In Social Media Age, New Products Need New Marketing Ideas

Consumers often look to other consumers before deciding to try a new product. But in the world of social networks, the process has changed—and marketers need to catch up.

Based on research by Andrew Whinston

In days of old — before Facebook and other social media platforms — you might pick a new restaurant based on the number of cars you saw in the parking lot. Today, you might consult your smartphone and see how many of your friends have checked in.

The difference may sound minor, but the consequences are not, explains Andrew Whinston, professor of information, risk, and operations management at the McCombs School of Business. Social media has upended the ways consumers try new places and products. To appeal to consumers, businesses need to adopt fresh tactics.

“Instead of talking to a few friends about the product, they can look at thousands of people on Facebook,” he says. “It calls for different strategies for new product introductions.”

In a pair of new studies, Whinston examines ways in which social networks are altering the process of consumer choice and how marketers can take advantage of them, on everything from outreach to setting prices.

Learning by Watching

What’s changed, Whinston says, is a phenomenon called observational learning. It’s a form of the herd instinct in which we’re motivated not by what other people say, but by observing what they do and how many of them do it.

Before social media, that learning came largely from strangers, such as when you saw a line of people and felt an urge to check out a new store. Today, consumers are bombarded with information about the economic behavior of their friends. When someone buys a gadget on Amazon and shares the news on Twitter, they’re helping to drive the digital herd.

Because those friends are more like you, you’re likely to pay closer attention when they try something new, says Whinston. “In the pre-social network way of doing things, mass popularity was the main thing. Now, it’s more segmented. Your friends seem to like it a lot, so maybe you should go.”

In one study, done with Liangfei Qiu of the University of Florida and Zhan Shi of Arizona State University, the researchers looked at social network data on 34,207 diners in Shanghai, China, and 50 restaurants they frequented. Most were repeat patrons. Over 31 months, the average user checked into 3.2 of the restaurants a total of 36 times.

More important, the researchers found that each check-in raised the probability of a friend checking in later by 4.3 percent. “The effect of friends’ check-ins is much more important than strangers’ check-ins,” Whinston says.

The greatest beneficiaries of friends’ check-ins were independent eateries, presumably because they were less well-known than chains. By analyzing postal codes, Whinston also found that check-ins carried more weight for restaurants that were farther from the user. “It costs you more time and money to get there, so it has to be really special,” he says.

Both Facebook and Yelp allow businesses to set up special offers for customers who check in using their apps. But many restaurants and retailers still have yet to take advantage of those options. Whinston’s research suggests how effective they might be in spurring customers to check in more often and further entice their friends.

When the Price is Wrong

In a second paper, Whinston looks at a different side of observational learning: setting an introductory price for a new product.

Manufacturers often launch an item like an athletic shoe with a limited-time offer, a discount for the first buyers. They hope that once people see enough strangers wearing the shoe, the herd instinct will kick in. Shoppers will decide the coolness factor is worth paying full price.

“At some point, you want to go from the introductory to the regular price,” says Whinston. “You’ve seeded the market enough.”

But in a networked world, that conventional strategy might backfire, he suspected.

“If you set the initial price too low, it doesn’t really test the product,” he says. “You’re not paying enough to show that you’re seriously interested in it. Your friends who follow you don’t know if it’s worth the full price.”

They may conclude the quality is cheap, he says, and be unwilling to pay more for it later on. The result: fewer sales at full price and lower overall profits.

To test the assumption, Whinston and Liangfei Qiu of the University of Florida ran a computer simulation in which 10,000 consumers shopped for an iPad accessory. One scenario used the traditional strategy: a low introductory price followed by a large hike to the regular one. The other scenario set a higher introductory price but a lower increase afterwards.

When consumers were not part of a social network, the standard strategy led to higher profits 90 percent of the time. But in a network, with friends looking over one another’s shoulders, the results were reversed. The higher introductory price proved more profitable in 70 percent of cases. It led to fewer initial sales, but it encouraged more full-price sales later on.

The lesson, says Whinston, is that in a social networked world, companies should be wary of discounting too deeply. “If you set the price too low, it doesn’t work,” he says.

The larger point, he argues, is that traditional economic theory has some catching up to do. It’s based on an era in which consumers had much less information about other consumers than they do today.

Pointing to the restaurant example, he says, “In earlier research, it’s assumed that you don’t know the people in the restaurant. Today, you have to take account of the social networking of people who are either past customers or know past customers. We have to do more studies on the way the world works today.”

“Learning from Your Friends’ Check-Ins” was published in Information Systems Research.

“Pricing Strategies under Behavioral Observational Learning in Social Networks” was published in Production and Operations Management.

Story by Steve Brooks