Featured faculty: Jesse Yao
Written by Putro Harnowo

For the first time, Meta will eclipse Google as the largest advertising platform on earth. The social media company is poised to claim more than US$243 billion in revenue this year, edging out Google’s US$240 billion. Artificial intelligence (AI) has optimised Meta’s algorithms to better match ads to its 3.56 billion daily users while engaging them with short videos across Instagram and Facebook.

Both giants have invested heavily in AI, yet neither can sit on its laurels since other big techs have also ramped up their AI-driven algorithms to refine their social media ad targeting. Advertisers pay digital platforms to ensure their message reaches the right users and receive a payoff if those users make a purchase. Without being targeted with an ad, a potential consumer would not be aware of the product and may never buy it.

Ad targeting creates value for businesses and consumers when advertisers accurately reach their target audience. AI technologies like machine learning and large language models come in handy to help platforms collect information about users’ behaviours and demographics, such as age and location, and crunch the data to predict their likelihood of purchase.

At this point, it may be scary to see how social media uses AI-fueled algorithms to match their user profiles with the diverse needs of advertisers. However, Jesse Yao, an Associate Professor at the Department of Marketing at the Chinese University of Hong Kong (CUHK) Business School, argues that perfect targeting is impossible.

“When competition is strong, companies have a high chance of targeting the same pool of individuals, especially if their algorithms use similar mechanisms,” he says. “Companies will definitely develop more sophisticated algorithms to improve their targeting ability, but data privacy regulations will continue to limit their ability to perfect their targeting.”

Data privacy laws restrict businesses from collecting personal data that could identify an individual, so businesses must implement measures to decouple users from their real identities. Consequently, algorithms cannot achieve 100 per cent accurate targeting or certainty that someone is interested, and even if they did, the targets would no longer be high-quality.

How do businesses deal with flawed targeting

Since perfect targeting is arduous, advertisers often ponder whether to focus on “precision” to carefully target only a small number of very interested groups or on “recall” to cast a wider net to reach almost everyone who might be interested. The drawback is that prioritising high precision may miss out on other individuals who are also interested but were not identified, while prioritising high recall may waste resources.

A paper titled Algorithmic targeting and the precision-recall tradeoff, tries to navigate this dilemma. In the study, Professor Yao collaborates with Ganesh Iyer at the University of California, Berkeley and Zachary Zhong Zemin at the University of Toronto to use game theory, a mathematical study of strategic decision-making in which the outcome for each party depends on the choices of all involved.

“When competition is strong, companies have a high chance of targeting the same pool of individuals, especially if their algorithms use similar mechanisms.”

Professor Jesse Yao

The study highlights that the algorithms used by many platforms may be highly similar. While the algorithms used by the platforms are proprietary, their underlying machine learning techniques are similar, especially when they use public data and the same data analytics tools or AI models. People also typically search for products on multiple channels, signalling their interest in different platforms.

When algorithms identify individuals with a high probability of purchase, there is a big chance that other competitors are also eyeing the same targets. Even across distinct apps like TikTok, Facebook, and Amazon, there would still be significant overlap, and advertisers end up targeting similar groups with their competitors. This is often why, when you Google a brand, you might see an ad for the product you searched for on social media, and then see more ads from other brands.

“Companies can benefit a lot from being the only one that targets interested people, but will benefit less from competing for the same targets,” says Professor Yao. “To soften competition, they strategically target fewer people who are moderately interested, or lower both recall and precision. This way, the targets still have a reasonable chance of making a purchase when seeing ads, but without as much costly head-to-head competition.”

What if businesses tailor their algorithms differently?

Undoubtedly, targeting fewer people with moderate interest is not ideal, as it could also result in a pool of duds. Hence, advertisers are motivated to develop unique algorithms and analytics tools to differentiate their predictions. “The more unique, proprietary data a company uses, the less likely they are to target the same people as their competitors,” Professor Yao adds.

Advertisers nowadays can either work with digital platforms or build their own custom algorithms, but this approach is costly. It may also indirectly help their competitors by making the markets less crowded with ads, without the competitors even needing to spend a penny, so this strategy must be executed carefully.

Some may consider combining public and proprietary data to improve predictions and reduce costs. However, data privacy regulations in many jurisdictions require companies to choose either public or proprietary data for a given consumer, but not both at once.

Combining data sources also creates new personal data profiles, which require new consent or a re-evaluation under most data privacy regulations. Some digital platforms even explicitly forbid data scraping or combining user profiles for commercial targeting, especially if the data becomes personally identifiable.

Modern targeting in ever-competitive markets

Given that there is no easy way to avoid targeting overlap, Professor Yao suggests that advertisers strategically adjust their precision and recall while keeping tabs on the rivals’ digital campaigns. “Companies should not only think about the potential customers but also consider the strategic response from their competitors.”

When ad costs are low, they may consider targeting a larger pool of people to reach as wide an audience as possible or to achieve high recall. When ad costs are high, they should be more selective and target only those genuinely interested. To minimise overlap, advertisers should continue seeking unique segments they can own, rather than competing for the most obvious targets all the time.

For Meta, perhaps its unique segments are its short videos and cross-platform ecosystem, but for advertisers, its vast user base may increase overlap with their competitors. While the study does not specifically analyse Meta’s success, its framework provides a useful lens on how developing proprietary data analytics and strategic differentiation can gain a competitive edge.

There are plenty of fish in the sea, but if all the boats have trawlers, a wise fisher is those who know where to cast their line.

The post If everyone uses AI, who stands out? first appeared on China Business Knowledge.

Featured faculty: Cao Xinyu and Wang Jingbo
Written by Putro Harnowo

Many may call it cliché or cheesy when watching a short movie about a bullied employee who turns out to be the CEO’s son or a poor husband revealing himself as a billionaire, but believe it or not, these microdramas have stolen the show. Their plot twists and cliff hangers have helped them find a way to Hollywood, as Fox Entertainment and Disney recently announced investments in producing bite-sized movies.

Microdramas have less than two-minute duration and a vertical format because they are meant to be watched on a smartphone. Their popularity can be traced back to 2018, when Chinese short-video platforms began featuring them. Fast forward to 2024, the country’s microdrama industry surpassed its box-office revenue with US$6.9 billion, according to the China Netcasting Services Association.

Nowadays, China’s microdrama industry has become highly competitive, powered by more than 100,000 enterprises producing around 3,000 series monthly. Video platforms recognise these miniseries as profitable content and not only host but also actively incentivise them through financial rewards, algorithm optimisation, and the like, to encourage more original and high-quality content.

However, the ever-increasing number of creators and limited financial resources have made selecting creators for such incentives more challenging. After analysing data from a major video platform, Wang Jingbo, Assistant Professor in the Department of Marketing, and Cao Xinyu, Vice-Chancellor Associate Professor of Marketing at the Chinese University of Hong Kong (CUHK) Business School, find that creators with a large number of followers tend to be selected for financial support.

