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So, now that we've learned a little bit

about influence from one individual to
another, I'd also
like just to think about influence from
one
neighborhood to the next, one location to
the next.
It's really the same idea But there are
some important nuances or twists here.
So, the unit of analysis that we could be
talking about could
be a zip code or a city block, or even a
whole town.
What we want to think about when we think
about acquiring customers and
lead-users, how there may be a process of
spreading from one location to the next.
Whether it's a physical neighborhood or
also, a virtual neighborhood.
So, I'm going to do this by a way of an
example.
And it's a little bit technical, but I
think if you follow
along, it will be very useful because it's
such a central concept here.
So on the slides, what I'm showing is I'm
showing a diagram
that has four pieces, left, right, bottom,
and to the right-hand side.
And I want you to think about at the
top-left, you see, three entities.
Or think of these neighborhoods but they
can also be people.
So there's z1, z2, z3, z4.
Or if you prefer in my original native
tongue
from New Zealand I would say zed1, zed2,
zed3.
So those are the four locations.
Now notice, all of those four locations
are connected to each other.
They could be zip codes within the United
States,
they could be people on a social network.
Now in order to understand how something
spreads, through those neighborhoods
by a process of influence, we first will
need to understand.
Who is connected to whom, or which
neighborhood is connected to which one.
So, now let's move down to the bottom-left
and
let me explain that little matrix there,
called C.
You've probably seen matrices and things
before in in high
school and other places, but sometimes
it's good to refresh
our memory of what this means, and what it
means in this particular context.
So, the letter C stands for Contiguity,
the word
at the top of the slide, which just means.
Things that are next to each other or
touching.
They are contiguous.
So let's start by focusing on the first
row,
and then I'll do another example with the
third row.
So row number one corresponds to Z1, zip
code number 1.
Now what we see is, column number one has
a zero in it.
That's just a convention.
That means that.
Zip code 1 is not connected to itself, by
definition.
And in fact, if you go down the matrix,
you'll see all the diagonal numbers are
all zeros.
That's just a convention that says, zip
code 2, row
2, is not connected to zip code 2, column
2.
Now if we move row 1 column 2, we'll
notice there's a one in there.
Why is there a one in there?
The reason there's a one in there is
because zip
code 1 is connected to zip code 2.
So we put a one for that combination.
And similarly, when we go to column number
3, there's another one, because zip code
1 is also connected to zip code 3, but not
connected to zip code 4.
So you can repeat that process for the
other three rows, and and
then you'll see, all that really is saying
is who is connected to whom.
Or, which zip code is connected to the
which other one.
So now, let's just move across to the
bottom right-hand
side, and focus for a moment please on row
number 1.
Notice on the bottom-left, row number 1
are the numbers zero, one, one, zero.
What that means is that z1, zip code 1 has
two neighbors.
Zip code 2.
And zip code 3.
Now since zip code 1 has two neighbors,
one of the simplest
assumptions we could make is that zip code
1 is receiving half
of its influence from the first neighbor,
and
half of its influence from the second
neighbor.
If we move down to row number 2, we
notice there that the numbers have changed
from ones.
To 1 3rd.
Why is that the case?
Because zip code 2 has three neighbors.
Notice that zip code 2 is connected to all
of the three.
And we could assume in the simplest
possible case, that if
I have three neighbors, one is exerting 1
3rd influence on me.
The other one's
also a third, and the third one's also a
third.
All of my neighbors have equal influence
on me.
This is the simplest possible case.
And of course in doing research, we could
relax this assumption.
But I just want to give you a flavor for
the mechanics of
how one actually studies a process of
influence and a process of contagion.
So, just move up one more to the final
piece
of the puzzle, there's something that's
called Yz t minus 1.
I know that sounds like a mouthful
but you can see it there on the screen.
That's an indicator Y, for zip code Z, at
t minus 1, that means the
previous period, of whether some activity
that
we're interested in has actually happened
or not.
