Pricing strategies for viral marketing on Social Networks

# Pricing strategies for viral marketing on Social Networks

David Arthur 111Department of Computer Science, Stanford University   Rajeev Motwani footnotemark:   Aneesh Sharma222Institute for Computational and Mathematical Engineering, Stanford University   Ying Xu333Work done when author was a student at the Department of Computer Science, Stanford University
{darthur,rajeev,aneeshs,xuying}@cs.stanford.edu
###### Abstract

We study the use of viral marketing strategies on social networks to maximize revenue from the sale of a single product. We propose a model in which the decision of a buyer to buy the product is influenced by friends that own the product and the price at which the product is offered. The influence model we analyze is quite general, naturally extending both the Linear Threshold model and the Independent Cascade model, while also incorporating price information. We consider sales proceeding in a cascading manner through the network, i.e. a buyer is offered the product via recommendations from its neighbors who own the product. In this setting, the seller influences events by offering a cashback to recommenders and by setting prices (via coupons or discounts) for each buyer in the social network.

Finding a seller strategy which maximizes the expected revenue in this setting turns out to be NP-hard. However, we propose a seller strategy that generates revenue guaranteed to be within a constant factor of the optimal strategy in a wide variety of models. The strategy is based on an influence-and-exploit idea, and it consists of finding the right trade-off at each time step between: generating revenue from the current user versus offering the product for free and using the influence generated from this sale later in the process. We also show how local search can be used to improve the performance of this technique in practice.

## 1 Introduction

Social networks such as Facebook, Orkut and MySpace are free to join, and they attract vast numbers of users. Maintaining these websites for such a large group of users requires substantial investment from the host companies. To help recoup these investments, these companies often turn to monetizing the information that their users provide for free on these websites. This information includes both detailed profiles of users and also the network of social connections between the users. Not surprisingly, there is a widespread belief that this information could be a gold mine for targeted advertising and other online businesses. Nonetheless, much of this potential still remains untapped today. Facebook, for example, was valued at $15 billion by Microsoft in 2007 [13], but its estimated revenue in 2008 was only$300 million [17]. With so many users and so much data, higher profits seem like they should be possible. Facebook’s Beacon advertising system does attempt to provide targeted advertisements but it has only obtained limited success due to privacy concerns [16].

This raises the question of how companies can better monetize the already public data on social networks without requiring extra information and thereby compromising privacy. In particular, most large-scale monetization technologies currently used on social networks are modeled on the sponsored search paradigm of contextual advertising and do not effectively leverage the networked nature of the data.

Recently, however, people have begun to consider a different monetization approach that is based on selling products through the spread of influence. Often, users can be convinced to purchase a product if many of their friends are already using it, even if these same users would be hard to convince through direct advertising. This is often a result of personal recommendations – a friend’s opinion can carry far more weight than an impersonal advertisement. In some cases, however, adoption among friends is important for even more practical reasons. For example, instant messenger users and cell phone users will want a product that allows them to talk easily and cheaply with their friends. Usually, this encourages them to adopt the same instant messenger program and the same cell phone carrier that their friends have. We refer the reader to previous work and the references therein for further explanations behind the motivation of the influence model [6, 4].

In fact, many sellers already do try to utilize influence-and-exploit strategies that are based on these tendencies. In the advertising world, this has recently led to the adoption of viral marketing, where a seller attempts to artificially create word-of-mouth advertising among potential customers [8, 9, 14]. A more powerful but riskier technique has been in use much longer: the seller gives out free samples or coupons to a limited set of people, hoping to convince these people to try out the product and then recommend it to their friends. Without any extra data, however, this forces sellers to make some very difficult decisions. Who do they give the free samples to? How many free samples do they need to give out? What incentives can they afford to give to recommenders without jeopardizing the overall profit too much?

In this paper, we are interested in finding systematic answers to these questions. In general terms, we can model the spread of a product as a process on a social network. Each node represents a single person, and each edge represents a friendship. Initially, one or more nodes is “active”, meaning that person already has the product. This could either be a large set of nodes representing an established customer base, or it could be just one node – the seller – whose neighbors consist of people who independently trust the seller, or who are otherwise likely to be interested in early adoption.

At this point, the seller can encourage the spread of influences in two ways. First of all, it can offer cashback rewards to individuals who recommend the product to their friends. This is often seen in practice with “referral bonuses” – each buyer can optionally name the person who referred them, and this person then receives a cash reward. This gives existing buyers an incentive to recommend the product to their friends. Secondly, a seller can offer discounts to specific people in order to encourage them to buy the product, above and beyond any recommendations they receive. It is important to choose a good discount from the beginning here. If the price is not acceptable when a prospective buyer first receives recommendations, they might not bother to reconsider even if the price is lowered later.

After receiving discount offers and some set of recommendations, it is up to the prospective buyers to decide whether to actually go through with a purchase. In general, they will do so with some probability that is influenced by the discount and by the set of recommendations they have received. The form of this probability is a parameter of the model and it is determined by external factors, for instance, the quality of the product and various exogenous market conditions. While it is impossible for a seller to calculate the form of these probability exactly, they can estimate it from empirical observations, and use that estimate to inform their policies. One could interpret the probabilities according to a number of different models that have been proposed in the literature (for instance, the Independent Cascade and Linear Threshold models), and hence it is desirable for the seller to be able to come up with a strategy that is applicable to a wide variety of models.