This method may be counterproductive since the supports might not provide a significant boost to their already high performance. “The platform may simply select creators who already have the highest content quantity and quality, rather than those who were likely to experience the greatest improvement due to the incentives,” Professor Cao says.

Therefore, in a study titled A Deep-DiD method to estimate heterogeneous treatment effects: Application to content creator selection, Professors Cao and Wang, as well as Cheng Yan of Shanghai University of Finance and Economics, Shen Zuo-Jun (Max) of the University of Hong Kong, and independent researcher Zhang Yuhui, propose a new method to optimise a digital platform’s selection process.

Practical experiment and application in the digital world

The short video platform launched a signing programme in three countries in 2022. Selected creators were asked to sign a contract and receive monthly payments based on their performance.

Professor Cao and her team then try to measure how effective the signing programme was, using three key indicators: the number of video uploads per day, the time users spent on each video, and user engagement from likes, comments, shares, and follows. To create a fair comparison, they match 2,343 creators who signed the programme with the same number of other creators who did not sign up based on their performance trajectories.

Through a statistical method called difference-in-differences (DiD), which has been widely used in economics and social sciences to estimate the effect of specific interventions, the researchers find that the signed group shows a significant boost in all key indicators. After signing up, their average number of videos per day temporarily increases, while the positive impacts on user time and engagement last longer.

However, the researchers also find that the effects vary widely across different creators. “The DiD method calculates the overall average impact by blending all the individual effects,” says Professor Cao. “If an intervention affects different individuals in several ways, or if the impact changes over time, the analyses could lead to an inaccurate picture of the actual impact.”

“The platform may simply select creators who already have the highest content quantity and quality, rather than those who were likely to experience the greatest improvement due to the incentives.”

Professor Cao Xinyu

Therefore, Professor Cao and the team further examine the specific impact on each creator with an advanced method by leveraging a computer programme called a deep neural network. Dubbed as the Deep-DiD method, it possesses extra layers to process information and find hidden patterns that traditional techniques overlook.

How does Deep DiD work, and how good is it?

First, the researchers develop a Deep DiD model by integrating deep neural networks into a difference-in-differences framework to flexibly estimate individual-level heterogeneous treatment effects as nonparametric functions of high-dimensional pre-treatment features.

By inspecting rich data from the platform, the model can predict which creators would have improved the most if they joined the programme. “With this advanced predictive analysis, we can examine how a specific programme helped some individuals more than others,” Professor Cao adds.

Creators selected by the Deep DiD model as favourable candidates show 57 to 123 per cent higher performance than those selected by the platform. Overall, creators chosen by the model consistently show a 72 to 114 per cent higher performance.

In out-of-sample evaluations, creators selected by the Deep-DiD model exhibit substantially larger performance gains than those selected by the platform. Among signed creators, those also identified by the model experience 70 to 80 per cent higher realised performance jumps relative to the average signed creator, across both user time contributed and user engagement.

When comparing selection rules directly, creators ranked highest by the model have 57 to 123 per cent higher estimated treatment effects than platform-selected creators, indicating significant scope for improvement in targeting. Notably, nearly half of the creators identified by the model were not signed by the platform, reflecting systematic differences in selection criteria.

What makes the Deep DiD method remarkable is its flexibility. While the three key indicators above reflect outcomes that platforms are likely to consider, platforms can tailor any other metrics depending on their goals. This way, they can maximise the impact of their programmes by investing only in those who will gain the most.

“If a platform’s revenue depends on users’ watching time, then this metric can be prioritised. The goal can also be defined as a weighted combination of metrics or other customised outcomes,” Professor Cao says. “The process can be repeated multiple times to reduce randomness and improve the stability of the results. Whenever the platform plans to implement a new intervention, new rounds of estimation should be conducted using the corresponding data and inputs.”

Beyond the digital platform, the Deep DiD method may also be applied in other settings. For instance, a retail shop launching a rewards programme must choose its target wisely to ensure only the right customers contribute to revenue, a company deploying bonus systems needs to determine which employees would achieve the largest productivity boost, and a government introducing a subsidy scheme should predict which individuals would benefit most.

In the real world, figuring out how much an intervention truly impacts a beneficiary is never easy since many variables interact in complex and hidden ways. These intricate and unknown linkages are nearly impossible to figure out using traditional mathematical methods, but the deep neural network acts much more like a sophisticated brain and is exceptionally good at discovering complex and subtle patterns.

The post How should video platforms spot their next big stars first appeared on China Business Knowledge.

Featured faculty: Lisa Wan
Written by Pan Jingyi

Imagine you are scrolling through Instagram or RedNote, craving your next travel adventure. A stunning mountain vista appears, but it leaves you unmoved. Then you see the same peak again, this time with a lone hiker, back turned, gazing at the horizon. Suddenly, you pause. “That could be me,” you think.

Science can explain why you feel indifferent to stunning landscapes, but get captivated by a random hiker’s back view, regardless of their personal attractiveness. Travellers heavily rely on imagination when planning trips, as tourism is unique—you can’t try before you buy. Therefore, visual materials play a powerful role in helping tourists envision future experiences.

“We found that the presence of a person in photos significantly prompted tourists to imagine their future travel experiences in the depicted travel scenes, thereby enhancing the perceived destination attractiveness.”

Professor Lisa Wan

But what happens when people are included in these photos? Researchers have long debated whether human presence enhances or detracts from a destination’s appeal. Lisa Wan, Associate Professor of the School of Hotel and Tourism Management and Department of Marketing at the Chinese University of Hong Kong (CUHK) Business School, delves deeper into this question, shedding light on the psychology behind it.

“We found that the presence of a person in photos significantly prompted tourists to imagine their future travel experiences in the depicted travel scenes, thereby enhancing the perceived destination attractiveness,” says Professor Wan.

Moreover, she adds, this favourable effect depends on the type of photo and how the human figure is portrayed.

Humans activate mental simulation

In the study titled Inspiring tourists’ imagination: How and when human presence in photographs enhances travel mental simulation and destination attractiveness, Professor Wan and her PhD student, Li Yuan, conducted three experimental studies across different cultures to test their hypotheses.

The first study recruited 200 American participants through an online platform, aiming to investigate how human presence in destination photos affects tourists’ responses. All participants were required to imagine planning a trip and were shown a travel recommendation post on the social media platform.

As expected, participants found the destination more appealing when the photos included human figures. “The inclusion of humans in the photo activated their mental simulation, resulting in an increase in perceived destination attractiveness,” says Professor Wan.

Mental simulation is a future-thinking process, which happens when people imagine and create scenarios in their minds based on memories and past experiences. “Human presence in destination photos can act as a mental shortcut, making it easier for you to imagine yourself in that scene by observing how other individuals interact with the place,” she adds.

This experience is similar to seeing someone model clothing, which helps us envision how the outfit would look on ourselves. The vivid and detailed imagery of the product experience and consumption process enhances tourists’ connection to the destinations, thus amplifying the destination attractiveness, she explains.

