How to Use Social Media to Increase Firm Value

August 11, 2018 / James Hughes

Social media has shown itself to be incredibly important in marketing and sales. Word-of-mouth, especially, has been shown to impact consumer behavior and be a core element of any marketing strategy. But can social media “buzz” go so far as directly impact the value of a business? According to a recent model by Luo & Zhang (2013), the answer is not only “yes!”, but it showed that social media buzz and web traffic can impact firm value substantially.


Luo & Zhang did an extensive analysis of the top electronic brands and found that the market value of the companies fluctuated based on the buzz and traffic on their social media. Their model theorized that roughly 10% of a variation in a company’s stock was due to the social media buzz of their company and their competitors, and roughly 8.5% of the variation of their stock was due to traffic comparisons between the company and the competitors. All else being equal, a 10% increase in buzz (that is, consumer generated content), lead to a value increase of $750 million on average for the large tech firms.


Implications for Managers:


While they acknowledged the difficulty in implementation, Luo & Zhang both strongly recommended that managers included increasing site traffic and content generation as part of a company’s financial goals. Specifically, they noted the importance of not just generating lots of content, but also getting that content and page views at a higher rate than competitors, because in a saturated market there is a limited amount of customer attention available.


Thus, it is paramount that companies not only keep metrics on their own content and page views, but also on their competitors’ standings as well, in order to properly assess their social media strategies.


Thanks for reading,

James Hughes


References:

Luo, X., & Zhang, J. (2013). How Do Consumer Buzz and Traffic in Social Media Marketing Predict the Value of the Firm?. Journal Of Management Information Systems, 30(2), 213-238. doi:10.2753/MIS0742-1222300208

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