Now let us suppose that a seller has access to data from a social network such as Facebook, Orkut, or MySpace. Using this, the seller can estimate what the real, true, underlying friendship structure is, and while this estimate will not be perfect, it is getting better over time, and any information is better than none. With this information in hand, a seller can model the spread of influence quite accurately, and the formerly inscrutable problems of who to offer discounts to, and at what price, become algorithmic questions that one can legitimately hope to solve. For example, if a seller knows the structure of the network, she can locate individuals that are particularly well connected and do everything possible to ensure they adopt the product and exert their considerable influence.

In this paper, we are interested in the algorithmic side of this question: Given the network structure and a model of the purchase probabilities, how should the seller decide to offer discounts and cashback rewards?

### 1.1 Our contributions

We investigate seller strategies that address the above questions in the context of expected revenue maximization. We will focus much of our attention on non-adaptive strategies for the seller: the seller chooses and commits to a discount coupon and cashback offer for each potential buyer before the cascade starts. If a recommendation is given to this node at any time, the price offered will be the one that the seller committed to initially, irrespective of the current state of the cascade.

A wider class of strategies that one could consider are adaptive strategies, which do not have this restriction. For example, in an adaptive strategy, the seller could choose to observe the outcome of the (random) cascading process up until the last minute before making very well informed pricing decisions for each node. One might imagine that this additional flexibility could allow for potentially large improvements over non-adaptive strategies. Unfortunately, there is a price to be paid, in that good adaptive strategies are likely to be very complicated, and thus difficult and expensive to implement. The ratio of the revenue generated from the optimal adaptive strategy to the revenue generated from the optimal non-adaptive strategy is termed the “adaptivity gap”.

Our main theoretical contribution is a very efficient non-adaptive strategy whose expected revenue is within a constant factor of the optimal revenue from an adaptive strategy. This guarantee holds for a wide variety of probability functions, including natural extensions of both the Linear Threshold and Independent Cascade models444More precisely, the strategy achieves a constant-factor approximation for any fixed model, independent of the social network. If one changes the model, the approximation factor does vary, as made precise in Section 3.. Note that a surprising consequence of this result is that the adaptivity gap is constant, so one can make the case that not much is lost by restricting our attention to non-adaptive policies. We also show that the problem of finding an optimal non-adaptive strategy is NP-hard, which means an efficient approximation algorithm is the best theoretical result that one could hope for.

Intuitively, the seller strategy we propose is based on an influence-and-exploit idea, and it consists of categorizing each potential buyer as either an influencer or a revenue source. The influencers are offered the product for free and the revenue sources are offered the product at a pre-determined price, chosen based on the exact probability model. Briefly, the categorization is done by finding a spanning tree of the social network with as many leaves as possible, and then marking the leaves as revenue sources and the internal nodes as influencers. We can find such a tree in near-linear time [7, 10]. Cashback amounts are chosen to be a fixed fraction of the total revenue expected from this process. The full details are presented in section 3.

In practice, we propose using this approach to find a strategy that has good global properties, and then using local search to improve it further. This kind of combination has been effective in the past, for example on the k-means problem [1]. Indeed, experiments (see section 4) show that combining local search with the above influence-and-exploit strategy is more effective than using either approach on its own.

### 1.2 Related work

The problem of social contagion or spread of influence was first formulated by the sociological community, and introduced to the computer science community by Domingos and Richardson [2]. An influential paper by Kempe, Kleinberg and Tardos [5] solved the target set selection problem posed by [2] and sparked interest in this area from a theoretical perspective (see [6]). This work has mostly been limited to the influence maximization paradigm, where influence has been taken to be a proxy for the revenue generated through a sale. Although similar to our work in spirit, there is no notion of price in this model, and therefore, our central problem of setting prices to encourage influence spread requires a more complicated model.

A recent work by Hartline, Mirrokni and Sundararajan [4] is similar in flavor to our work, and also considers extending social contagion ideas with pricing information, but the model they examine differs from our model in a several aspects. The main difference is that they assume that the seller is allowed to approach arbitrary nodes in the network at any time and offer their product at a price chosen by the seller, while in our model the cascade of recommendations determines the timing of an offer and this cannot be directly manipulated. In essence, the model proposed in [4] is akin to advertising the product to arbitrary nodes, bypassing the network structure to encourage a desired set of early adopters. Our model restricts such direct advertising as it is likely to be much less effective than a direct recommendation from a friend, especially when the recommender has an incentive to convince the potential buyer to purchase the product (for instance, the recommender might personalize the recommendation, increasing its effectiveness). Despite the different models, the algorithms proposed by us and [4] are similar in spirit and are based on an influence-and-exploit strategy.