Visible vs. invisible faces

Some studies support the positive effects of including humans in travel photos, but others argue it may diminish tourists’ perceived attractiveness. To explore this further, the team tested different ways of portraying people in photos.

In the second study, nearly 500 American and British participants were recruited from the same online platform. They were randomly assigned to view one of three types of landscape photos: without human presence, with human faces visible and with human faces invisible.

Researchers discovered that travel destinations appear more attractive when the faces in the photos are invisible. Additionally, the physical attractiveness and gender of the model did not impact the results.

“The presence of unfamiliar faces in the photo would make consumers more aware that it is someone else’s travel experience but not theirs, potentially hindering their ability to retrieve self-referencing memories and knowledge to simulate future scenarios,” says Professor Wan.

Natural vs. urban landscape

In the final study, the researchers explored how the types of destinations affect the impact of human presence in photos. This offline experiment involved over 250 Chinese undergraduate students from a university in Hong Kong. The participants were shown photos of a natural mountain landscape or a view of a European city street.

Interestingly, human presence enhanced the appeal of natural landscapes but had a less significant impact on urban ones. Professor Wan notes that urban landscapes represent typical man-made environments, which can effectively activate observers’ mental simulation process and diminish the positive effect of human presence cues.

“In contrast, individuals have fewer expectations about what they can do in the non-humanised scene.  Human presence in such cases would effectively help viewers construct potential behavioural scenarios,” she says.

Present human in a wise way

It’s not uncommon for marketers to include human figures in travel photos to attract tourists, but Professor Wan emphasises the importance of doing it wisely.

Given that mental simulation induced by human presence can significantly improve destination attractiveness, she encourages marketers to incorporate human figures in travel photos on their official websites and social media thoughtfully.

It would be more beneficial to include humans in natural landscape photos than those with urban views. However, Professor Wan reminds that showing a clear face may backfire, “using a model with a back view or an unclear face can reduce the intrusiveness of others to achieve a better communication effect.”

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What about urban attractions? The researchers recommend to highlight the atmosphere, design details or the cultural vibe instead of filling the photo with human figures.

While the results are consistent among participants from various backgrounds, Professor Wan notes that cultural nuances may still play a role. These nuances can manifest in varying attitudes towards group versus solo travel and preferences for social versus private experiences.

Besides these subtle cultural differences, researchers can also further explore how advancements in technology could open new opportunities for leveraging human presence in travel promotion. “Future research can investigate whether the positive effects of human presence still exist in advanced visual formats, such as video and virtual reality devices,” she adds.

The post How the backs of strangers become your invisible guides first appeared on China Business Knowledge.

Featured faculty: Andrew Meyer
Written by Sha Miao

“Intuition is a very powerful thing, more powerful than intellect, in my opinion,” said Steve Jobs. Intuition often inspires a multitude of ideas, but creating a tech giant like Jobs did requires more than just instinct. For most of us, simply relying on gut feelings for problem-solving may only work best in movies and novels.

“There’s an idea that we should follow our intuition,” says Andrew Meyer, Research Assistant Professor with the Department of Marketing at the Chinese University of Hong Kong (CUHK) Business School. “Obviously, we need to act and can’t be paralysed by reflection, but the idea that there’s any special insight in whatever first comes to mind is probably wrong.”

Since the 1970s, two world-renowned psychologists, the late Amos Tversky and Daniel Kahneman, have highlighted flawed patterns in decision-making with their theories of cognitive bias. A notable example is their famous Linda problem:

Linda is 31 years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations. Which of the following is more likely:

1) Linda is a bank teller; or

2) Linda is a bank teller and is active in the feminist movement.

Most people guess the second option because Linda “seems” like a feminist. However, the likelihood of two events occurring together is always less than or equal to either individual event. Therefore, the first option is more likely. This conjunction fallacy exemplifies how intuition can blind us to logic—a tendency measured by tools like the cognitive reflection test.

More than just a math test

In a recent paper, Professor Meyer worked with Kahneman before the Nobel laureate passed away in 2024 to explore the cognitive reflection test, a seemingly simple test to measure how likely someone is to stop and think before jumping to conclusions.

Unlike standard mathematical tests that simply assess how well individuals can compute or solve equations, the cognitive reflection test has intuitively compelling wrong answers (like Linda seeming like a feminist) that allow it to evaluate “cognitive reflection” – the ability to override an incorrect gut response and reach a correct answer. This ability is crucial in many areas of life, from making better decisions at work, having the patience to wait for larger rewards, and being less prone to fall for misleading information.

“You could think about a distinction between the ability to think and the tendency to think,” says Professor Meyer. “Some people might be very smart but prone to stick with initial intuitions instead of actually thinking. The cognitive reflection test is supposed to measure this latter tendency.”

“The tendency to stop and think is important for avoiding all kinds of traps in daily life, from phishing emails to overly sweet desserts.”

Professor Andrew Meyer

Cognitive reflection is a distinct and measurable trait describes recent research by Professor Meyer along with Kahneman, as well as Shane Frederick of the Yale School of Management, Maya Bar-Hillel of the Hebrew University of Jerusalem, and Yigal Attali of Duolingo. They compared the cognitive reflection test with a standard math test to see which was a better predictor.

In the study, 4,407 participants were recruited from four different online platforms, and each participant was administered an eight-item cognitive reflection test and an eight-item mathematical aptitude test.

The questions in the cognitive reflection test appear simple, like the classic bat and ball problem: A bat and a ball cost $1.10 in total. The bat costs $1.00 more than the ball. How much does the ball cost?

Most people quickly and intuitively guess 10 cents, because 1.10 and 1.00 differ by 0.10, but the correct answer is five cents. On their variant of this problem, only 26 percent of participants answered correctly.

The questions are designed to trick people into relying on gut feelings rather than taking a moment to think it through. However, the items are still math problems, so they test mathematical abilities. In a previous paper, the Bar-Hillel and Attali had argued that that was all these items tested.

Although the standard math test without intuitive lures was better at predicting numeracy skills, the cognitive reflection test was a better predictor of religious and paranormal beliefs, patience, and the ability to tolerate risk. This suggests that the cognitive reflection test measures something unique beyond math skills.

Why reflection matters

The key aspect of the cognitive reflection test is its intuitive lures—easy responses that seem right, but are designed to catch the participants off guard. These layers help distinguish between those who rely on quick, intuitive answers and those who reflect.

“The cognitive reflection test has been shown to correlate with lots of behaviours like investment decisions, belief in God, and work performance,” Professor Meyer says. “If it was just a math test, those relations might mean something very different than if the cognitive reflection test was actually measuring the tendency to question initial intuitions.”

The study also found that those who scored high on the cognitive reflection test are more sceptical of claims that lack evidence, such as paranormal beliefs or verbiage that sounds deep but is meaningless.

