HONG KONG,

CHINA – Media OutReach – 17 September

2020 – We live in

the age of the social influencer. Nowadays, with

the development of the internet and the growth of social media, it is

increasingly easy for consumers to post a comment or a picture of a product and

to notice whether somebody else uses or praises a product or a brand, making word

of mouth and opinion leader recommendations more important than ever.

Online, a recommendation may come in

a form of a selfie on Instagram, a short Tweet, a “like” on Facebook,

or the fact that an opinion leader uses certain products. An entire cottage

industry has seemingly risen overnight where internet celebrities — people who

acquired or developed their fame online — make their entire livings from

corporate endorsement, using their relative notability to peddle products or

experiences to their followers.

However, using social influencers to

market a company’s products or services can be tricky. Consumers nowadays are

savvy enough when they encounter a product endorsement to consider not only

that it is likely sponsored, but also whether the recommendation is purely

based on high product quality. It is highly likely they would also think about

whether it was because the social influencer selected a specific product (from

a variety of offerings) that suited their particular taste, says Chenxi

Liao, Assistant Professor at The Chinese University of Hong Kong

(CUHK) Business School‘s Department of Marketing.

Under such a scenario, is there an

ideal number of varieties of a product a company could offer to maximise

profits? This is what drove a group of researchers to look at the impact of

product variety when consumers rely on the product evaluations of opinion

leaders or experts to make purchase decisions. Entitled Opinion

Leaders and Product Variety, the study was

conducted by Prof. Liao in collaboration with Prof. Dmitri Kuksov of the

University of Texas at Dallas.

“Absent costs of variety, to

increase profit, an intuitive solution is to increase product variety. With

more alternatives available, it is more likely that an expert can find a

variant that fits their personal preference, and post a positive product

opinion,” says Prof. Liao, adding that since consumers expect quality to

be higher when the expert opinion is positive than when it is negative, they

are willing to pay a higher price.

When

More Variety is Bad

From this perspective, increased

assortment can benefit the firm. However, when many product variants are

available, consumers may expect an expert to find a better fit, and this

consideration would then reduce consumer expectations of the product quality,

leading to lower profits.

There is also the issue of market

noise. Consider that opinion leaders are likely to be more knowledgeable and

have a greater desire to educate themselves about a certain product, since this

is typically how they gain popularity and the trust of their followers in the

first place. These experts are likely to be able to better understand and

choose which variant fits them best.

On the other hand, the everyday

consumer may not be as familiar with the product or are not willing to spend

the time and effort. This means they may not be able to choose the best-fitting

alternative and may benefit less from having many alternatives.

Taken all of this into

consideration, the researchers formulated a complex mathematical model and

found that there does exist a point beyond which increasing product variety

netted no significant benefits to a company.

Prof. Liao explains that two

opposing forces come into play when a company increases the variety. First of

all, when product variety increases, it raises the probability of getting a

positive expert opinion and therefore the product being recognized by consumers

as of high quality. On the other hand, it also decreases certainty by the

consumer that the product received a good review because of its inherent high

quality.

Although the first effect is

positive, the second is negative. It turns out that for a small number of

variants, the first effect dominates the second, and for a large number of

variants, the second effect dominates the first.

“We further find that the

optimal number of product variants increases if the importance of fit for the

expert or the expert’s unwillingness to provide a positive recommendation is

higher,” Prof. Liao adds.

Another consideration is whether the

company has a good grasp of how consumers would rate the quality of its

products. The researchers cite as examples two similar products in recent years

— the Apple iPod and the Microsoft Zune music players. Whereas the second

flopped, the first became a phenomenal success, but because they were both

conceptually new products, it was difficult to tell how consumers would rate

their quality.

The research also found that,

unsurprisingly, when the firm has a good understanding of how consumers will

perceive the quality of its products, the firm with the lower quality product

may seek to hide its inferiority by limiting the information transmitted

through expert opinions and mimic the variety provided by a firm with a similar

product but of a higher quality.

Real

World Implications

Relating the findings to real world

business practices, Prof. Liao notes that it is not uncommon for a company to

introduce a product line with a small number of products, or even just one,

promoted to opinion leaders.

“The idea is that the promotion

of a smaller number of products makes communication easier and clearer,”

she says, citing a successful promotional campaign by the U.S. luxury

department store chain Lord & Taylor. In introducing its Design Laboratory

collection, the company chose to promote a single dress to many influencers on

Instagram.

The fact that a number of social

influencers all agreed to create a post on Instagram with the same dress

signaled to their followers that the choice was based on the quality of the

dress itself, rather than because it complimented a specific fit or complexion.

Another prediction of the model is

that when opinion leaders are more likely to be happy with the product

regardless of the exact quality they see, a firm should prefer to offer a

smaller product selection, says Prof. Liao. For example, Apple does not provide

as many customisation opportunities in iOS for iPhones as Android systems

usually do. However, since many opinion leaders like Apple products more, they

are likely to give a positive review.

Prof. Liao adds that one important

assumption was that consumers are unable to tell exactly how much of a positive

product review is because the product is suited to the reviewer’s tastes. This

is changing in that many websites, such as the American NGO Consumer Reports,

are providing more detailed information regarding the reviewer’s context. In

these circumstances, the negative effect of having a large number of product

variants will be diminished.

Looking at opportunities for future

research, Prof. Liao notes that another assumption is that the expert always

posts a product evaluation. “In practice, opinion leaders could be silent

on many products. An absence of a recommendation may be interpreted as a

negative opinion, as in the expert did not find it worthwhile to choose the

product, or could be reducing the informativeness of the recommendations,”

she says.

One interesting avenue is to

consider the uncertainties facing the expert before and after the purchase, and

how it affects the likelihood of a positive review, she adds.

Reference:

Kuksov, Dmitri and Liao, Chenxi, Opinion Leaders

and Product Variety (December 14, 2018). Available at SSRN: https://ssrn.com/abstract=2985153

or http://dx.doi.org/10.2139/ssrn.2985153

This article was first published in the China

Business Knowledge (CBK) website by CUHK Business School: https://bit.ly/3mm5EM6.

About CUHK Business School

CUHK

Business School comprises two schools — Accountancy and Hotel and Tourism Management — and

four departments — Decision Sciences and Managerial Economics, Finance, Management and Marketing.

Established in Hong Kong in 1963, it is the first business school to offer BBA,

MBA and Executive MBA programmes in the region. Today, the School offers 10 undergraduate programmes and

18

graduate programmes including MBA, EMBA, Master, MSc, MPhil

and Ph.D.

In

the Financial Times Global

MBA Ranking

2020, CUHK MBA

is ranked 50th. In FT‘s

2019 EMBA

ranking, CUHK EMBA is

ranked 24th in the world. CUHK Business School has the largest

number of business alumni (40,000+) among universities/business schools in

Hong Kong — many

of whom are key business leaders. The School currently has about 4,500 undergraduate and

postgraduate students and Professor Lin Zhou is the Dean of

CUHK Business School.

More

information is available at http://www.bschool.cuhk.edu.hk

or by connecting with CUHK Business School

on:

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