This work has also been inspired by a direction mentioned by Kleinberg [6], and is our interpretation of the informal problem posed there. Finally, we point out that the idea of cashbacks has been implemented in practice, and new retailers are also embracing the idea [8, 9, 14]. We note that some of the systems being implemented by retailers are quite close to the model that we propose, and hence this problem is relevant in practice.

## 2 The Formal Model

Let us start by formalizing the setting stated above. We represent the social network as an undirected graph , and denote the initial set of adopters by . We also denote the active set at time by (we call a node active if it has purchased the product and inactive otherwise). Given this setting, the recommendations cascade through the network as follows: at each time step , the nodes that became active at time (i.e. for , and for ) send recommendations to their currently inactive friends in the network: . Each such node is also given a price at which it can purchase the product. This price is chosen by the seller to either be full price or some discounted fraction thereof.

The node must then decide whether to purchase the product or not (we discuss this aspect in the next section). If does accept the offer, a fixed cashback is given to a recommender (note that we are fixing the cashback to be a positive constant for all the nodes as the nodes are assumed to be non-strategic and any positive cashback provides incentive for them to provide recommendations). If there are multiple recommenders, the buyer must choose only one of them to receive the cashback; this is a system that is quite standard in practice. In this way, offers are made to all nodes through the recommendations at time and these nodes make a decision at the end of this time period. The set of active nodes is then updated and the same process is repeated until the process quiesces, which it must do in finite time since any step with no purchases ends the process.

In the model described above, the only degree of freedom that the seller has is in choosing the prices and the cashback amounts. It wants to do this in a way that maximizes its own expected revenue (the expectation is over randomness in the buyer strategies). Since the seller may not have any control over the seed set, we are looking for a strategy that can maximize the expected revenue starting from any seed set on any graph. In most online scenarios, producing extra copies of the product has negligible cost, so maximizing expected revenue will also maximize expected profit.

Now we can formally state the problem of finding a revenue maximizing strategy as follows:

###### Problem 1.

Given a connected undirected graph , a seed set , a fixed cashback amount , and a model M for determining when nodes will purchase a product, find a strategy that maximizes the expected revenue from the cascading process described above.

We are particularly interested in non-adaptive policies, which correspond to choosing a price for each node in advance, making the price independent of the time of the recommendation and the state of the cascade at the time of the offer. Our goal will be threefold: (1) to show that this problem is NP-hard even for simple models M, (2) to construct a constant-factor approximation algorithm for a wide variety of models, and (3) to show that restricting to non-adaptive policies results in at most a constant factor loss of profit.

To simplify the exposition, we will assume the cashback for now. At the end of Section 4, we will show how the results can be generalized to work for positive , which should be sufficient incentive for buyers to pass on recommendations.

In this section, we discuss how to model the probability that a node will actually buy the product given a set of recommendations and a price. We use a very general model in this work that naturally extends the most popular traditional models proposed in the influence maximization literature, including both Independent Cascade and Linear Threshold.

Consider an abstract model M for determining the probability that a node will buy a product given a price and what recommendations it has received. We allow M to take on virtually any form, imposing only the following conditions:

1. The seller has full information about M. This is a standard assumption, and it can be approximated in practice by running experiments and observing people’s behavior.

2. A node will never pay more than full price for the product (we assume this full price is 1 without loss of generality). Without an assumption like this, the seller could potentially achieve unbounded revenue on a single network, which makes the problem degenerate.

3. A node will always accept the product and recommend it to friends if it receives a recommendation with price 0 (i.e. if a friend offers the product for free). Since nodes are given positive cash rewards for making recommendations, this condition is true for any rational buyer.

4. If the social network is a single line graph with being the two endpoints, the maximum expected revenue is at most a constant . Intuitively, this states that each prospective buyer on a social network should have some chance of rejecting the product (unless it’s given to them for free), and therefore the maximum revenue on a line is bounded by a geometric series, and is therefore constant.

5. There exist constants , , so that if more than fraction of a given node’s neighbors recommend the product to the node at cost , the node will purchase the product with probability . This rules out extreme inertia, for example the case where no buyer will consider purchasing a product unless almost all of its neighbors have already done so.

The fourth and fifth conditions here are used to parametrize how complicated the model is, and our final approximation bound will be in terms of this model “complexity”, which is defined to be . While it may not be obvious that all these conditions are met in general, we will show that they are for both the Independent Cascade and Linear Threshold models, and indeed, the arguments there extend naturally to many other cases as well.

In the traditional Independent Cascade model, there is a fixed probability that a node will purchase a product each time it is recommended to them. These decisions are made independently for each recommendation, but each node will buy the product at most once.

To generalize this to multiple prices, it is natural to make a function where represents the probability that a node will buy the product at price . For technical reasons, however, it is convenient to work with the inverse of , which we call .555It is sometimes useful to consider functions that are not one-to-one. These functions have no formal inverse, but in this case, can still be formally defined as . Our general conditions on the model reduce to setting and in this case. To ensure bounded complexity, we also impose a minor smoothness condition.

###### Definition 1.

Fix a cost function with and with differentiable at 0 and 1. We define the Independent Cascade Model ICM as follows:
Every time a node receives a recommendation at price , it buys the product with probability and does nothing otherwise. If a node receives multiple recommendations, it performs this check independently for each recommendation but it never purchases the product more than once.