Cognitive reflection is a powerful trait that plays a critical role in both the personal and professional realms. Consumers can apply cognitive reflection when choosing between many products to help them think about the long-term benefits and costs. In professional settings, cognitive reflection can lead to better strategic planning and risk management. In personal situations, it can help manage finances better or make better choices about health and education.

The cognitive reflection test is a useful tool for highlighting this trait and identifying people who possess it. It emphasises the importance of thinking about things in a reflective way. “The tendency to stop and think is important for avoiding all kinds of traps in daily life, from phishing emails to overly sweet desserts,” Professor Meyer adds. “Being able to measure it could be useful for large employers.”

The post Trust your mind or follow your gut? first appeared on China Business Knowledge.

Featured faculty: Tony Ke
Written by Ellis Ng

Positioning a company’s brand can be a complicated process, especially in today’s world, where even luxury brands struggle to gain dominance. Take a look at LVMH, the owner of Louis Vuitton, and Kering, the owner of Gucci and Bottega Veneta. Both have grappled with shrinking consumer spending and reported a significant drop in China sales.

In these hard times, it’s natural for companies to rethink of positioning themselves closer to the mainstream in search of success. However, does giving in to popular taste will guarantee success? Recent research sheds light on how brands can effectively guide consumer decisions through strategic positioning.

“Positioning is one of the most important strategic decisions for brands, but as technology advances, market and consumer tastes are ever-changing,” says Tony Ke, Associate Professor in the Department of Marketing at the Chinese University of Hong Kong (CUHK) Business School. “It is not uncommon for some brands to chase the trends by adding new products to their portfolio. This will create the discrepancy between the product portfolio and the brand positioning and thus leads to brand dilution.”

Brand positioning requires careful planning. Therefore, in a new paper titled A model of product portfolio design: Guiding consumer search through brand positioning, Professor Ke along with Shin Jiwoong of Yale University and Yu Jungju of Korea Advanced Institute of Science and Technology, came up with a theory to help brands connect with their customers more meaningfully. The study also identifies conditions under which brands should adopt a niche positioning strategy rather than a mainstream one.

“Traditional marketing theory does not really distinguish between brand positioning and product positioning, and when it does, it talks about brand positioning totally separate from product positioning,” Professor Ke says. “Our theory of product-based brand positioning recognises both the difference as well as the link between brand positioning and product positioning.”

Niche vs. mainstream

Brands have become shorthand for consumers, and their positioning provides critical information about the characteristics of a firm’s products, making it easier for consumers to look for what they want. Product positioning, on the other hand, focuses on the specific attributes and characteristics of an individual product within the brand’s portfolio.

“When we want to shop for a new jacket, we may visit our favourite brand first, even though we do not know what designs of the new season will be offered by this brand,” Professor Ke says. “This simple observation implies that brand is guiding consumer search for products.”

Professor Ke used this idea to propose a theory using a Hotelling line model to visualise how brands position themselves in a market. Named after economist Harold Hotelling, the model illustrates how businesses position themselves in a market to maximise consumer reach. The mainstream brands are positioned close to the centre of the Hotelling line to appeal to the mass consumers, while niche brands are positioned near an endpoint to appeal to a specific group of consumers.

“It is not uncommon for some brands to chase the trends by adding new products to their portfolio. This will create the discrepancy between the product portfolio and the brand positioning and thus leads to brand dilution.”

Professor Tony Ke

The researchers then analysed how different factors affected the firm’s optimal positioning strategy, considering variables like search cost, consumer preferences, and the firm’s ability to position its various products in the market. Search cost refers to expenses or efforts consumers must take when searching for products before making a purchase decision.

The niche brand positioning allows firms to stand out and better match the specific tastes of their consumers, especially when search costs are high. Mainstream positioning allows brands to attract a larger number of consumers, but they may dilute their unique identity by offering a wide range of products. However, if many consumers are interested in the brand, maintaining a mainstream position won’t be a problem.

“Many great brands start as niche brands, such as Arc’teryx and Patagonia. Even the name of these brands hints at their niche origin,” says Professor Ke. “Yet, they become very successful because of the clarity of their brand positioning.”

Why is it good to be niche?

According to the theory of product-based brand positioning that the researchers propose, consumers may not know the exact details of every product, but they understand the overall style or type of products the brand offers. Based on this information, consumers can decide whether to search for a specific brand by visiting the store.

Therefore, a brand’s position can convey crucial information that guides the consumer’s search decisions. Instead of having to search through multiple brands to find what they want, consumers can use their understanding of brand positions to narrow down where they look for. Niche positioning naturally provides more information that facilitates consumer search because it restricts the spread of the product portfolio and hence guarantees the consistency between the brand position and the designs of all products under the brand.

A good example of a successful niche brand is Lululemon, which is known for its activewear and lifestyle apparel. “Lululemon builds a very consistent product portfolio,” says Professor Ke. “Consumers know if they want a particular style, say a pair of violet yoga pants with a slim fit and high waist for warm weather, they can get it at Lululemon.”

The theory then implies that a consistent portfolio will save consumers’ search costs. Lululemon, with its limited designs and rich selections, is thus clear and informative with its branding, Professor Ke says. “The brand itself tells consumers lots of information about the products under the brand,” he adds. “If they go to a different brand, there is a chance they can get some selections of yoga pants, but they may not get the exact thing they want.”

And that has helped Lululemon, which is currently enjoying breakout popularity. It now has more than 100 stores in mainland China and saw a 34 per cent year-on-year revenue rise in the last quarter.

Brand positioning in the e-commerce era

Brand building takes time as consumers form their perception about a brand over interactions with its products. Search costs, to some extent, “lock” consumers to their favourite brand by limiting their consideration set. The rise of e-commerce is likely to disrupt branding in general, Professor Ke says, with some merchants focusing less on brand positioning and more on grabbing consumer attention.

“The rise of e-commerce has lowered consumers’ search costs, and our theory thus predicts that brand positioning would become less important, as consumers can now freely explore more products from different brands, consistent with the market trend of ‘brandless’,” he adds. “Indeed, instead of using brands to guide consumer search, e-commerce platforms have powerful recommendation algorithms that could steer consumers to products or brands.”

However, Professor Ke argues that branding itself remains a comprehensive concept. “Besides guiding consumer search, the brand is an important social device that allows patrons to signal their wealth, taste and social status, and this aspect will not be altered by the advancement of e-commerce,” he says.

As big Chinese brands seek breakout success, with BYD attempting to make inroads in the electric vehicle market, Chagee and Luckin Coffee in the beverages market, and Pop Mart in the toys market, they should be more patient. Instead of constantly rolling out new products to chase market trends, companies can focus on the consistency of their product portfolio. This is the organic way to build a brand that lasts and resonates with consumers. For companies with diverse product capabilities, instead of throwing everything under one brand, they can consider building a house of brands to segment the market, like what P&G and Unilever did, says Professor Ke.

“Chasing the market trend is risky because it leads to brand dilution,” he adds. “Staying focused on their product portfolio is important. You cannot put everything that you can make, or you can sell under one brand, which will make the brand lose its identity.”

