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Word of Mouth Programs – Making Money

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Another thought-provoking piece of research from one of our ‘must read’ organisations, the Marketing Science Institute is the Sources of Social Value in Word-of-mouth Programs.

Using computer agent models based on 12 real world communities (several provided by Lithium), Libai, Muller and Peres focussed on the impact Word of Mouth (WOM) has on the value (discounted cash flow) generated in a new product introduction.

Their particular interest was on the WOM generated by ‘seeding’ programs, where organisations give new products to a portion of the customer population in order to invoke WOM. I believe the principles discussed in their paper probably apply to any WOM initiative, not just seeding programs.

The focus on hard dollar returns is notable and useful for marketers considering WOM programs (and certainly plays to our bias for ‘do’ marketing). The authors call these hard dollar impacts changes in ‘social value’ for the customer population.

Two ways that WOM can increase the value of the social network, i.e. make you money (versus new product diffusion with no WOM) were examined;

  1. Acquisition of new customers who would not have bought without the WOM, and
  2. Acceleration of purchases from customers who would have bought anyway, just later. In this case, the added value is the time value of getting money earlier.

They also contrasted WOM programs that randomly select customers with Influentials programs that specifically target customers with large numbers of social links.

The findings, in plain language, were;

  1. Competition amplifies WOM effects. With 1 brand, i.e. a monopoly, WOM increased value by 17% for random customer selection and 27% for influentials. Adding a competitor jumped these numbers to 80% and 107%!
  2. The stronger the brand relative to competition the less value delivered by WOM; stronger brands benefit less.
  3. You can select too many customers: Random customer selection WOM programs including 20% of the target population deliver the maximum social value
    Do not try to recruit all customers in launch WOM programs
  4. Compared to random customer selection, Influentials’ effects decrease faster as you increase the number of customers in the program
  5. Most of the value from WOM can be achieved by random customer selection. Targeting Influentials can increase the return; an additional 33% in these networks
  6. If you target Influentials, acceleration drives the majority of value, not acquisition

This is good news for our start-up customers introducing new products, using social media, in highly competitive markets…

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