HONG KONG,CHINA - Media OutReach - 17 September2020 - We live inthe age of the social influencer. Nowadays, withthe development of the internet and the growth of social media, it isincreasingly easy for consumers to post a comment or a picture of a product andto notice whether somebody else uses or praises a product or a brand, making wordof mouth and opinion leader recommendations more important than ever.

Online, a recommendation may come ina 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 cottageindustry has seemingly risen overnight where internet celebrities -- people whoacquired or developed their fame online -- make their entire livings fromcorporate endorsement, using their relative notability to peddle products orexperiences to their followers.

However, using social influencers tomarket a company's products or services can be tricky. Consumers nowadays aresavvy enough when they encounter a product endorsement to consider not onlythat it is likely sponsored, but also whether the recommendation is purelybased on high product quality. It is highly likely they would also think aboutwhether it was because the social influencer selected a specific product (froma variety of offerings) that suited their particular taste, says ChenxiLiao, Assistant Professor at The Chinese University of Hong Kong(CUHK) Business School's Department of Marketing.

Under such a scenario, is there anideal number of varieties of a product a company could offer to maximiseprofits? This is what drove a group of researchers to look at the impact ofproduct variety when consumers rely on the product evaluations of opinionleaders or experts to make purchase decisions. Entitled OpinionLeaders and Product Variety, the study wasconducted by Prof. Liao in collaboration with Prof. Dmitri Kuksov of theUniversity of Texas at Dallas.

"Absent costs of variety, toincrease profit, an intuitive solution is to increase product variety. Withmore alternatives available, it is more likely that an expert can find avariant that fits their personal preference, and post a positive productopinion," says Prof. Liao, adding that since consumers expect quality tobe higher when the expert opinion is positive than when it is negative, theyare willing to pay a higher price.

WhenMore Variety is Bad

From this perspective, increasedassortment can benefit the firm. However, when many product variants areavailable, consumers may expect an expert to find a better fit, and thisconsideration would then reduce consumer expectations of the product quality,leading to lower profits.

There is also the issue of marketnoise. Consider that opinion leaders are likely to be more knowledgeable andhave a greater desire to educate themselves about a certain product, since thisis typically how they gain popularity and the trust of their followers in thefirst place. These experts are likely to be able to better understand andchoose which variant fits them best.

On the other hand, the everydayconsumer may not be as familiar with the product or are not willing to spendthe time and effort. This means they may not be able to choose the best-fittingalternative and may benefit less from having many alternatives.

Taken all of this intoconsideration, the researchers formulated a complex mathematical model andfound that there does exist a point beyond which increasing product varietynetted no significant benefits to a company.

Prof. Liao explains that twoopposing forces come into play when a company increases the variety. First ofall, when product variety increases, it raises the probability of getting apositive expert opinion and therefore the product being recognized by consumersas of high quality. On the other hand, it also decreases certainty by theconsumer that the product received a good review because of its inherent highquality.

Although the first effect ispositive, the second is negative. It turns out that for a small number ofvariants, the first effect dominates the second, and for a large number ofvariants, the second effect dominates the first.

"We further find that theoptimal number of product variants increases if the importance of fit for theexpert or the expert's unwillingness to provide a positive recommendation ishigher," Prof. Liao adds.

Another consideration is whether thecompany has a good grasp of how consumers would rate the quality of itsproducts. The researchers cite as examples two similar products in recent years-- the Apple iPod and the Microsoft Zune music players. Whereas the secondflopped, the first became a phenomenal success, but because they were bothconceptually new products, it was difficult to tell how consumers would ratetheir quality.

The research also found that,unsurprisingly, when the firm has a good understanding of how consumers willperceive the quality of its products, the firm with the lower quality productmay seek to hide its inferiority by limiting the information transmittedthrough expert opinions and mimic the variety provided by a firm with a similarproduct but of a higher quality.

RealWorld Implications

Relating the findings to real worldbusiness practices, Prof. Liao notes that it is not uncommon for a company tointroduce a product line with a small number of products, or even just one,promoted to opinion leaders.

"The idea is that the promotionof a smaller number of products makes communication easier and clearer,"she says, citing a successful promotional campaign by the U.S. luxurydepartment store chain Lord & Taylor. In introducing its Design Laboratorycollection, the company chose to promote a single dress to many influencers onInstagram.

The fact that a number of socialinfluencers all agreed to create a post on Instagram with the same dresssignaled to their followers that the choice was based on the quality of thedress itself, rather than because it complimented a specific fit or complexion.

Another prediction of the model isthat when opinion leaders are more likely to be happy with the productregardless of the exact quality they see, a firm should prefer to offer asmaller product selection, says Prof. Liao. For example, Apple does not provideas many customisation opportunities in iOS for iPhones as Android systemsusually do. However, since many opinion leaders like Apple products more, theyare likely to give a positive review.

Prof. Liao adds that one importantassumption was that consumers are unable to tell exactly how much of a positiveproduct review is because the product is suited to the reviewer's tastes. Thisis changing in that many websites, such as the American NGO Consumer Reports,are providing more detailed information regarding the reviewer's context. Inthese circumstances, the negative effect of having a large number of productvariants will be diminished.

Looking at opportunities for futureresearch, Prof. Liao notes that another assumption is that the expert alwaysposts a product evaluation. "In practice, opinion leaders could be silenton many products. An absence of a recommendation may be interpreted as anegative opinion, as in the expert did not find it worthwhile to choose theproduct, or could be reducing the informativeness of the recommendations,"she says.

One interesting avenue is toconsider the uncertainties facing the expert before and after the purchase, andhow it affects the likelihood of a positive review, she adds.

Reference:

Kuksov, Dmitri and Liao, Chenxi, Opinion Leadersand Product Variety (December 14, 2018). Available at SSRN: https://ssrn.com/abstract=2985153or https://dx.doi.org/10.2139/ssrn.2985153

This article was first published in the ChinaBusiness Knowledge (CBK) website by CUHK Business School: https://bit.ly/3mm5EM6.

About CUHK Business School

CUHKBusiness School comprises two schools -- Accountancy and Hotel and Tourism Management -- andfour 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 and18graduate programmes including MBA, EMBA, Master, MSc, MPhiland Ph.D.

Inthe Financial Times GlobalMBA Ranking2020, CUHK MBAis ranked 50^th. In FT's2019 EMBAranking, CUHK EMBA isranked 24^th in the world. CUHK Business School has the largestnumber of business alumni (40,000+) among universities/business schools inHong Kong -- manyof whom are key business leaders. The School currently has about 4,500 undergraduate andpostgraduate students and Professor Lin Zhou is the Dean ofCUHK Business School.

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