The post Stay niche for better branding first appeared on China Business Knowledge.

Featured faculty: Philip Zhang Renyu
Written by Putro Harnowo

If you ask teenagers nowadays what they want to be growing up, don’t be surprised if many of them answer: influencer. Social media encourages youngsters to be famous. While the popularity of platforms varies from place to place, short videos have gained significant traction, with TikTok, Instagram Reels, and YouTube Shorts continuing to attract viewers.

“Viewers access the partner platform freely to consume extensive video content spanning entertainment, education, sports, lifestyle, and other interests,” says Philip Zhang Renyu, Associate Professor of the Department of Decisions, Operations and Technology at the Chinese University of Hong Kong (CUHK) Business School. “A portion of the platform revenue gets shared with creators, incentivising them for continued content production.”

The brain behind the success is the algorithm that suggests unlimited videos on the recommendation page to viewers, displaying a seamless scrolling feed appealing to their interests. However, these recommendations often prefer popular creators with massive followers while neglecting less-known creators, putting the glass ceiling on small and emerging talents trying to seek a name for themselves.

Highlighting content from popular creators may maximise user engagement, but viewers may later find platforms no longer attractive to fulfil their wide spectrum of tastes. As algorithms play a crucial role in driving content and user engagement, which directly impacts the platform’s ability to attract advertisers and generate revenue, video platforms have to tread carefully.

In a study titled Viewer traffic allocation for small creator development: Experimental evidence from short-video platforms, Professor Zhang and his PhD student, Hu Qinlu, along with Ni Huang of the University of Miami, explored the value of the content from small creators in user engagement, as well as the efficacy of traffic allocation in motivating small creators to improve their content.

The hidden power of small creators

The researchers partnered with a leading online short video-sharing platform in Asia to conduct two field experiments. In the first experiment, the platform split viewers into two groups: the treatment group and the control group. The control group had 9,065,114 viewers, and the treatment group had 4,532,431 viewers.

Viewers in the treatment group were assigned content from small creators whose half of the videos were removed from their recommendation pages. Viewers in the control group received no intervention, which means they were exposed to normal recommendation pages without any modification.

“To maximise viewer engagement, a platform should support and promote small creators to keep active viewers engaged. At the same time, it should attract and retain less active viewers by offering popular, high-quality content from star creators.”

Professor Philip Zhang Renyu

Small creators are defined as those who have historically attained less than one thousand followers, which comprise around 99 per cent of the platform’s population. The result showed that reducing content from small creators at first seemed beneficial for engagement. The content from small creators might be perceived as low quality.

However, as a result of reduced content, active viewers spent less time on the platform, while inactive viewers engaged more. Replacing recommended content from small creators with content from well-known creators was found to appeal more to inactive viewers, but not to active viewers. Inactive viewers prefer high-quality content from well-known creators, while active viewers seek content diversity and engage with smaller creators.

The researchers then investigated further by observing a random sample of more than 188 million creators and their content production behaviours in seven days. The results confirmed that when active viewers are exposed to less diverse content due to the reduced videos from small creators, they may find the platform less appealing.

Small creators are more likely to produce diverse content, and removing such content reduces consumption diversity, which may affect active viewers more than inactive ones. It bears mentioning that active viewers contribute the most to viewership and are critical to the platform’s success.

“To maximise viewer engagement, a platform should support and promote small creators to keep active viewers engaged. At the same time, it should attract and retain less active viewers by offering popular, high-quality content from star creators,” says Professor Zhang.

Not all small creators deserve merits

In the next experiment, the researchers assessed the impact of traffic allocation on small creators by increasing their content exposure. In the treatment group that received a modified algorithm, the platform gave extra exposure to more than 480,000 small creators to boost their viewership on the recommendation pages. In the control group, the same number of small creators received normal algorithms without any modification.

The result showed small creators in the treatment group scored 265.65 per cent more exposure and 289.81 per cent more new followers than those in the control group. This led them to increase content production quantity by 5.87 per cent without compromising the quality. Content quality is measured by likes, comments, and forward rates.

These positive effects are more prominent among popular small creators, who only take 0.83 per cent of the sample yet contribute to 79 per cent of the total viewership and 17.85 per cent of the total videos uploaded.

Meanwhile, the small creators in the treatment group only increased their content production by 2.89 per cent. The researchers then suggest that aided exposure can be optimally utilised if given to more experienced and emerging small creators.

Popular small creators are also more likely to engage with replies and comments when given additional exposure. Therefore, Professor Zhang suggests platforms to strategically allocate traffic to small creators that are relatively more popular to foster their growth and development.

“Our findings challenge the common belief that higher output may compromise quality, as our evidence shows that small creators are capable of maintaining their production standards even when the visibility is significantly enhanced,” says Professor Zhang. “It is possible that, upon receiving more viewer traffic, the small creators with motivation and passion for their content are able to scale up their production without sacrificing quality.”

Further delving into the history of viewership, the researchers found that additional traffic for small creators with low viewership in the past can motivate them to improve content quantity and quality, but those with consistently low viewership might not benefit much as they may lack motivation or skills. The impact of boosted traffic might also be less noticeable for small creators with higher past viewership, but more experienced creators may still be motivated to improve.

Finally, the research suggests that segmenting viewers based on their historical watching frequency helps optimise traffic allocation by tailoring content recommendations to active and inactive viewers, ensuring both small and established creators reach the right audience.

The post Small video content creators may be mightier than they look first appeared on China Business Knowledge.

Featured faculty: Lisa Wan
Written by Pan Jingyi

Young faces often take the spotlight in discussions about tourism, yet senior tourists, with their discretionary savings and spare time, possess significant resources and chances to travel. Alas, there remains a limited understanding of their decision-making process in the digital age.

Given that internet usage is increasingly pivotal to fulfilling informational needs, Lisa Wan, Associate Professor of the School of Hotel and Tourism Management and Department of Marketing at the Chinese University of Hong Kong (CUHK) Business School, delves into the impact of senior tourists’ internet literacy on their preferences for travel destinations.

“The world is rapidly advancing technologically and witnessing a significant demographic shift towards an ageing population, but we discovered that limited internet abilities among seniors act as limiters rather than complete barriers,” Professor Wan says.

“Our findings demonstrate that a lack of internet abilities does not necessarily prevent seniors from travelling, but encourages them to adopt alternative travel approaches that are deemed more feasible for them.”

Professor Lisa Wan

In a study titled Exploring uncharted digital horizons: Role of internet self-efficacy in shaping the destination preferences of senior tourists, Professor Wan and Jia Guangmei, Liu Xin and Wen Ji of Jinan University in China, also explore how marketers should target elderly tourists strategically in the era of technology.

Desirability vs. feasibility

Professor Wan notes that tourists often rely on the internet to solve problems when encountering unfamiliar environments, suggesting a strong correlation between tourists’ decision-making processes and their internet self-efficacy levels. Internet self-efficacy, representing one’s confidence in effectively performing internet-related tasks, stands as a critical factor that can change an individual’s decisions and behaviour.