###### Lemma 1.

Fix a cost function . Then:

1. ICM has bounded (model) complexity.

2. If has maximum slope (i.e. for all ), then has complexity.

3. If is a step function with regularly spaced steps (i.e. if ), then ICM has complexity.

###### Proof.

We show that the complexity of ICM can be bounded in terms of the maximum slope of near 0 and 1. Recall that if is differentiable at 0, then, by definition, there exists so that for . A similar argument can be made for , and thus we can say formally that there exist and such that:

 C(x)≥1−mx for x≤ϵ,and C(x)≤m(1−x) for x≥1−ϵ.

In this case, we will show that ICM has complexity at most , proving part 1. Note that parts 2 and 3 of the lemma will also follow immediately.

We begin by analyzing , the maximum expected revenue that can be achieved on a path of length if one of the endpoints is a seed. Note that since selling a product on a line graph with two seeds can be thought of as two independent sales, each with one seed, that are cut short if the sales ever meet. Now we have:

 Ln=maxxx(C(x)+Ln−1).

This is because offering the product at cost will lead to a purchase with probability , and in that case, we get revenue immediately and expected revenue in the future. Since is obviously increasing in , this can be simplified further:

 Ln≤maxxx(C(x)+Ln) ⟹ L≤2Ln≤max0

For , we have , and for , we have . Either way, .

It remains to choose and as per the first complexity condition. We use , and . Indeed, if a node has more than 0 active neighbors, it will accept a recommendation at cost with probability .

Thus ICM has complexity at most , as required. ∎

In the traditional Linear Threshold model, there are fixed influences on each directed edge in the network. Each node independently chooses a threshold uniformly at random from , and then purchases the product if and when the total influence on it from nodes that have recommended the product exceeds .

To generalize this to multiple prices, it is natural to make a function where indicates the influence exerts on as a result of recommending the product at price . To simplify the exposition, we will focus on the case where a node is equally influenced by all its neighbors. (This is not strictly necessary but removing this assumptions requires rephrasing the definition of to be a weighted fraction of a node’s neighbors.) Finally, we assume for all that to satisfy the second general condition for models.

###### Definition 2.

Fix a max influence function , not uniformly 0. We define the Linear Threshold Model LTM as follows:
Every node independently chose a threshold uniformly at random from . A node will buy the product at price only if where denotes the fraction of the node’s neighbors that have recommended the product. A node will always accept a recommendation if the product is offered for free.

###### Lemma 2.

Fix a max influence function and let . Then LTM has complexity .

We omit the proof since it is similar to that of Lemma 1. In fact, it is simpler since, on a line graph, a node either gets the product for free or it has probability at most of buying the product and passing on a recommendation.

## 3 Approximating the Optimal Revenue

In this section, we present our main theoretical contribution: a non-adaptive seller strategy that achieves expected revenue within a constant factor of the revenue from the optimal adaptive strategy. We show the problem of finding the exact optimal strategy is NP-hard (see section A.1 in the appendix), so this kind of result is the best we can hope for. Note that our approximation guarantee is against the strongest possible optimum, which is perhaps surprising: it is unclear a priori whether such a strategy should even exist.

The strategy we propose is based on computing a maximum-leaf spanning tree (MAXLEAF) of the underlying social network graph, i.e., computing a spanning tree of the graph with the maximum number of leaf nodes. The MAXLEAF problem is known to be NP-Hard, and it is in fact also MAX SNP-Complete, but there are several constant-factor approximation algorithms known for the problem [3, 7, 10, 15]. In particular, one of these is nearly linear-time [10], making it practical to apply on large online social network graphs. The seller strategy we attain through this is an influence-and-exploit strategy that offers the product to all of the interior nodes of the spanning tree for free, and charges a fixed price from the leaves. Note that this strategy works for all the buyer decision models discussed above, including multi-price generalizations of both Independent Cascade and Linear Threshold.

We consider the setting of Problem 1, where we are given an undirected social network graph , a seed set and a buyer decision model M. Throughout this section, we will let , , and denote the quantities that parametrize the model complexity, as described in Section 2.1. To simplify the exposition, we will assume for now that the seed set is a singleton node (i.e., ). If this is not the case, the seed nodes can be merged into a single node, and we can make much the same argument in that case. We will ignore cashbacks for now, and return to address them at the end of the section.

The exact algorithm we will use is stated below:

• Use the MAXLEAF algorithm [10] to compute an approximate max-leaf spanning tree for that is rooted at .

• For each leaf of (excluding ), independently flip a biased coin. With probability , offer the product to the node for free. With probability , offer the product to the node at cost .

We henceforth refer to this strategy as STRATEGYMAXLEAF.

Our analysis will revolve around what we term as “good” vertices, defined formally as follows:

###### Definition 3.

Given a graph , we define the good vertices to be the vertices with degree at least 3 and their neighbors.

