagram wields most of the power to set standards in the value exchange. This may lead to issues because the motivation of the business to profit off user data may overpower its responsibility to protect identifiable information.
For more of this series, please follow the links below:
Part 2 | Privacy: The Business Perspective
Part 3 | Privacy: The Consumer Perspective
Part 4 | The Changing Terms of the Value Exchange
[1] Barker, Shane. “A Comprehensive Guide to Instagram Influencer Marketing”. Convince & Convert with Jay Baer.
[2] “Carousel Ads for Stories”. Instagram | Business.
[3] Simon, Ellen. “How Instagram Makes Money”. Investopedia, 25 Jun 2019.
[4] Marr, Bernard. “The Amazing Ways Instagram Uses Big Data And Artificial Intelligence.” Forbes, 16 Mar 2018.
[5] Form 10-K for the Fiscal Year Ended December 18, 2018, Fitbit, Inc. Filed 1 Mar 2019 with the U.S. Securities and Exchange Commission
[6] Id.
[7] Nissenbaum, Helen. Privacy in Context: Technology, Policy and the Integrity of Social Life. Stanford Law Books, 2010.