Therefore, the researchers posited that senior tourists with high internet self-efficacy are more likely to choose desirable or attractive destinations, while those with low internet self-efficacy focus more on the feasibility or accessibility of tourist spots. Desirable destinations include charming scenery, abundant food choices, and a pleasant climate. Feasibility, on the other hand, typically pertains to factors such as convenient transportation and ample age-friendly services.

In addition, the researchers argued that mindsets and travel companions could influence the effect of internet self-efficacy on their destination preferences among seniors.

The role of internet self-efficacy

The team conducted a series of experiments in China to test their hypotheses, recruiting participants from online platforms and in person. They categorised senior travellers as individuals aged 55 years and above, aligning with the average retirement age in China.

The first experiment consisted of two parts: a field experiment and a scenario-based trial. In the field experiment, participants were presented with a choice between two portable nightlights for travel. Nightlight A is easy to learn but has fewer functions, while nightlight B is hard to learn but has multiple functions.

The results confirmed that seniors who are less confident in their internet skills chose nightlife A for its feasibility, while seniors with high internet self-efficacy were keen to use nightlight B that represents desirability.

In the scenario-based experiment, participants were asked to imagine going on vacation and determine whether they would choose a highly attractive yet less practical destination. Similar to previous results, senior participants with high internet self-efficacy demonstrated a greater inclination towards desirability.

“This preference may arise because high internet self-efficacy instils a sense of autonomy, the extent to which individuals have control over their travel actions and experiences,” Professor Wan explains.

Be open-minded or choose a competent companion

The researchers further explored how seniors’ mindsets and travel companions impact their decision-making. People with a fixed mindset perceive human traits as predetermined and stable, whereas those with a growth mindset see human traits as flexible and subject to significant transformation through diligent effort.

“Individuals holding a growth mindset tend to be open-minded when facing obstacles, but those holding a fixed mindset are inclined to exhibit avoidance behaviours,” says Professor Wan.

In a subsequent experiment, participants were asked to read articles designed to manipulate their mindset before selecting travel destinations. One article emphasised that an individual’s character is amendable, and another stated the opposite. The result showed that seniors with strong internet skills in a fixed mindset prefer destinations with high desirability, while those with weaker skills opt for high-feasibility ones. Conversely, senior tourists with a growth mindset tend to prioritise desirable destinations regardless of their internet proficiency.

Lastly, the researchers examined the role of travel companions. Participants were asked to imagine travelling with a friend and chose destinations as in previous experiments. The results showed that senior tourists prefer destinations with higher desirability when travelling with a tech-savvy companion, regardless of their own internet self-efficacy. However, if travel companions are incompetent, seniors with low internet self-efficacy are more inclined to visit high-feasibility places.

This finding aligns with the self-expansion theory, which suggests individuals can broaden their sense of self by engaging in relationships with others who offer resources. “Competent companions with advanced abilities and skills can be perceived as complementary to senior travellers’ own abilities, helping them overcome their personal deficiencies,” says Professor Wan.

Tailored marketing strategies for distinct groups

This research not only demonstrates senior tourists as rational decision-makers who plan ahead before making choices, but also challenges the common assumption of older adults lacking proficiency in technology.

“As senior tourists still have a strong desire to participate in travel experiences, it is crucial for marketers to acknowledge the potential of this demographic in the digital world and tailor product marketing strategies to effectively meet their unique needs and preferences,” Professor Wan says.

For senior tourists with adept internet capabilities, marketers should highlight desirable features, such as scenic beauty and diverse food options. When targeting seniors with limited digital proficiency, accentuating practical aspects like accessibility and transportation convenience would work best.

Diverse marketing channels should be employed to reach both groups, as tech-savvy seniors may use social media networks, travel forums, and websites frequently, while traditional marketing tools such as billboards and brochures are more effective in targeting seniors with low internet abilities.

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Travel planning, especially for self-organised trips, is highly dependent on internet searches nowadays. Despite technological advancements posing challenges, this research emphasises that internet abilities may serve as limiters rather than prohibitors for some senior tourists.

“Our findings demonstrate that a lack of internet abilities does not necessarily prevent seniors from travelling, but encourages them to adopt alternative travel approaches that are deemed more feasible for them,” Professor Wan says.

The post Will lack of internet skills prevent seniors from travelling? first appeared on China Business Knowledge.

By Pan Jingyi, Principal Writer, China Business Knowledge @ CUHK

“A wealth of information creates a poverty of attention,” writes Herbert Simon, an American Nobel Laureate who proposed the concept of attention economy. In a world of information inundation, it is vital for businesses to master the art of attracting and monetising consumers’ attention.

Platforms like YouTube, Instagram, and TikTok have given birth to many content creators or “influencers”, many of whom have become global celebrities. The influencer marketing industry has seen exponential growth, expanding from US$1.7 billion in 2016 to US$24 billion by the end of this year, according to The state of influencer marketing 2024: Benchmark report by a social media research firm, Influencer Marketing Hub.

“The attention monetisation via e-commerce (AMveC) model allows businesses to focus on garnering consumer attention, which becomes the core strategic resource for businesses.”

Professor Tony Ke

In China, live stream selling has become a common norm among top influencers, with Crazy Little Yang Brother or Crazy Xiaoyangge, who also hosts e-commerce live streams, outperforming his peers with an annual net income of 3.21 billion Chinese yuan (US$451 million). This is no surprise as a new report by KPMG, Navigating the future of seamless commerce in Asia Pacific, found that Gen Z ranked social commerce and live streaming commerce as important parts of their shopping experience.

“The business strategy to monetise attention through e-commerce is economically feasible both in the short term and for the long haul,” says Tony Ke, Associate Professor of the Department of Marketing at the Chinese University of Hong Kong (CUHK) Business School.

E-commerce platforms are not the only ones that leverage content to captivate consumers and monetise their attention through direct product sales. The New York Times has introduced a digital store that not only offers books but also a diverse range of apparel and accessories, while Vogue went further by opening an online shop showcasing products curated by its editorial team.

However, there is much to understand about how attention monetisation works in a competitive market and how it helps smaller companies or individual content creators compete against the giants. Professor Ke and Mandy Hu, Associate Professor of the same department, along with their PhD student Wee Chaimanowong, as well as Cao Jingcun of the University of Hong Kong, delve into the model of attention monetisation via e-commerce (AMveC) in their latest research titled Attention Monetisation via e-commerce: Why do people buy groceries on an education app?

Differences from traditional business models

Unlike conventional business models like product merchandising and attention monetisation via advertisement, the AMveC model boasts its distinctive characteristics. Businesses adopting AMveC invest in content creation to allure consumer attention before monetising it by selling products from third parties and relying on e-commerce platforms to sell and deliver their products, instead of engaging in manufacturing.

