LBS logo London experience. World impact.

How transparency is damaging social media marketing

A chihuahua inspires research into influencer marketing

By Andrea Galeotti and Itay Fainmesser 20 November 2018

How-Trans-banner

A dog is the unlikely inspiration for an upcoming paper by Andrea Galeotti, Professor of Economics at London Business School. The Italian chihuahua named Miami, whose Instagram feed has 13,600 followers, is one of a growing breed of social influencers. Miami’s claim to fame is as ‘the world’s most travelled dog’, according to Condé Nast Traveller.

What interests an economist such as Professor Galeotti, other than Miami’s quirky yet glamorous photoshoots, is the market he is engaged in as a social influencer.

Miami is not an A-list celebrity but one of hundreds of micro-influencers, a new phenomenon made possible by platforms like Instagram and Facebook. Marketers want to place products with Miami, because his recommendations and endorsements reach followers increasingly missed by traditional media and they can see the engagement in the hundreds of ‘likes’ and reposts.

“In many ways, Miami is a pioneer but in others, what he is doing is one of the oldest economic services – providing personal recommendations,” said Professor Galeotti.

“In the past, a personal recommendation was given face-to-face in your village, then film stars, celebrities and athletes were paid to endorse products. Now, the internet has allowed ordinary individuals to offer advice on a global scale.”

This network of influencers, followers, marketers and policy makers has been little-studied. Professor Galeotti, together with Itay Fainmesser, Assistant Professor of Economics at Johns Hopkins Carey Business School, has written a paper ‘The Market for Influence', a first step in setting out its characteristics and parameters in rigorous terms.



How does online influencing work?


In the beginning, social influencers were, in effect, unregulated. They started out by gathering followers through offering entertaining, relevant and useful content; earning their trust. This quickly caught the attention of marketers who, attracted by the follower engagement, would pay to have their products and services plugged on their social media channels. In the early days, followers could not tell if a recommendation was paid or organic (real and unpaid).

“Miami is not an A-list celebrity but one of hundreds of micro-influencers, a new phenomenon made possible by platform like Instagram and Facebook.”

This annoyed some followers, especially if they followed advice and it turned out to be sub-optimal. If a blogger was skilful and the advice was good, they would be paid for it and no one would be any the wiser. In most cases, however, evidence suggests undeclared paid-posts irritate followers. This irritation means that the influencer must find the right balance between paid and organic content, so they can be paid but don’t lose followers. According to Professor Galeotti, this trade-off is an important source of competition between influencers. And it is this competition that assures high-quality recommendations in the market.


Regulation


“The regulation which governs endorsements pre-dates the internet, it dates back to 1960s radio,” explains Professor Galeotti. “But its application online wasn’t initially very clear. When it was drawn up, the regulation applied to celebrities who were required to say they were being paid for an endorsement.

“In the past two years, advertising authorities in Europe and the US have made it clear the same requirement applies to everyone online. This means that online influencers are now required to be transparent and declare which of their recommendations are paid for.

“I wanted to understand this market,” says Professor Galeotti. “If we can understand the underlying forces shaping this market, we can understand the effect of the regulation.”

Superficially this transparency should be a good thing – providing protection for followers. However, the effect of segregating paid and unpaid recommendations and advice removes the need for the balancing act trade-off between unpaid advice and paid advice. Since some followers (the ones with good alternative sources of advice) will now ignore or skip the paid content, influencers can take more paid content without losing many followers. This means all influencers tend to take much more advertising on board.

“The policy of making the posts transparent can easily backfire.”

Counterintuitively, the regulation effectively reduces competition between influencers as a result, thus hurting the quality of advice. Critically, marketers also lose the level of engagement which attracted them to social influencer marketing in the first place. Professor Galeotti’s research found that influencers are then dissuaded from offering advice because they are unpaid and the quality of advice declines, further undermining engagement.

Another restriction on the market for influence, which many of us will have direct experience of, is how do you find good advice?

“You can Google it, there is an algorithm which will direct you to reviews but the market is large and which is the right one? It is far from perfect,” observes Professor Galeotti. “The way you are matched to the advice is guided by how other people view that advice. Are the people who like that advice similar to you, is the advice right for you?”

Two big takeaways


According to Professor Galeotti there are two takeaways from his research – for search engines and for regulators.

“If you are interested in improving this market, for great advice and better matches between posts and followers, the best way is to make the search technology more efficient. A more effective search technology creates stronger competition across influencers, thereby increasing higher quality online advice; a multiplier effect to the improved search technology,” he says.

“In contrast, the policy in making the posts transparent can easily backfire. Once you act in this way, in this market, you are effectively decreasing competition and creating an environment where advice or recommendations are of less quality.”

For Professor Galeotti, the paper represents an important evidence-based voice on influencer marketing and regulation, which has not been heard by policymakers until now. If regulators want to protect and enhance online advice, they need to think about policies that promote engagement online and competition between micro-influencers.

Comments (0)

585801 LBSR LBSR Footer banner Full width desktop

Subscribe to LBSR

Get the latest ideas and opinion from London Business School’s experts, straight to your inbox