Introducing New Products via Social Media Influencers: Pricing and Commission Strategies

Abstract

Firms are increasingly leveraging social media influencers to enhance customer awareness of their products and generate sales. In this paper, we develop a two-period model to investigate a firm's strategy for introducing a product via an influencer. In a promotional campaign conducted in the first period, the influencer exerts an effort to sell the product to her followers, who may disseminate the product information to non-followers via word-of-mouth (WOM). In the subsequent selling period, the firm sells the product directly. We explore how factors relating to the influencer affect the firm's decisions. We find that the firm's pricing and commission contract decisions for the promotional campaign depend on the difference between the WOM effect of followers who do or do not make purchases, rather than the individual effect of each group. The firm generally offers a base pay plus sales-based commission to influencers with high reservation payoffs and a pure sales-based commission contract to those with low reservation payoffs. The influencer with a medium-sized follower base receives the highest commission rate and exerts the largest promotion effort, while the firm may charge her followers the highest price. Moreover, the firm may not be better off using an influencer with a larger follower base. Additionally, we demonstrate the robustness of our major findings when there exists the network effect in the product diffusion process.