On the one hand, we show that if has good vertices, then the MAXLEAF algorithm will find a spanning tree with leaves. We then show that each leaf of this tree leads to revenue, implying STRATEGYMAXLEAF gives revenue overall. Conversely, we can decompose into at most line-graphs joining high-degree vertices, and the total revenue from these is bounded by for all policies, which gives the constant-factor approximation we need.

We begin by bounding the number of leaves in a max-leaf spanning tree. For dense graphs, we can rely on the following fact [7, 10]:

###### Fact 1.

The max-leaf spanning tree of a graph with minimum degree at least 3 has at least leaves [7, 10].

In general graphs, we cannot apply this result directly. However, we can make any graph have minimum degree 3 by replacing degree-1 vertices with small, complete graphs and by contracting along edges to remove degree-2 vertices. We can then apply Fact 1 to analyze this auxiliary graph, which leads to the following result:

###### Lemma 3.

Suppose a connected graph has vertices with degree at least . Then has a spanning tree with at least leaves.

###### Proof.

Let and denote the number of vertices of degree 1 and 2 respectively, and let denote the number of leaves in a max-leaf spanning tree of . If , the result follows from Fact 1.

Now, suppose but . Clearly, every spanning tree has at least leaves, so the result is obvious if . Otherwise, we replace each degree-1 vertex with a copy of (the complete graph on 4 vertices), one of whose vertices connects back to the rest of the graph. Let denote the resulting graph. Then has vertices, and they are all at least degree 3, so has a spanning tree with at least leaves.

We can transform this into a spanning tree on by contracting each copy of down to a single point. Each contraction could transform up to 3 leaves into a single leaf, but it will not affect other leaves. Since there are exactly contractions that need to be done altogether, has at least leaves, as required.

We now prove the result holds in general by induction on . We have already shown the base case . For the inductive step, we will define an auxiliary graph with and defined as for . We will then show , and for every spanning tree on , there is a spanning tree on with at least as many leaves. This implies , and using the inductive hypothesis, it follows that , which will complete the proof.

Towards that end, suppose is a degree-2 vertex in , and let its neighbors be and . If and are not adjacent, we let be the graph attained by contracting along the edge . Then and . Any spanning tree on can be extended back to a spanning tree on by uncontracting the edge and adding it to . This does not decrease the number of leaves in the tree, so we are done.

Next, suppose instead that and are adjacent. We cannot contract here since it will create a duplicate edge in . However, a different construction can be used. If the entire graph is just these 3 vertices, the lemma is trivial. Otherwise, let be the graph attained by adding a degree-1 vertex adjacent to . Then and . Now consider a spanning tree of . We can transform this into a spanning tree on by removing the edge that must be in . This removes the leaf but if has degree 2 in , it makes a leaf. In this case, and have the same number of leaves, so we are done.

Otherwise, and are also in , and since was assumed to have more than 3 vertices, and cannot both be leaves in . Assume without loss of generality that is not a leaf. We then further modify by replacing with . Now, is a leaf in and the only vertex whose degree has changed is , which is not a leaf in either or . Therefore, and again have the same number of leaves, and we are once again done.

The result now follows from induction, as discussed above. ∎

We must further extend this to be in terms of the number of good vertices , rather than being in terms of :

###### Lemma 4.

Given an undirected graph with good vertices, the MAXLEAF algorithm [10] will construct a spanning tree with leaves.

###### Proof.

If , the result is trivial. Otherwise, let denote the number of vertices in with degree at least 3, and let denote the number of leaves in a max-leaf spanning tree of . By Lemma 3, we know .

Now consider constructing a spanning tree as follows:

• Let denote the set of vertices in with degree at least 3.

• Set to be a minimal subtree of that connects all vertices in .

• Add all remaining vertices in to one at a time. If a vertex could be connected to in multiple ways, connect it to a vertex in if possible.

To analyze this, note that can be decomposed into a collection of “primitive” paths. Given a primitive path , let denote the number of good vertices on and let denote the number of leaves has on .

In Step 2 of the algorithm above, exactly of these paths are added to . For each such path , we have and . On the remaining paths, we have . Therefore, the total number of leaves on is at least

 ∑PlP=(g−n3)+∑P(lP−gP) ≥ (g−n3)−2(n3−1).

Thus,

 M ≥ max(n38+1,g−3n3+1) ≥ 2425⋅(n38+1)+125⋅(g−3n3+1)=g25+1

The result now follows from the fact that the MAXLEAF algorithm gives a 2-approximation for the max-leaf spanning tree, and that every non-degenerate tree has at least two leaves. ∎

We can now use this to prove a guarantee on the performance of STRATEGYMAXLEAF in terms of the number of good vertices on an arbitrary graph:

###### Lemma 5.

Given a social network with good vertices, STRATEGYMAXLEAF guarantees an expected revenue of .

###### Proof.

Let denote the spanning tree found by the MAXLEAF algorithm. Let denote the set of interior nodes of , and let denote the leaves of (excluding ). Since we assumed , Lemma 4 guarantees .

Note every vertex can be reached from by passing through nodes in , each of which is offered the product for free. These nodes are guaranteed to accept the product, and therefore, they will collectively pass on at least one recommendation to each vertex.