So, we might be interested in whether or
not, in that zip
code, at some point before the last time
period we looked at.
Had anyone bought anything from
diapers.com?
If the answer was yes, we say one.
If the answer
was no, we say zero.
Okay, so now we have all four of the
elements, the diagram, the
first C matrix, the C matrix that's
standardized, and then also the vector.
Of four rows and one column, that's
summarizing the past activity
of either the people, or the neighborhoods
that we're interested in.
Now in the next couple of slides that I'm
going to put in
the, the deck so that you can see, they're
a little more technical.
I know some
of you out there like the technical
material, but it's not necessary.
For understanding what's going on.
All I'm going to do is I'm going to take
those two pieces of information, and I'm
going to combine
them in a statistical model, to understand
whether or
not there's any contagion or any influence
taking place.
So, some of you may have looked at the
technical material on
the next three slides but if you didn't,
it doesn't really matter.
The main thing that.
To take away or to understand from this
conversation
so far, is that when you're measuring
influence, either between individuals in
a social network or in-, influence
spreading from one neighborhood to
another.
Is they adopts some certain product or
service.
You need to understand two things.
First of all, who is connected to whom,
or which neighborhood is connected to
which other one?
And what has happened so far with respect
to the activity?
If you know those two things, who's
connected to whom, and what's happened,
you can combine that information, and do
some very very interesting research with
it.
So now let's get to the four research
studies that I mentioned at the beginning.
I'm going to go through them one at a
time,
and explain the different things that we
learned from this
process, about the degree to which
customers influence each other,
and how that actually helps the firm or
the seller.
So the first study, Study One, is looking
at
neighborhood to neighborhood influence and
how people come to try
an internet grocery retailer.
In this case it's called netgrocer.com.
below there on the slide, I put the
abstract from the
paper that I wrote with my friend and
co-author Sang Yung Son.
Sang Yung is there in Korea at AY
University.
So what we did is we studied.
How netgrocer.com spread its sales
throughout the
United States after it opened its
business.
So what I'm going to show you now is some
maps
of how netgrocer.com acquired its
customers
over space, over the United States, and
over time, as the business evolved in the
first three and a half years.
I think these maps are really pretty cool.
Because we can see some interesting
behavior
of customers going on underneath the map.
the same kind of thing I've also observed,
when I've looked
at other Internet retail businesses like
diapers.com, warbyparker.com and so on.
So, let me put up the first
map and explain what's going on here.
This is a map of the continental United
States, 48 states, except for Alaska and
also Hawaii.
Now, what you'll see in the map.
Is that, there are some areas on the map,
little dots or squares, that are
darkened in a dark brown or a black shade,
depending on where you're watching us.
What that means is in that location, there
was
at least one order to netgrocer.com within
the first six
months of operation.
Now I should say that netgrocer opened in
May 19, 1997.
And in the first month that they opened,
they shipped
out 34 orders to different places in the
United States.
This is now looking six months out.
Now, as this goes through, just compare to
the next map.
We're now 18 months out.
The first thing you'll notice is there are
many, many more dark shaded areas,
meaning, wow.
Netgrocer had somehow acquired customers
in a lot more places than
it had after just six months.
If we look at after 30 months, the map's
getting darker still.
And then finally after 42 months, there's
an incredible
visual of almost most of the United
States, at
least 20,000 zip codes that are all shaded
brown,
meaning at least one person has made an
order.
In that zip code.
So the question that you might have, and
the question that
Sang Yung and I had was, is there any kind
of
special structure to how this is
happening, or is it just happening
randomly?
So, at the top of the slide we see 42
months.
And we might scratch our heads and say,
hmm.
I wonder where the new customers are going
to show up in month 43?
Would they just be random dots on the map,
or would there
be some way to predict where they were
more likely to come?
Now, in order to answer that question, we
went back
to that material that I showed you
earlier, the example
with the four zip codes, and we did all of
those computations, not just for four
zip codes in a neighborhood, but for all
of the zip codes in the entire United
States.
