Word-of-Mouth or Traditional Marketing?

Posted on September 13th, 2009

Some people may disagree with what I am about to say here: online social networks bring
people closer to each other. At least that is the personal impact that they have had on me.  But
what does this mean for marketing?  One answer is that word-of-mouth between consumers is
carrying more weight in how we choose and consume products. Whether we love or hate a
product, now it is so easy to make it known to the public that we are essentially affecting the
opinions of other consumers (from total strangers to close friends) every day.

Managers are often hesitant to invest in encouraging word-of-mouth, however, as its effects
are notoriously difficult to measure.  This is because word-of-mouth behavior is often
unobserved, and it is difficult to tease out the concurrent impact of traditional marketing. 
These are the exact problems a recent article by Michael Trusov and colleagues in Journal of
Marketing tried to tackle.  Entitled “Effects of Word-of-Mouth Versus Traditional Marketing:
Findings from
an Internet Social Networking Site”, this article offers a clear answer to the relative
effectiveness of word-of-mouth vs. traditional PR and marketing.

What did they look at?

The impact of word-of-mouth, event marketing, and media appearance on the sign-ups for an
undisclosed online social network.

Some intuitive findings:

More new sign-ups resulted in more word-of-mouth; event marketing led to more media
appearance, and vice versa;  word-of-mouth was not affected by previous event marketing or
media appearance, however, suggesting consumers’ relatively independent opinions and
actions.

Some not-so-intuitive and very important findings:

The 3-day elasticity of sign-ups with respect to word-of-mouth was .17. In layman’s terms,
this means that doubling the amount of word-of-mouth increases sign-ups by 17%. The
corresponding impact from event marketing and media appearance, in contrast, was only
1.7% and 2.2%. The gap became even bigger with regard to long-term effects.  In the long
run, the effect of word-of-mouth is 20 times that of event marketing and 30 times that of
media appearance.  While doubling event marketing or media exposure led to 1.7% and 2.6%
respective increase in sign-ups in the long run, doubling word-of-mouth increases sign-ups by
a full 53%. Financially, an outbound word-of-mouth referral translates into 75 cents/year
increase in advertising revenue.

What does this mean for marketing practice?

Word-of-mouth is a powerful tool for customer acquisition.  With the help of more powerful
tracking tools provided by social networks and websites, it is possible for managers to
measure the return from word-of-mouth activities. The mathematical approach used in this
article (vector autoregressive modeling) further helps tease out the impact of other marketing
and PR activities so that the true effect of word-of-mouth can be accurately measured.
Together, this should reduce the hesitation to incorporate word-of-mouth into a company’s
overall marketing strategy. The findings from this article also provide a strong motivation to
better utilize word-of-mouth channel of communication.

Cautions
Readers should be cautioned from taking the results from the above research too literally. 
Two things should especially be taken into consideration.  First, the data came from an online
social network.  Customers on such websites are usually highly motivated to invite their
friends, and those invited by their friends are also very likely to sign up.  If we were to change
the context to, say, online banking, both the level of referral and the impact of referral are
likely to be lower.  Second, the word-of-mouth activities studied in this article are all organic
referrals initiated by consumers themselves. If the word-of-mouth had been stimulated by the
company (say, with financial incentives), the referrals may not have been considered as
genuine to other consumers and therefore may not have created as strong of an effect as
reported in this study.  Although these are real limitations, the findings from this study are
still quite powerful indicators of word-of-mouth effect. It is a tool managers should not
ignore.