March 1, 2010

WOM vs. traditional marketing

Research by Michael Trusov

The power of word-of-mouth marketing has never been more important or more cool. “Buzz” is the Holy Grail for many companies who wish that word about their product offerings would go viral. Few would argue that today’s consumer has the power to influence their fellow consumers as never before. But word-of-mouth advertising has been very difficult to evaluate and quantify in a way that would allow marketers to establish how effective it really is.

Michael Trusov, assistant professor of marketing, with co-author Randolph E. Bucklin, University of California-Los Angeles, and Koen Pauwels, Ozyegin University, Istanbul, Turkey, examined the effect of word-of-mouth (WOM) marketing on membership increases at a popular social networking site and compared it with the effectiveness of some traditional marketing techniques, such as event marketing and media advertising.

WOM communication strategies are appealing because they combine the prospect of overcoming consumer resistance with significantly lower costs and fast delivery, says Trusov. Unfortunately, empirical evidence is currently scant regarding the relative effectiveness of WOM marketing in increasing firm performance over time.

The key challenge is that while traditional marketing activities are relatively easy to quantify, social interactions are not, because they are rarely observable. The social networking site setting considered in Trusov’s work offered an appealing context in which to study word-of-mouth. Popular sites such as Facebook or MySpace provide easy-to-use tools for current users to invite others to join the network. The electronic recording of these outbound referrals opens a new window into the effects of WOM, giving researchers an unobtrusive trace of this often hard-to-study activity. When combined with data that also tracks new member signups, it becomes possible to model the dynamic relationship between this form of word-of-mouth and the addition of new members to the social networking site.

Using a Vector Autoregression model, Trusov found that WOM referrals have much stronger impact on new customer signups compared to traditional marketing efforts, and that the effect of WOM lasts longer than the effect of traditional marketing. Doubling the amount of WOM increased new customer signups by 17%. When measured over a long time period, the effect of WOM is 20 times that of event marketing and 30 times that of media appearances.

Part of the reason for the high long-term effect of WOM relative to traditional marketing is that it has a much longer carryover period. An increase in WOM continues to affect new member sign-ups for three weeks, while traditional marketing effects last for three to seven days. There seems to be a positive feedback cycle with WOM: WOM leads to more new members and more new members lead to more WOM – which then leads to more new members. Indeed, the long-run impact of WOM-referrals is akin to the “gift that keeps on giving,” especially when compared to the performance of traditional marketing activities.

And WOM may enhance the effectiveness of traditional marketing when that traditional marketing tool stimulates WOM – such as when a particularly funny television commercial becomes water cooler conversation the following morning or prompts people to e-mail the YouTube link to their friends.

This research offers managers a tool which can help to evaluate the extent to which financial incentives to existing customers might be used to stimulate WOM, says Trusov. The results obtained through a simulation analysis suggest that social networking firms with a primary stream of revenues from online display advertising might benefit from paying their customers to spread the word about their site.

“This research will help companies more effectively gauge the effectiveness of WOM and incorporate it into their marketing strategy, so they can figure out how to allocate resources across different media,” says Trusov. “And it is important for companies to ask themselves how much they’d be interested in paying for each referral.”

“Effects of Word-of-Mouth versus Traditional Marketing: Findings from an Internet Social Networking Site,” was published in the Journal of Marketing. It was the runner-up for the 2009 Marketing Science Institute/H. Paul Root Award and a finalist for the 2009 Harold H. Maynard Award. For more information about this research, contact Michael Trusov.

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