But before we run that analysis, I just
want to
show you, but before I show you the
results of
that analysis, I'd just like to show you
the data,
and a little bit of a closer, label of
detail.
So what I've done is I've split the
screen,
left to right, with the left half being
the
west coast of the United States and the
right
half being the east coast of the United
States.
You can see New York and Philadelphia
there.
Now again, this is in month 1, May 1997.
Notice that Netgrocer had some customers
near the San Francisco bay area, think
one down there in Los Angeles, and some
other in the east coast.
Look at what happens as we proceed through
month 2, then month 3, then month 4.
Are you noticing any
kind of a pattern here?
let me do one more month five and now
month six, and so on.
Spreading out all the way to month 45.
What you might of noticed, and I think is
fairly clearly from the visual.
Is that the areas that turn dark, that
have new
customers tend to be close to areas that
already have customers.
So, let me just say two things here that
could be going on underneath
this pattern of data.
So, first of all, it could be the case
that my
friend Chris and I live in a similar
neighborhood in Philadelphia.
And because we're friends, I happen to
tell him, hey Chris.
You should try netgrocer.com or
diapers.com
or warbyparker.com or whatever that is.
And because I've told him through word of
mouth, he then ends up adopting the
product too, and that's why you see the
sales pattern spreading through this
proximity or contiguity.
Secondly, there could be information that
gets transmitted, not
through conversation, but what I'll call
through just direct observation.
This one's very interesting.
Let's say I order the box from
Netgrocer.com or Amazon
or Warby Parker or Harry's or whatever
company I'm thinking about.
And the box comes to my apartment
building.
And Chris, who lives in the same building.
Even if he and I don't know each other.
Maybe he sees the box and as a result he
then goes
on to order.
So that's why packaging is so important
for e-commerce companies, because
it's a little bit like advertising and
distribution all rolled into one.
Second interesting thing to think about
here is, where
the product gets shipped can also play an
important role.
So for example, if you think about a
company like birchbox.com, very
interesting business that will send.
Both men and ladies, but the original
business
was just for ladies, for $10 a month
you could receive some samples of makeup
that you might
want to try and then later purchase
through the website.
Now, if those boxes get delivered to your
office and
you open them at the office, other people
see them.
You can imagine what might happen when a
conversation ensues about the product.
So for an e-converse, e-commerce company,
even thinking about
where to ship the product is very very
important.
So just to wrap up this study, what Sang
Yung
and I did was, we ran a huge statistical
analysis,
with millions, literally millions of
observations.
And what we tried to do is, we tried to
control for all of the other things
that would explain why in one zip code,
netgrocer.com
was stronger, and in another one it was
weaker.
So you might imagine what those things
could be.
They're things like the demographics, so
in neighborhoods where there's higher
income, higher
levels of education, more access to the
Internet, probably Netgrocer would have
higher sales.
So what we
wanted to do, is make sure that we
equalized all
those things, or held them constant in a
statistical sense.
But after doing that, we found there was
still a persistent effect.
Of this so called contagion.
And the contagion actually was very, very
powerful and very,
very helpful to the company or to any
e-commerce company.
And we actually computed from our
statistical
analysis what the affect was and how
beneficial
it can be for the firm.
And I put an example there for you on the
slides,
so it turns out in the United States that
the average
zip code has about 8700 people and it has
about 5.6
neighboring zip codes, so that's just the
fact of the data.
What we did is we simulated what would
happen to a zip code currently had no
customers.
At netgrocer.com.
Well, that zip code has about 3% chance if
it has none
right now.
Little under 3% chance of some customer
showing up in the future.
However, if in its neighboring, six or
seven zip
codes, and additional 20,000 people try,
then the pressure.
To try a net zip code where there's
currently no customers goes up to about
14%.
And this is economically very, very
important for the firm.
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