The rise of electronic social networks and implications for advertisers

The rise of modern digital communication technologies, most notably electronic social networks, transforms structures through which consumers interact with one another. In this paper we distinguish between two channels through which product promotion affects sales. The direct channel always positively affects consumers' pre-purchase valuation. The indirect channel goes through word-of-mouth (WoM) and can be either positive or negative. The sentiment contained in WoM is generated by the complex interaction process and depends on the aggressiveness of the advertising campaign. We investigate the implications of the current changes in social network architectures for the effectiveness of the indirect channel. We show that changes in social structures have increased the efficiency of WoM across a host of industries. Our results call for “smart” advertising policies. •We distinguish between two channels through which advertising affects sales and study the interplay between them.•Direct channel positively affects consumers' pre-purchase valuation. Indirect channel can be either positive or negative.•We show that the changes in social network topologies have increased the efficiency of WoM across a host of industries.•Modern firms risk too much by placing premature products on the market (even only for testing).•This is true for non-repeated, as well as for repeated purchases.