Word of Mouth is very valuable – as long as you do not pay for it
There has been a lot of research on the value of acquiring a customer though Word of Mouth versus Traditional Marketing. One recent project, which was published in the Journal of Marketing this past September, found that the long term elasticity (defined as the percentage of change in new customer acquisition to the percentage of change in the corresponding marketing driver) for Word of Mouth is 20 times higher than the elasticity for for events and 30 times higher than the elasticity for media appearances. Another study, this one from last year, found that the lifetime value of a customer acquired through word of mouth can be twice that of the lifetime value of a customer acquired through traditional marketing. And they can bring in twice the amount of additional business through their own positive word of mouth compared to those who were acquired through traditional marketing programs.
There is no question that customers who are acquired through word of mouth will be buzzing more and longer than those who are acquired through traditional marketing means. Some companies are actually able to quantify the value of a word of mouth referral. Unfortunatelly, the knee-jerk reaction of many marketers who quantify that referral value is to use it to calculate the financial incentive that they are willing to pay to stimulate word of mouth referrals.
That is where the system breaks down.
If you give me a pure financial incentive to make a referral, I will evaluate whether it’s worth spending some of my social capital for the amount of money that you are giving me (and chances are it won’t). As Dan Ariely calls it, I will evaluate the referral transaction in my market framework. If you do not give me any financial incentive, I will evaluate making a referral in my social framework (e.g., I am actually helping the person who I am referring this product or service to? Or I am helping the company person who was helpful with me in dealing with my problem by bringing her more business?). While there is no research data that I am aware of to back this up, I believe that the financial incentive-based word of mouth will look a lot like traditional marketing-based customer acquisition programs – resulting in a lot less buzzing and lower customer lifetime value.
Now what if you were putting incentives in place that were social in nature rather than financial. Don’t give me an incentive that would trigger the evaluation of what I do in a market framework, but allow me to give a valuable gift to the person who I am referring to you. If I like your offering and you increase the value that I deliver to my friends or colleagues by referring them to you, then you have a winner.
The key to success is not by commercializing the social – it’s by making the social stronger.
What do you think?
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“The key to success is not by commercializing the social – it’s by making the social stronger.”
This is my instinct, too.
People in social networks do connect with companies in order to receive deals and special promotions, but I think there definitely needs to be an awareness to the psychology that fuels this kind of connection. Does the deal or promotion feel like a gift or a financial incentive. Curiously enough we have a word for “financial incentive” — bribery — which, is not a very nice word.
I’m especially skeptical of the sort of “retweet to win” contests we see all over Twitter recently. The connection is so thin and can often put a person’s social capital at risk, however, these are the ideas that are often attempted first as companies wade their way into social media. Although, I suppose not every connection should require depth. Sometimes a short-term buzz could be beneficial, but I’m with you in the sense that benefits that arise from social connection and reciprocation are much more powerful in the longterm.
I’m so glad I nudged you on Twitter into writing this. It’s always good to pick your brain
Great thinking.
I think word of mouth is something you “have to pay for” but the difference with traditional media is that you’re not paying a media investment. You need to invest time (and this means money, too) to find out the best way to build engagement.
So, social media is nothing you have to buy, but it’s something you definitely need have to pay for (or invest in).
It’s not free.
Great post. Just the other day I received a generic direct mail from my subscription TV provider encouraging me to sign up four friends to the service. I’ve received these before from this company as well as banks, utilities, mobile phone companies and more.
I don’t think I’ve ever used one. Why? Because it seems incredibly complicated – what am I meant to do? Go give a sales pitch to a friend telling them to sign up for service X so that we can both get $20 off our next bill? No thanks, couldn’t be bothered.
Also, another problem I have with this type of marketing is that the systems are inevitably quite complex. It can be very difficult to track things with either the referer or referree required to enter/mention my name or some sort of code at time of registration.
I agree with your argument – marketers must focus on making the product compelling, valuable, easy to understand and explain and people will take it upon themselves to talk about it.
@paulalexgray
I recall that part of Predictably Irrational that discusses how framing a request can influence behavior. If the request to tell friends is framed with self interest, I don’t think people will be as likely to share and the recommendation may seem less trustworthy if the self interest is revealed.
Really enjoyed meeting you at the IERG meeting in Boston. I listened to your MENG presentation today — it was great. Communities and word of mouth marketing was the focus. This article touches a bit on what you said. Your presentation was even more engaging. Can’t wait to read your upcoming book!
[...] (WOM) activity the company is trying to foster. Since customers who are acquired through WOM are much more profitable than those acquired by traditional marketing programs, companies should make that a high priority. [...]
[...] (WOM) activity the company is trying to foster. Since customers who are acquired through WOM are much more profitable than those acquired by traditional marketing programs, companies should make that a high priority. [...]
[...] evaluate things in a social framework or in a market framework – with the social framework being much more powerful than the market framework. If you pay [...]