Now consider the expected revenue from a vertex . Let be the random variable giving the fraction of ’s neighbors in that were not offered the product for free. We know , so with probability , we have .

In this case, is guaranteed to receive recommendations from a fraction of its neighbors in , as well as all of its neighbors in (of which there is at least 1). If we charge a total of for the product, it will then purchase the product with probability at least , by the original definitions of , and . Furthermore, independent of ’s neighbors, we will ask this price from with probability . Therefore, our expected revenue from is at least .

The result now follows from linearity of expectation. ∎

Now that we have computed the expected revenue from STRATEGYMAXLEAF, we need to characterize the optimal revenue to bound the approximation ratio. This bound is given by the following lemma.

###### Lemma 6.

The maximum expected revenue achievable by any strategy (adaptive or not) on a social network with good vertices is .

###### Proof.

Let denote the set of vertices in with degree at least 3, and let . Clearly, no strategy can achieve more than revenue directly from the nodes in .

As observed in the proof of Lemma 4, however, can be decomposed into a collection of primitive paths. Since each primitive path contains at least one unique good vertex with degree less than 3, there is at most such paths. Even if each endpoint of a path is guaranteed to recommend the product, the total revenue from the path is at most .

Therefore, the total revenue from any strategy on such a graph is at most . ∎

Now, we can combine the above lemmas to state the main theorem of the paper, which states that STRATEGYMAXLEAF provides a constant factor approximation guarantee for the revenue.

###### Theorem 1.

Let denote the complexity of our buyer decision model M. Then, the expected revenue generated by STRATEGYMAXLEAF on an arbitrary social network is -competitive with the expected revenue generated by the optimal (adaptive or not) strategy.

###### Proof.

This follows immediately from Lemmas 5 and 6, as well as the fact that . ∎

As a corollary, we get the fact that the adaptivity gap is also constant:

###### Corollary 1.

Let denote the complexity of our buyer decision model M. Then the adaptivity gap is .

Now we briefly address the issue of cashbacks that were ignored in this exposition. We set the cashback to be a small fraction of our expected revenue from each individual , i.e. , where . Then, our total profit will be . Adding this cashback decreases our total profit by a constant factor that depends on , but otherwise the argument now carries through as before, and nodes now have a positive incentive to pass on recommendations.

In light of Corollary 1, one might ask whether the adaptivity gap is not just 1. In other words, is there any benefit at all to be gained from using non-adaptive strategies? In fact, there is. For example, consider a social network consisting of 4 nodes in a cycle, with connected to two other isolated vertices. Suppose furthermore that a node will accept a recommendation with probability 0.5 unless the price is 0, in which case the node will accept it with probability 1. On this network, with seed set , the optimal adaptive strategy is to always demand full price unless exactly one of and purchases the product initially, in which case should be offered the product for free. This beats the optimal non-adaptive strategy by a factor of 1.0625.

## 4 Local Search

In this section, we discuss how an arbitrary seller strategy can be tweaked by the use of a local search algorithm. Taken on its own, this technique can sometimes be problematic since it can take a long time to converge to a good strategy. However, it performs very well when applied to an already good strategy, such as STRATEGYMAXLEAF. This approach of combining theoretically sound results with local search to generate strong techniques in practice is similar in spirit to the recent k-means++ algorithm [1].

Intuitively, the local search strategy for pricing on social networks works as follows:

• Choose an arbitrary seller strategy and an arbitrary node to edit.

• Choose a set of prices to consider.

• For each price , empirically estimate the expected revenue that is achieved by using the price for node .

• If any revenue beats the current expected revenue (also estimated empirically) by some threshold , then change to use the price for node .

• Repeat the preceding steps for different nodes until there are no more improvements.

Henceforth, we call this the LOCALSEARCH algorithm for improving seller strategies.

To empirically estimate the revenue from a seller strategy, we can always just simulate the entire process. We know who has the product initially, we know what price each node will be offered, and we know the probability each node will purchase the product at that price after any number of recommendations. Simulating this process a number of times and taking the average revenue, we can arrive at a fair approximation at how good a strategy is in practice. In fact, we can prove that performing local search on any input policy will ensure that the seller gets at least as much revenue as the original policy with high probability. The proof of this fact holds for any simulatable input policy, and proceeds by induction on the evolution tree of the process. The proof is somewhat technical, so we will skip it, and instead focus on the empirical question of the advantage provided by local search.

In light of the fact that local search can only improve the revenue (and never hurt it), it seems that one should always implement local search for any policy. There is a important technical detail that complicates this, however. Suppose we wish to evaluate strategies and , differing only on one node . If we independently run simulations for each strategy, it could take thousands of trials (or more!) before the systematic change to one node becomes visible over the noise resulting from random choices made by the other nodes. It is impractical to perform these many simulations on a large network every time we want to change the strategy for a single node.

Fortunately, it is possible to circumvent this problem using an observation first noted in [5]. Let us consider the Linear Threshold model LTM. In this case, all randomness occurs before the process begins when each node chooses a threshold that encodes how resistant it is to buying the product. Once these thresholds have been fixed, the entire sales process is deterministic. We can now change the strategy slightly and maintain the same thresholds to isolate exactly what effect this strategy change had. Any model, including Independent Cascade, can be rephrased in terms of thresholds, making this technique possible.

