Economics of social networks

Mikolaj Jan Piskorski of HBS has been doing a lot of research on understanding social networks. Here is a profile of his research findings.

If the ongoing social networking revolution has you scratching your head and asking, “Why do people spend time on this?” and “How can my company benefit from the social network revolution?” you’ve got a lot in common with Harvard Business School professor Mikolaj Jan Piskorski.

Only difference: Piskorski has spent years studying users of online social networks (SN) and has developed surprising findings about the needs that they fulfill, how men and women use these services differently, and how Twitter—the newest kid on the block—is sharply different from forerunners such as Facebook and MySpace. He has also applied many of the insights to help companies develop strategies for leveraging these various online entities for profit.

First why do people use these online networks? Simply put, it helps them address failures of offline networks:

Online social networks are most useful when they address real failures in the operation of offline networks,” says Piskorski.

They can address some basic search failures: “It’s hard to know what my friends are up to, but online I can catch up with them quickly.” But they can also fix bigger search shortcomings, such as those related to establishing new relationships.

“If I am looking for someone who can help me with my start up, I would ask my friends if they know such a person, and if they don’t, I would ask them to inquire with their friends. The problem is that those friends of friends don’t always have an incentive to help, so they won’t work on my behalf. But here is where LinkedIn comes in handy—there I can go and search through the network of my friends of friends and find the person I am looking for.”

Online social networks also can improve people’s ability to use offline social networks as “covers.” This is very salient on LinkedIn. There, people display a lot of information about their careers, which makes them available to headhunters and other employers as passive candidates. But they also establish relationships with others to stay in touch with peers and to make new contacts. This network allows them to establish plausible deniability that they are not looking for a job, even if they are.

Next q is why people spend so much time on these networks? Pictures is what draws people:

With these general ideas of why people use these sites, Piskorski examined weblogs of social networking sites (not LinkedIn) to see what people did when they were online. “I just wondered why people spend so much time on these sites; what do they do?”

The biggest discovery: pictures. “People just love to look at pictures,” says Piskorski. “That’s the killer app of all online social networks. Seventy percent of all actions are related to viewing pictures or viewing other people’s profiles.”

Why the popularity of photos? Piskorski hypothesizes that people who post pictures of themselves can show they are having fun and are popular without having to boast.

Another draw of photos (and of SN sites in general) is that they enable a form of voyeurism. In real life there is a strong norm against prying into other people’s lives. But online enables “a very delicate way for me to pry into your life without really prying,” the researcher says. “Harvard undergrads do it all the time. They know all about each other before they meet face to face. ‘Oh, you’re that guy that did that internship in D.C. last summer.’ “

Not surprisingly, women profile draw maximum views:

Piskorski has also found deep gender differences in the use of sites. The biggest usage categories are men looking at women they don’t know, followed by men looking at women they do know. Women look at other women they know. Overall, women receive two-thirds of all page views.

“This was a very big surprise: A lot of guys in relationships are looking at women they don’t know,” says Piskorski. “It’s an easy way to see if anyone might be a better match.” Again, online networks act as cover.

He finds, things change  when it comes to Twitter:

Looking at who uses Twitter, which restricts users to 140-character messages, Piskorski and student-researcher Bill Heil (HBS MBA ’09) found that 90 percent of Twitter posts were created by only 10 percent of users. This was not surprising, he says, because the technology uses words without photos to communicate.  Only the people who are willing to put themselves out there publicly in words to people who they may not know will use Twitter. Some people will find this incredibly appealing, others will find this too scary.”

Then gender mix changes here:

But the remarkable finding was the gender dynamics. According to the research, there are more women on Twitter than men, women tweet about the same rate as men, but men’s tweets are followed by both sexes much more than expected by chance.

“That was stunning because on all these other social networks you see the opposite,” Piskorski says.

Piskorski and Heil are now doing a follow up study to see whether this is because there are no pictures on Twitter or because men and women say different things. Early results suggest that women create fewer links in their tweets than men. “Women actually say things, guys give references to other things.” But even accounting for these differences, the researchers still saw differences between how men and women are followed, perhaps pointing to a fundamental representation of the role of men and women in society.

It talks about Myspace which despite a low profile has 70 million US loggers in a month. FB has 90 million US loggers and Twitter 20 million.  Why not popular then?  It is because its users are from small cities and communities. Hence, has a poor PR.

Finally how can companies use these networks? Most just advertise on these networks but people hardly click on them. The idea is to integrate these networks as part of your social strategy:

Corporate marketers by and large struggle with how to use social networking sites to reach potential customers, says Piskorski, who advises companies on this subject. The problem is that execs think of online social networks as social media and treat it as another channel to get people to click through to a site.

It doesn’t work that way.

For one thing, findings show that people don’t click through on advertising on social networks. “A good analogy is to imagine sitting at a table with friends when a stranger pulls up a chair, sits down, and tries to sell you something while you are talking to your friends. You will not get far with a strategy like this.”

“To be successful, you need to shift your mindset from social media to social strategy,” he continues. A good social strategy essentially uses the same principles that made online social networks attractive in the first place—by solving social failures in the offline world. Firms should begin to do the same and help people fulfill their social needs online.

To continue the earlier analogy, “You should come to the table and say, ‘Here is a product that I have designed for you that is going to make you all better friends.’ To execute on this, firms will need to start making changes to the products themselves to make them more social, and leverage group dynamics, using technologies such as Facebook Connect. But I don’t see a lot of that yet. I see (businesses) saying, ‘Let’s talk to people on Twitter or let’s have a Facebook page or let’s advertise.’ And these are good first steps but they are nowhere close to a social strategy.”

Hmmm.

Sunil Gupta of HBS offers more lessons on this Social Network Marketing.

Following the success of Google, social networking sites such as Facebook have been trying an advertising-based business model. However, studies show that the click-through rate of ads on social networking sites is extremely low—simply because people don’t go to these sites to seek information about specific products. Therefore, the advertising-based business model has had only limited success on social networking sites.

If the purpose of advertising is to influence consumers’ purchases, our research shows that there is another way to influence their behavior. Imagine that Sony wants to promote its new digital camera. Sony can either advertise on Facebook and accept a very low click-through rate, or give away free cameras to several Facebook members (potentially at a lower cost than advertising) and generate a viral campaign. Our research shows that this viral campaign is possible. We further show what type of users are more likely to be influenced by such a campaign.

Interestingly, Sheryl Sandberg [HBS MBA '95], the new COO of Facebook, recently talked about such a campaign. On Valentine’s Day, Honda offered 750,000 Facebook members a heart-shaped virtual gift complete with the Honda logo that could then be passed on to other members. It is exactly this type of viral campaign that has the potential to be an enormous source of revenue. Unlike banner ads, these viral campaigns truly leverage the network aspect of these social networking sites.

Interesting bit. As people are already spending a lot of time on facebook etc. The time to view advertisements on TV etc should decline (might have started to decline already). In that case, companies need to understand this medium and position them accordingly. Unlike TV where advertisements keep coming one after the other, here one can’t really stream ads continuously. People do not really like these pop-ups etc while working on these networks. So to capture mindspace will require a lot of creativity.

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