“This model allows businesses to focus on garnering consumer attention, which becomes the core strategic resource for businesses,” Professor Ke explains, adding that the AMveC model also allows businesses to control over product assortment and price directly.

To formulate this model, the researchers conducted a large-scale randomised field experiment with a private online education service provider in China to scrutinise the viability of the AMveC model.

Various and updated product choices win

The researchers created a new in-app store and randomly assigned 100,000 users to one of their four stores that differ in product assortment (educational vs. non-educational) and prices (regular vs. high). The study revealed insights into consumer behaviour and purchasing trends over a 32-day period.

The findings indicated that the non-educational store with regular pricing tends to attract the most buyers and generate the highest sales, revenue, profit, and repeat purchases. Although fewer people shop in education stores due to the less popular product assortment, those who shop are more willing to spend more money. However, Professor Ke notes that the sales declined quickly over the experiment period for all the stores.

“This suggests that even though some customers indeed make repeated purchases, the stores still need to change the assortment of products frequently to boost sales,” he says.

Building competitive advantages for small firms

Given consumers’ limited attention, Professor Ke and his collaborators also explore how smaller companies can compete with industry leaders.

Compared to the leading firms with a wide range of products, small companies or fringe firms usually provide limited product selections. “The fringe firms may have limited resources to develop the necessary technologies, and therefore, even if they have access to a large selection of product assortment, it may not be optimal for them to offer all of them,” Professor Ke says.

Therefore, smaller firms can harness the AMevC model to compete against the dominant seller. Professor Ke highlights that in this model, the core strategy for small firms is to create appealing content that can capture consumers’ attention, and third-party products are just a means to monetise the attention. “Consumers visit the fringe firms for the content, instead of product consumption.”

On the other hand, the researchers also found that a discounted rate works best for businesses adopting the AMevC model. “A lower price compensates the business’ disadvantage in product assortment and also discourages consumers from continuing to search,” Professor Ke adds. “Fringe firms can secure consumers’ first visit via attention-grabbing content and retain consumers by charging a lower price.”

Managerial insights for companies

With the unstoppable rise of e-commerce platforms, more businesses are now leveraging the AMveC model, selling unrelated products to monetise the attention of a larger consumer base.

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The management team of the education platform Professor Ke collaborated with did not expect non-educational products to sell better than educational ones. After implementing an in-app store showcasing a mix of educational and non-educational products, as learned from the experiment, the platform saw a substantial 45 per cent revenue increase.

“Our research not only demonstrates AMveC as an economically viable business strategy, but also offers managerial insights on product assortment and pricing decisions,” says Professor Ke.

He emphasises that by focusing on engaging content creation, strategic product offering, and competitive pricing, small businesses can foster growth and co-exist in a frictional market with the leading seller.  “Sales are old and inaccurate, while eyeballs (attention) are new and informative.”

The post Attention is the new gold, but how to mine it first appeared on China Business Knowledge.

By Pan Jingyi, Principal Writer, China Business Knowledge @ CUHK

The adage “you are what you wear” often leads many to buy branded products. People normally buy luxury brands for their extraordinary appeal and the confidence they can inspire. For some professionals like lawyers, accountants, investment bankers, and the like, wearing a Rolex watch or a Louis Vuitton handbag could help them catch elite clients.

The consumer’s thirst for high-end products is no secret in China, where the luxury market is expected to reach 816 billion Chinese yuan (US$112 billion) in 2025, accounting for about 25 per cent of the global luxury market share, according to PwC’s 2023 report. However, luxury consumption can lead to negative judgments.

“Luxury consumers are conferred higher status and receive preferential treatment from others, but such benefits come with a hefty social price.”

Professor Jung SungJin

Adam Smith, a pioneer in modern economics, classified goods into necessities, basic goods, affluence goods, and luxuries. Since then, scholars have viewed luxury products as exclusive and expensive items only accessible to the wealthy.

However, recent economic uncertainties have led Chinese consumers to avoid flaunting their wealth in favour of more discreet fashion due to “luxury shame”, similar to what happened in the US during the 2007-2008 financial crisis, according to a June report published by Bain consultancy.

“These are the social costs of luxury consumption,” says Jung SungJin, Assistant Professor in the Department of Marketing at The Chinese University of Hong Kong (CUHK) Business School.

Many luxury consumers worry that their choices may be judged negatively by others, leading them to appear pretentious, wasteful, and snobbish. These concerns can deter individuals from fully enjoying their luxury items as they grapple with potential backlash.

“Luxury consumers are conferred higher status and receive preferential treatment from others, but such benefits come with a hefty social price,” he adds. “They are often viewed as striving for status and managing impressions, and therefore judged as inauthentic.”

Express your true emotions

In a series of experiments, Professor Jung found that many individuals actually enjoy and love luxury products, yet a significant portion of them choose to keep this fervour hidden from others, especially from co-workers and social media followers. “This is because they worry about receiving negative judgments,” Professor Jung explains, citing an example of one individual who indicated wanting to avoid being thought of as a snob.

So, how can luxury consumers alleviate those negative social consequences? Professor Jung, in collaboration with Charlene Chen of Nanyang Technological University and Andy Yap of INSEAD, sought to answer this question in their latest research titled Expressing passion for luxury enhances perceived authenticity. The researchers proposed that openly sharing one’s passion for luxury can lead others to perceive them as more authentic. “Authenticity here refers to acting in accordance with one’s true self,” says Professor Jung.

The team carried out multiple studies to examine their hypotheses. The first experiment examined the consequences of expressing passion for luxury sneakers. The results show that demonstrating one’s passion for luxury helps alleviate the negative impressions associated with luxury consumption.

“We found that the luxury consumer was perceived as less warm than the non-luxury consumer,” says Professor Jung, “However, more importantly, expressing passion for luxury helped mitigate these social costs, making the luxury consumer appear more authentic and, therefore, warmer.”

Positive interpersonal outcomes

In the following experiment, Professor Jung and his co-authors aimed to investigate the reasons why luxury passion expression can enhance one’s perceived authenticity. “This occurs because luxury passion expression makes the luxury consumption appear more intrinsically motivated,” Professor Jung says.

Existing literature indicates that observers often attribute luxury consumption to external motives. In other words, they assume that consumers engage in luxury consumption to gain external benefits like status, social approval, and favourable impressions.

However, expressing passion shifts this inference. “A consumer who expresses passion for luxury will be seen as pursuing the enjoyment and stimulation inherent in the usage of luxury products, such as the pleasure derived from craftsmanship,” Professor Jung explains.

Publicly expressing one’s passion for luxury can make individuals appear more authentic, leading to several positive interpersonal outcomes. Firstly, increased perceptions of authenticity tend to make individuals seem warmer and more trustworthy. “People often associate warmth with genuine intentions, and feel less defensive toward authentic individuals and regard them as more trustworthy,” Professor Jung explains.

