New research shows how word of mouth programs really create value

Apr 09, 2013, 10:07 ET from American Marketing Association

CHICAGO, April 9, 2013 /PRNewswire-USNewswire/ -- Researchers reveal how the value of the increasingly popular tool of word of mouth programs is driven by the combination of getting people who would have gone to the competition and accelerating the purchase of people who would have purchase anyhow, but purchase earlier due to the program.


Only recently have managers and researchers began to untangle the "black box" of word of mouth: How numerous people that affect each other ultimately create value to the firm. This article is the first to explore the fundamental way in which word of mouth programs create value in a competitive setting: integrating  value from future buyers who just buy earlier ("customer acceleration"), and future competitive buyers who switch to the brand due to the effect of the word of mouth program ("market expansion"). 

The analysis appears in the May 2013 issue of the American Marketing Association's Journal of Marketing Research. The authors used data taken from 12 real social networks to create an "Agent Based Model" analysis - a simulation that emulates real world market behavior where many customers interact with each - and explore the consequences of a firm operating word of mouth program that gets a part of the market to adopt a new product early on.

"Industry observers have argued that building a word-of-mouth campaign is in many ways the easy part; measuring its effectiveness is the real challenge," say the authors. "While word of mouth programs, online and offline, are becoming a major marketing tool, it is very hard to follow how the word of mouth ripple effect that involves so many people actually creates monetary value. This analysis is among the first to shed light on the basic process and can help us understand not only the actual value created by word of mouth programs but also explore issues such as how targeting opinion leaders creates more value than targeting random customers."

Using this novel approach this study shows that the acceleration/expansion dynamics is fundamental to answering questions such as why a stronger brand will benefit less from a word-of-mouth program; how a future decline in price or a lower retention rate should affect the benefit from the program; how targeting influential customers increases the value of a program; and how a shorter measurement horizon can lead to a considerable overestimation of the benefit of a word-of-mouth program.

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SOURCE American Marketing Association