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.

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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.

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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.

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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.

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"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.

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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.

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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.

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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.

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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.

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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.

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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.

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"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.

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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.

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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.

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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.

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"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.

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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.

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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.

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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.

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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.

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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.

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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

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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.

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In
the Financial Times Global
MBA Ranking
2020, CUHK MBA
is ranked 50^th. In FT's
2019 EMBA
ranking, CUHK EMBA is
ranked 24^th 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.

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