Network Affects in Social Media Advertising
In Class, we have learned about network effects and how more people using a product/service would lead to increased perception of value of the product or service (The model being p = r(z)f(z)). In an article on their business page, Verizon talks about the Network Effects of Social Media and specifically Social Media Advertising, a topic that is increasingly relevant today as there are many small/medium sized businesses who have an entirely online presence and therefore rely heavily on online advertising to grow relationships with their customers.
Verizon goes on to define a “network effect business model,” essentially something that relies on the advantages of social media networks in order to quickly increase network effects of a product. Trends in these content creations include simple and humorous messages, and some sense of urgency that should be generated in the user, as customers want to feel connected to a business without much in between. Upon further consideration, this makes sense in terms of creating demand for a product because the perceived z increases greatly if someone has say, 10 followers and they all see the product vs. if someone has one friend that they tell about the product.
Because social media marketing is not effective if the user does not actually interact, it is important to track data such as how long the average user tends to stay on a video ad for. This would be interesting to factor into a model that could predict how effective a strategy would be. For example, it might be hard for a brand to weigh the differences between 5 posts from a better known influencer and 10 posts from a lesser known influencer. However, if data exists that shows us the average interactivity of followers from each group of influencer (ex: 5000 followers, 10,000 followers, 50,000 followers), then it would be greatly valuable to a brand.
While it may seem like there are only positives to using social media for advertising, there are some potential negative side effects as well. The ease of information sharing for example, is a double edged sword. If a product is excellent, then glowing reviews can only boost its performance. However, if the CEO of a company says something or information regarding the malethics of a company’s practice come out, then social media will ensure it spreads to everyone and maybe even beyond the customer base. A current day example of this would be how Tesla shares fell sharply after Elon Musk tweeted (on November 6th) that he was considering selling 10% of his Tesla stock. On November 6th, the stock was trading at around $1222 a share and by November 8th, the stock was trading at a little over 1000. While many articles have come out regarding the phenomenon, the average person who owns a few shares of Tesla might not have the time to read all of this information, and the twitter post regarding the stock might be enough for them to think that Elon Musk is selling his shares due to something internal. Either way, it is not a great look for a company’s CEO to be getting rid of his shares and the increased visibility afforded by a social media platform likely caused shareholders to panic.
Tesla itself is an interesting company, as one does not see many physical ads about it. It is mainly marketed through the internet, the common knowledge that it is an incredibly scientifically advanced company, and word of mouth. This is interesting because one might consider the fact that if word of mouth is a method of marketing, people might be unintentionally restricting the usage of a product to the economic class they are in, as we tend to interact with those in the same socioeconomic class as ourselves. Perhaps this is another reason that companies turn to social media: as the cost to use an app such as Instagram is essentially $0 once someone has a phone, this can diversify the customer base.
In summary, while the network effect is a good tool for companies to use, it should not be the only marketing tool a company uses. Many companies that rely solely on it lost money after their IPO due to how unstable it can be. For example, groupon IPO’d at $28 and is now trading at around $22. This leads to the question of how one can build a model of the correct proportion of social media and other online/in person marketing and what one can do to maximize visibility and positive perception of a brand. Would this model need to include a variable to predict the brand’s public persona’s behavior such as in the case of Elon Musk and Tesla? Additionally, in terms of ad performance online, we see that data about users is incredibly valuable and I personally think the data market would be very interesting to study and learn more about.
Sources: https://www.verizon.com/business/small-business-essentials/resources/network-effects-social-media-230525786/
Google Stock Prices