Social Media Marketing, Quality Signaling, and the Goldilocks Principle

Abstract

Embraced by a rapidly increasing number of companies, social media marketing has become an integral part of companies' business strategies. However, not all the firms plan on a big spend on social media marketing. Our stylized model investigates the strategic effects of social media marketing spending (SMM spending) with the presence of exogenous quality revelation through sources over which firms have no direct control. Unlike traditional advertising, social media marketing has two roles: awareness enhancement and information revelation. Consumers are heterogeneous in their awareness of the product (e.g., whether they know the existence of the product). Our results suggest that the high-quality firm gets enough quality transparency from background user-generated discussions, and the cost of maintaining a social presence outweighs the benefits. The low-quality firm avoids social media marketing because quality transparency is broadly detrimental, whereas the mid-tier firm is “just right” to benefit from social media discussions they encourage. Our model provides a first step toward framing social media marketing spending as a strategic investment. We recognize that social media marketing, although capable of increasing consumer awareness and improving the realized perceptions of a firm's true quality, also has strategic signaling effects.