Internet Experts Who Attract Paid Advertisers Run the Risk of Alienating ‘Followers’

Social media has given rise to a new breed of social influencers. These are not A-list celebrities but rather the more numerous micro- and even nano-influencers, active on platforms such as Instagram and YouTube, and has a range of several hundred to hundreds of thousands of followers.

Influencers start out by creating attractive content and providing advice in a specific area. Over time, they build an audience. That audience comes to trust the Influencer for her insights and recommendations. Once an audience develops, marketers begin to take note and offer to pay Influencers to promote products to their followers.

In the early days, followers could not tell whether an influencer was paid for a recommendation or whether it was organic (that is, unpaid). This was an issue for some followers, especially if they followed a recommendation and ended up buying a low-quality product. Followers trust the influencers for their authentic and honest personal opinions, not for ones paid for by outside interests. By taking marketers’ fees, the influencers cash in on their expertise, but at the cost of the authenticity that helped them gain influence in the first place.

“Followers developed loyalty to influencers they considered authentic. Influencers had to find the right balance between paid and organic content, so they could be paid but not lose followers to competing influencers,” says Itay Fainmesser, a professor of economics at the Johns Hopkins Carey Business School, who explored the complex dynamics of the market for online influence in a recent paper. “Such competition between influencers increased the quality of influencers’ recommendations.”

Over the past three years, this landscape started to change, as authorities in the United States and Europe sought to regulate the market by increasing transparency. Their first step was to extend the scope of legislation dating from the 1960s that originally governed radio and television. Now influencers are required to reveal which of their recommendations are sponsored.

“These measures worked well in TV and radio, in which relatively few stations and networks provide entertainment,” explains Fainmesser. “In these traditional media markets, essentially all recommendations are sponsored ads. In contrast, there are thousands of social influencers on online platforms, and their content includes, more often than not, unpaid organic recommendations.”

On its face, transparency might sound like a good idea. Separating paid content from unpaid recommendations allows some followers to skip the paid content and focus on authentic recommendations. However, this seemingly positive development can backfire and eliminate the trade-off for influencers between taking on more paid content and retaining their followers. Because followers can ignore the paid content, they will follow an influencer with good unpaid recommendations even if she posts more paid content. Influencers can then take on more paid content without losing many followers. As a result, influencers no longer compete on having less sponsored content, and the regulation leads to an increase in paid content posted by all influencers.

Counterintuitively, Fainmesser’s research shows that the regulation is bad for followers, who suffer from the decline in the quality of advice. The regulation is bad for marketers, who observe lower levels of engagement with their paid content, and it is bad for influencers, who receive lower pay from marketers.

Looking for a way to improve users’ experience, Fainmesser turns to a question many of us are familiar with: How do you find good recommendations online?

“In most platforms, users have a ‘feed’ of posts chosen using a special curation algorithm. They can also Google for advice. Both are far from perfect,” notes Fainmesser. “Whether posts are picked by the algorithms depends on more than the quality of the advice, which is by itself not easy to evaluate.”

“The solution,” he suggests, “is not to regulate influencers or marketers but to improve search technology to better match followers to influencers, whether they are sponsored or not.”

Improving search helps consumers find their most preferred influencers while increasing competition among influencers for those followers ― leading to a decrease in the amount of paid content. Consumers benefit from higher quality recommendations overall, marketers benefit from higher engagement levels, and influencers benefit from higher fees for paid content. 

Fainmesser and his co-author, Professor Andrea Galeotti of the London Business School, have presented their paper, “The Market for Influence,” at various academic venues and at the Federal Trade Commission. The paper and a video summarizing the research are available at Social media has given rise to a new breed of social influencers. These are not A-list celebrities but rather the more numerous micro- and even nano-influencers, active on platforms such as Instagram and YouTube, and having a range of several hundreds to hundreds of thousands of followers. Influencers start out by creating attractive content and providing advice in a specific area. Over time, they build an audience. That audience comes to trust the Influencer for her insights and recommendations. Once an audience develops, marketers begin to take note and offer to pay Influencers to promote products to their followers. In the early days, followers could not tell whether an influencer was paid for a recommendation or whether it was organic (that is, unpaid).

This was an issue for some followers, especially if they followed a recommendation and ended up buying a low-quality product. Followers trust the influencers for their authentic and honest personal opinions, not for ones paid for by outside interests. By taking marketers’ fees, the influencers cash in on their expertise, but at the cost of the authenticity that helped them gain influence in the first place. “Followers developed loyalty to influencers they considered authentic. Influencers had to find the right balance between paid and organic content, so they could be paid but not lose followers to competing influencers,” says Itay Fainmesser, a professor of economics at the Johns Hopkins Carey Business School, who explored the complex dynamics of the market for online influence in a recent paper. “Such competition between influencers increased the quality of influencers’ recommendations.” Over the past three years, this landscape started to change, as authorities in the United States and Europe sought to regulate the market by increasing transparency.

Their first step was to extend the scope of legislation dating from the 1960s that originally governed radio and television. Now influencers are required to reveal which of their recommendations are sponsored. “These measures worked well in TV and radio, in which relatively few stations and networks provide entertainment,” explains Fainmesser. “In these traditional media markets, essentially all recommendations are sponsored ads. In contrast, there are thousands of social influencers on online platforms, and their content includes, more often than not, unpaid organic recommendations.” On its face, transparency might sound like a good idea. Separating paid content from unpaid recommendations allows some followers to skip the paid content and focus on authentic recommendations. However, this seemingly positive development can backfire and eliminate the trade-off for influencers between taking on more paid content and retaining their followers. Because followers can ignore the paid content, they will follow an influencer with good unpaid recommendations even if she posts more paid content. Influencers can then take on more paid content without losing many followers.

As a result, influencers no longer compete on having less sponsored content, and the regulation leads to an increase in paid content posted by all influencers. Counterintuitively, Fainmesser’s research shows that the regulation is bad for followers, who suffer from the decline in the quality of advice. The regulation is bad for marketers, who observe lower levels of engagement with their paid content, and it is bad for influencers, who receive lower pay from marketers. Looking for a way to improve users’ experience, Fainmesser turns to a question many of us are familiar with: How do you find good recommendations online? “In most platforms, users have a ‘feed’ of posts chosen using a special curation algorithm.

They can also Google for advice. Both are far from perfect,” notes Fainmesser. “Whether posts are picked by the algorithms depends on more than the quality of the advice, which is by itself not easy to evaluate.” “The solution,” he suggests, “is not to regulate influencers or marketers but to improve search technology to better match followers to influencers, whether they are sponsored or not.” Improving search helps consumers find their most preferred influencers while increasing competition among influencers for those followers ― leading to a decrease in the amount of paid content.

Consumers benefit from higher quality recommendations overall, marketers benefit from higher engagement levels, and influencers benefit from higher fees for paid content. Fainmesser and his co-author, Professor Andrea Galeotti of the London Business School, have presented their paper, “The Market for Influence,” at various academic venues and at the Federal Trade Commission. The paper and a video summarizing the research are available at here.