Another positive behavioural outcome of enhanced perceived authenticity is people’s increased interest in learning more about luxury consumers. “Disclosing a genuine, unvarnished self and not having a hidden motive is highly valued in interpersonal relationships,” says Professor Jung, adding that these positive effects can coexist with the status benefits of luxury consumption.

Unlike luxury consumption, non-luxury consumption is generally not linked to underlying motivations such as status enhancement or impression management. Thus, the researchers found that the benefits of passion expression are attenuated under the scenario of non-luxury consumption.

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A win-win scenario

While the luxury market continues to grow, this research offers practical insights for both luxury brands and their consumers.

On the one hand, the findings inform consumers that there is no need to hide their passion for luxury goods. On the other hand, Professor Jung suggests that companies can encourage consumers to showcase their passion explicitly. For example, they could nudge consumers to talk about the craftsmanship of the brand, or share and engage with specific social media content.

While expressing passion for luxury is generally viewed positively, Professor Jung underscores that the impact of passion expression on social evaluations might differ depending on what people are passionate about. “One avenue worth investigating is whether passion expression generates similar benefits when applied to other types of impression management behaviours, such as humblebragging about one’s professional achievement.”

The post The art of wearing luxury products first appeared on China Business Knowledge.

By Putro Harnowo, Senior Content Manager, China Business Knowledge @ CUHK

In our pursuit of knowledge, abundant resources exist nowadays to learn new skills, many of which come at no cost. Companies, non-profits, and governments are eager to provide free classes for human capital development initiatives. Meanwhile, online course providers like Coursera, Udacity and edX offer a wide range of subjects just a few clicks away without charge.

Regardless of the goals to be achieved, these free training and courses have the potential to deliver major benefits. However, low completion rates and a general lack of commitment loom as challenges that need to be addressed. There is little to know about whether these free offers can engage learners effectively and promote lasting commitment.

Free products normally attract customers, yet our modern lifestyle tends to undervalue what comes without a price tag. Many studies have shown that free offers reduce repurchase intention as the product’s inherent value would be obscured. With that being said, free courses may fall victim to a lack of appreciation. So, how can we design a free course that sustains long-term learning motivation?

This is the puzzle that Catherine Yeung, Associate Professor of Marketing at the Chinese University of Hong Kong (CUHK) Business School, and Dr Lee Yih Hwai of NUS Business School, try to solve. In recent research titled Incentives for learning: How free offers help or hinder motivation, they investigated the impact of different types of incentives on learning motivation when it comes to free courses.

It turns out that shifting attention from zero-price to a value proposition can encourage a longer-term commitment. “One way for marketers to redirect consumers from focusing on the zero price to elaborating on learning benefits can be found in how the offers are implemented,” says Professor Yeung.

The key point is the monetary cost incurred in the early stages. Compared to granting a waiver upfront, the study found that offering a refund would lead to greater motivation. Refunds also increase engagement and the likelihood of revisiting the learning materials for a longer term. This effect can be attributed to a set of cognitive operations called mental accounting, which keeps track of expenses and monitors consumption.

“People account for time and thinking costs through mental accounting procedures, just as they do for money,” she adds. “People create mental accounts for time spent on a specific activity and track the accrual of benefits associated with the time spent.”

How mental accounting calculates

In daily life, people open a transaction-specific mental account when they incur a cost and the account remains at a negative balance until they receive compensation. Driven by the need to account for upfront spending, people will reflect more on the benefits compared to when no penny was spent. Following payment, mental accounting draws more attention to the inherent value of the learning activity, laying a foundation for greater persistence.

“The cognitive procedure associated with making a payment, in general, may be activated and therefore induce a tendency to think through how one can benefit from the incentivised activity and whether these benefits justify the cost,” says Professor Yeung.

“One way for marketers to redirect consumers from focusing on the zero price to elaborating on learning benefits can be found in how the offers are implemented.”

Professor Catherine Yeung

Taking mental accounting into account, she contrasted two arrangements commonly used when offering free courses: tuition waiver and tuition refund. Although both arrangements essentially mean free of charge, one key difference is the need to make an upfront payment.

“Tuition waivers provide no cost that needs to be mentally accounted for, making learners less likely to contemplate the learning benefits,” she adds. “While waivers may attract more initial sign-ups, refunds tend to drive stronger engagement over time by putting the learning benefits front of mind.”

Weighing between waiver and refund

To get to know more about the differences between waivers and refunds in affecting learning motivation, Professor Yeung and Dr Lee ran multiple experiments involving hundreds of undergraduate students in Hong Kong and Singapore.

In one of the experiments, students were informed about a scenario where the publisher of an award-winning book, The Element of Style, was selling content in small portions based on individual needs. The students in the waiver condition were told that the university would cover the fee, while those in the refund condition had to pay a fee at the beginning and get a refund later.

The results of all experiments showed that the students who received a refund deliberated more on the benefits of learning, expressed greater determination, and were more likely to return to the learning task in the future.

In another trial with adult UK residents, Professor Yeung assessed the moderating role of non-monetary cost in shaping attention. Specifically, she modified the amount of effort required to sign up for the free course, with some participants facing no effort and others facing elevated effort. The finding also supports the advantage of a fee refund in focusing learners’ attention.

“Even though the payment is eventually refunded, the act of paying directs the learner’s attention to the benefits they expect to receive from the learning activities,” she explains. “This stimulates more conscious consideration of how the learning activities will help them develop valuable knowledge and skills. It is often this type of thoughts that keep people engaged.”

Designing programmes for learning and development

As one of many psychological principles influencing motivation, companies can utilise mental accounting to enhance employee motivation and commitment to professional development activities. In this case, the training content and perceived long-term career benefits tend to be the biggest drivers.

“When learning activities require some upfront investment of time or effort, it gives people more skin in the game. However, mental accounting alone is unlikely to sustain motivation in the long run if employees cannot figure out the actual benefits from the learning activities,” says Professor Yeung.

Therefore, she highlights that the choice between refunds and waivers should depend on the organisation’s learning engagement goals. For training focused on short-term knowledge transfer or one-time participation, upfront waivers are often the better choice. With no initial cost barrier, waivers maximise the number of learners who will sign up and attend.

However, if the objective is to foster long-term skills development through ongoing learning, refunds are more effective. The upfront payment makes learners more aware of the personal and professional benefits they expect to gain. This benefit-focused mindset motivates them to stay engaged.

The mental accounting model can also be applied to encourage continued participation or purchase behaviour. If a business wants to encourage continued participation or purchase behaviour, Professor Yeung suggests the long-term rewards must be clear and enticing. Under this premise, businesses can design incentive programmes that require a small initial investment of effort, time or money to participate.

“According to mental accounting principles, this upfront payment is mentally coded as a loss that motivates the customer to seek gains from the programme to balance their mental account,” she explains. “It’s about striking a balance. The initial cost activates mental accounting, but it shouldn’t be so large that it deters people from getting started. The key is framing the programme as an investment that will pay off.”

The post The problem with free courses first appeared on China Business Knowledge.