The LOCALSEARCH algorithm relies heavily on this observation. While comparing strategies, we choose several threshold lists, and simulate each strategy against the same threshold lists. If these lists are not representative, we might still make a mistake drawing conclusions from this, but we will not lose a universally good signal or a universally bad signal under the weight of random noise.

With this implementation, empirical tests (see the next section) show the LOCALSEARCH algorithm does do its job: given enough time, it will improve virtually any strategy enough to be competitive. It is not a perfect solution, however. First of all, it can still make small mistakes while doing the random estimates, possibly causing a strategy to become worse over time666Note that if we choose and the number of trials carefully, we can make this possibility vanishingly small (this is also the intuition behind the local search guarantee, as we had mentioned earlier. In practice, however, it is usually better to run fewer trials and accept the possibility of regressing slightly.. Secondly, it is possible to end up with a sub-optimal strategy that simply cannot be improved by any local changes. Finally, the LOCALSEARCH algorithm can often take many steps to improve a bad strategy, making it occasionally too slow to be useful in practice.

Nonetheless, these drawbacks really only becomes a serious problem if one begins with a bad strategy. If one begins with a relatively good strategy – for example STRATEGYMAXLEAF – the LOCALSEARCH algorithm performs well, and is almost always worth doing in practice. We justify this claim in the next section.

### 4.1 Experimental Results

In this section, we provide experimental evidence for the efficacy of the LOCALSEARCH algorithm in improving the revenue guarantee. Note that in these experiments, we need to assume a benchmark strategy as finding the optimal strategy is NP-hard (see section A.1). We pick a very simple strategy RANDOMPRICING, which picks a random price independently for each node. The results demonstrate that even this naive strategy can be coupled with the LOCALSEARCH algorithm to do well in practice.

We simulate the cascading process on two kind of graphs. The first graph we study is a randomly generated graph, based on the preferential attachment model that is a popular model for representing social networks [12]. We generate a node preferential attachment graph at random, and simulate the cascading process by picking a random node as the seed in the network. The probability model we examine is a step function (see the second example given in Lemma 1) of probabilities. We note that the function is necessarily arbitrary. The result of one particular parameter settings are shown in figure 1(a), which plots average revenue obtained by the two pricing strategies: RANDOMPRICING and STRATEGYMAXLEAF. Each point on the figure is obtained by average revenue over 10 runs on the same graph but with a different (random) seed. The horizontal axis indicates the number of LOCALSEARCH iterations that were done on the graph, where each iteration consisted of simulating the process 50 times, and choosing the best value over the runs. It is clear from the graph that STRATEGYMAXLEAF does quite well even without the addition of LOCALSEARCH, although the addition of LOCALSEARCH does increase the revenue. On the other hand, the RANDOMPRICING strategy performs poorly on its own, but its revenue increases steadily with the iterations of the LOCALSEARCH algorithm. We note that the difference between the revenue from the two policies does vary (as expected) with the probability model, and the difference between the revenue is not as large in all the different runs. But the difference does persist across the runs, especially when the strategies are run without the local search improvement.

We also conduct a similar simulation with a real-world network, namely the links between users of the video-sharing site YouTube.777The network can be freely downloaded; see [11] for details. The YouTube network has millions of nodes, and we only study a subset of nodes of the network. We simulate the random process as earlier, and the results are shown in figure 1(b). Again, we note that STRATEGYMAXLEAF does very well on its own, easily beating the revenue of RANDOMPRICING. The RANDOMPRICING strategy does improve a lot with LOCALSEARCH, but it fails to equalize the revenue of STRATEGYMAXLEAF. The large size of the YouTube graph and the expensive nature of the LOCALSEARCH algorithm restrict the size of the experiments we can conduct with the graph, but the results from the above does experiments do offer some insights. In particular, STRATEGYMAXLEAF succeeds in extracting a good portion of the revenue from the graph, if we consider the revenue obtained from STRATEGYMAXLEAF combined with LOCALSEARCH based improvements to be the benchmark. Further, LOCALSEARCH can improve the revenue from any strategy by a substantial margin, though it may not be able to attain enough revenue when starting with a sub-optimal strategy such as RANDOMPRICING. Finally, we observe that the combination of STRATEGYMAXLEAF and LOCALSEARCH generates the best revenue among our strategies, and it is an open question as to whether this is the optimal adaptive strategy.

## 5 Conclusions

In this work, we discussed pricing strategies for sellers distributing a product over social networks through viral marketing. We show that computing the optimal (one that maximizes expected revenue) non-adaptive strategy for a seller is NP-Hard. In a positive result, we show that there exists a non-adaptive strategy for the seller which generates expected revenue that is within a constant factor of the expected revenue generated by the optimal adaptive strategy. This strategy is based on an influence-and-exploit policy which computes a max-leaf spanning tree of the graph, and offers the product to the interior nodes of the spanning tree for free, later on exploiting this influence by extracting its profit from the leaf nodes of the tree. The approximation guarantee of the strategy holds for fairly general conditions on the probability function.

