Researchers at the University of Calgary have created a mathematical model aimed at helping businesses navigate uncertainty caused by social media.
“We developed a model to estimate demand for a new product or service considering the combined effects of three factors of choice: intrinsic preference – the perceived utility of a product or service to an individual independent of choices made by their peers or the general population; inner circle influence – the urge to mimic the choices of friends or close acquaintances in an attempt to conform to what the group appears to desire or represent; and global network influence – the urge to follow the preferences of the market as a whole,” said Giovani Caetano da Silveira, a professor with the university’s Haskayne School of Business.
“Forecasting methods based on panel studies estimate demand based only on individuals stated preferences, which in that environment are likely to be based mostly on intrinsic preference. Our forecasting model takes into account three factors of choice.”
He said the research is important because it provides a better understanding of demand and customer networks, particularly for new products or services.
“This can help business managers to make better decisions regarding capacity planning, supply and distribution contracts and inventory planning. Decisions in these strategic areas can make or break businesses, particularly in highly competitive markets with low profit margins. The research applies to manufacturing and service industries in competitive markets,” said da Silveira.
He said businesses can develop a much better knowledge of how demand for a new product or service should evolve by considering a number of factors.
“The nature of the product (e.g. hedonistic vs. utilitarian). This may indicate to what extent a customer’s choice might be influenced by intrinsic as opposed to social preference. Hedonic products are bought for pleasure or ‘higher level needs’ – so their choice may be more easily influenced by social preference, while utilitarian products are bought for functionality or more objective needs, so their choice should be more a function of intrinsic preference,” said da Silveira.
He said social influence, including inner-circle and global network effects, has always affected consumer choices but the impact has been heightened by more frequent and widespread access to digital social networks.
“On any given day, individuals are exposed to much information about what other people seek or avoid in terms of market (consumption) choices, and why. Individuals appear more likely to be influenced by those external factors than ever before,” explained da Silveira.
“With the high and fast connectivity of social media, preferences are spread quickly across multiple people. Not only are people becoming more influenced by external preferences, but also their own existing preferences may change more frequently as new information is obtained. This dynamic process can be difficult to capture and measure with traditional forecasting models, particularly for products or services with short life cycles.”
The research was done in collaboration with Mozart Menezes (Kedge Business School, Bordeaux) and Renato Guimaraes (ICN Business School in Nancy, France.).
Mario Toneguzzi is a veteran Calgary-based journalist who worked for 35 years for the Calgary Herald, including 12 years as a senior business writer.