Social networks have become a cultural phenomenon. Facebook, one of the largest social networking sites in US was founded in 2004. By February 2009, it boasts more than 175 million active users and continues to grow rapidly. Worldwide these users spend 3.0 billion minutes each day on Facebook. More than 850 million photos and 5 million videos are uploaded on the site each month. 2 There are hundreds of other similar sites including Myspace, Friendster, Xanga and Bebo. This cultural and technological revolution is not limited to the United States. Myspace has already launched its international sites in Britain, Australia and France and plans to expand its services to nine other countries in Europe and Asia in the near future. More than 70% of Facebook users are outside the U.S. and more than 35 translations are available on the site. Other countries have their own versions of Facebook and Myspace. For example, Cyworld, which started before Myspace and Facebook were conceived in the US, had over 21 million registered users in South Korea by mid-2007, or approximately 40% of the South Korean population. It has over 90% penetration in the 20-29 year old market. Cyworld users upload about 50,000 videos and 5 million photos every day.
In spite of this cultural and social revolution, the business viability of these social networking sites remains in question. While many sites are attempting to follow Google and generate revenues from advertising, there is significant scepticism if advertising will be effective on social networking sites. Seth Goldstein, co-founder of SocialMedia Networks, recently wrote on his Facebook blog that a banner ad “is universally disregarded as irrelevant if it’s not ignored entirely,” (New York Times, Dec 14, 2008).
Recognising this, in November 2007, Facebook experimented with a new program called Beacon, which shared purchases of a friend with a user with the hope that this would be viewed as “trusted referral” and generate more sales for its advertisers. The program backfired due to privacy issues but Facebook asserted that it would continue to evaluate this kind of program. Cyworld has been selling music and other virtual items (e.g., wallpaper) to its users for many years with the belief that friends influence each other’s purchases of these items.
If friends indeed influence purchases of a user in a social network, it could potentially be a significant source of revenue for the social networking sites and their corporate sponsors.
The purpose of this study is to empirically assess if this is indeed true. Specifically, we wish to answer the following questions: • Do friends influence purchases (frequency and/or amount) of a user in a social network? • Which users are more influenced by this social pressure? • Can we quantify this social influence in terms of percentage increase in sales revenue? We address these questions using a unique data set from the Korean social networking site, Cyworld. Using the actual (rather than reported or surveyed) data of over 200 users for several months, we build a model to examine how friends influence the purchases of a user. We estimate this model using Bayesian methods which provide us parameter estimates at an individual user level.
Our results show that there is a significant and positive impact of friends’ purchases on the purchase probability of a user. Even more interestingly, we find that there are significant differences across users. Specifically, we find that this social effect is zero for 48% of the users, negative for 12% of the users and positive for 40% of the users. Further examination reveals systematic differences across these user groups. Users who have limited connection to other members are not influenced by friends’ purchases.
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However, positive social effect is observed in moderately connected users. These users exhibit “keeping up with the Joneses” behaviour. On average, this social influence translates into a 5% increase in revenues. In contrast to this group, highly connected users show a negative effect of contagion. To maintain distinctiveness, these users tend to reduce their purchases of items when they see their friends buying them. This negative social effect reduces the revenue for this group by more than 14%. Summary: In spite of the cultural and social revolution in the rise of social networking sites such as Facebook and MySpace (and in South Korea, Cyworld), the business viability of these sites remain in question. While many sites are attempting to follow Google and generate revenues from advertising, will advertising be effective? If friends influence the purchases of a user in a social network, it could potentially be a significant source of revenue for the sites and their corporate sponsors. Using a unique data set from Cyworld, this study empirically assesses if friends indeed influence purchases. The answer: It depends. Findings are relevant for social networking sites and large advertisers. Key concepts include: – There is a significant and positive impact of friends’ purchases on the purchase probability of a user. – However, there are significant differences across users. Specifically, this social effect is zero for 48% of users, negative for 12% of users, and positive for 40% of users. – “Moderately connected” users exhibit “keeping up with the Joneses” behaviour. On average, this social influence translates into a 5% increase in revenues. Highly connected users tend to reduce their purchases of items when they see their friends buying them. This negative social effect reduces the revenue for this group by more than 14%. This finding is consistent with the typical fashion cycle wherein opinion leaders or the elite in the fashion industry tend to abandon one type of fashion and adopt the next in order to differentiate themselves from the masses. |
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Managerial Implications (from the original paper titled, Do Friends Influence Purchases in a Social Network?’ by Iyengar, Han & Gupta, pp. 19-20, Working Paper 09-123): Increasing clutter in traditional advertising medium (e.g., TV), higher usage of recording devices such as TiVo, fragmentation of consumers, and increasing use of the Internet especially among younger consumers, has led marketers to start experimenting with alternative forms of communication. One of the promising, yet less well understood, forms is viral marketing. For instance, P&G operates Tremor and Vocalpoint, two word-of-mouth marketing services, to promote many of its products. Our study points to a promising area for the social networking sites as well as for the large advertisers, such as P&G or Sony. If the purpose of advertising is to make consumers aware of the product and create interest among potential users, then it is possible for Sony to achieve the same result by giving its, say, new digital cameras free to the high status consumers. Similarly, music companies can offer free songs to this group of users. In many cases, offering free products to the right group of people may in fact be cheaper than traditional advertising. Our study shows that presence of these items among consumers can have a strong and positive social effect among middle-status members. Using the methodology offered in our study, the sponsoring company can also identify the size of different groups and the likely impact on appropriate metrics such as brand awareness or sales |