## 6 Open Questions

The added dimension of pricing to influence maximization models poses a host of interesting questions, many of which are open. An obvious direction in which this work could be extended is to think about influence models stronger than the model examined here. It is also unclear whether the assumptions on the function are the minimal set that is required, and it would be interesting to remove the assumption that there exists a price at which the probability of acceptance is 1. A different direction of research would be to consider the game-theoretic issues involved in a practical system. Namely, in the model presented here, we think of each buyer as just sending the recommendations to all its friends and ignore the issue of any “cost” involved in doing so, thereby assuming all the nodes to be non-strategic. It would be very interesting to model a system where the nodes were allowed to behave strategically, trying to maximize their payoff, and characterize the optimal seller strategy (especially w.r.t. the cashback) in such a setting.

## 7 Acknowledgments

Supported in part by NSF Grant ITR-0331640, TRUST (NSF award number CCF-0424422), and grants from Cisco, Google, KAUST, Lightspeed, and Microsoft. The third author is grateful to Mukund Sundararajan and Jason Hartline for useful discussions.

## References

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## Appendix A Appendix

### a.1 Hardness of finding the optimal strategy

In this section, we show that Problem 1 is NP-hard even for a very simple buyer model M by a reduction from vertex cover with bounded degree (see [3] for the hardness of bounded-degree vertex cover). Letting denote the degree bound, and letting , we will use an Independent Cascade Model ICM with:

 C(x)={1 if x

Intuitively, the seller has to partition the nodes into “free” nodes and “full-price” nodes. In the former case, nodes are offered the product for free, and they accept it with probability 1 as soon as they receive a recommendation. In the latter case, nodes are offered the product for price 1, and they accept each recommendation with probability . (Note that the seller is allowed to use other prices between and but a price of is always better.)

We are going to use a special family of graphs illustrated in Figure 2. The graph consists of four layers:

• A singleton node , which we will use as the only initially active node (i.e., );

• links to a set of nodes, denoted by ;

• Nodes in also link to another set of nodes, denoted by . Each node in will be adjacent to nodes in , and each node in will be adjacent to nodes in (so );

• Each node also links to new nodes, denoted by ; these nodes do not link to any other nodes. The union of all ’s is denoted by .

We first sketch the idea of the hardness proof. The connection between and will be decided by the vertex cover instance: given a vertex cover instance with bounded degree , we construct a graph as above where and , adding an edge between and if the corresponding vertex is incident to the corresponding edge in . The key lemma is that, in the optimal pricing strategy for , the subset of nodes in that are given the product for free is the minimum set that covers (i.e., a minimum vertex cover of ).

To formalize this, first note that, in an optimal strategy, all nodes in should be full-price. Giving the product to them for free gets 0 immediate revenue, and offers no long-term benefit since nodes in cannot recommend the product to anyone else. If the nodes are full-price, on the other hand, there is at least a chance at some revenue.

On the other hand, we show the optimal strategy must also ensure each vertex in eventually becomes active with probability 1.

###### Lemma 7.

In an optimal strategy, every node is free, and can be reached from by passing through free nodes.

###### Proof.

Suppose, by way of contradiction, that the optimal strategy has a node that does not satisfy these conditions. Let and be the two neighbors of in , and let denote the probability that eventually becomes active.

We first claim that . Indeed, if is full-price, then even if and become active, the probability that becomes active is . Otherwise, and are both full-price. Since and connect to at most edges other than , the probability that one of them becomes active before is at most . Thus, .

It follows that the total revenue that this strategy can achieve from , , and is . Conversely, if we make and free, we can achieve revenue from the same buyers. Furthermore, doing this cannot possibly lose revenue elsewhere, which contradicts the assumption that our original strategy was optimal. ∎

It follows that, in an optimal strategy, all of is full-price, all of is free, and every node in is adjacent to a free node in . It remains only to determine , the nodes in , that an optimal strategy should make free. At this point, it should be intuitively clear that should correspond to a minimum vertex-cover of . We now formalize this as follows:

###### Lemma 8.

Let denote the set of free nodes in , as chosen by an optimal strategy. Then corresponds to a minimum vertex cover of .

###### Proof.

As noted above, every node in must be adjacent to a node in , which implies does indeed correspond to a vertex cover in .

Now we know an optimal strategy makes every node in free, and every node in full-price. Once we know , the strategy is determined completely. Let denote the expected revenue obtained by this strategy. Since all nodes in are free and are activated with probability , we know the strategy achieves 0 revenue from and expected revenue from .

Among nodes in , the strategy achieves 0 revenue for free nodes, and exactly expected revenue for each full-price node. This is because each full-price node is adjacent to exactly other nodes, and each of these nodes is activated with probability 1. Therefore, , which is clearly minimized when is a minimum-vertex cover. ∎

Therefore, optimal pricing, even in this limited scenario, can be used to calculate the minimum-vertex cover of any bounded-degree graph, from which NP-hardness follows.

###### Theorem 2.

Two Coupon Optimal Strategy Problem is NP-Hard.

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