Word of Mouth
Michael Trusov, Randolph E. Bucklin, & Koen Pauwels
Effects of Word-of-Mouth Versus Traditional Marketing: Findings from an Internet Social Networking Site
The authors study the effect of word-of-mouth (WOM) marketing on member growth at an Internet social networking site and compare it with traditional marketing vehicles. Because social network sites record the electronic invitations from existing members, outbound WOM can be precisely tracked. Along with traditional marketing, WOM can then be linked to the number of new members subsequently joining the site (sign-ups). Because of the endogeneity among WOM, new sign-ups, and traditional marketing activity, the authors employ a vector autoregressive (VAR) modeling approach. Estimates from the VAR model show that WOM referrals have substantially longer carryover effects than traditional marketing actions and produce substantially higher response elasticities. Based on revenue from advertising impressions served to a new member, the monetary value of a WOM referral can be calculated; this yields an upper-bound estimate for the financial incentives the firm might offer to stimulate WOM.
Keywords: word-of-mouth marketing, Internet, social networks, vector autoregression
ord-of-mouth (WOM) marketing has recently attracted a great deal of attention among practitioners. For example, several books tout WOM as a viable alternative to traditional marketing communication tools. One calls it the world’s most effective, yet least understood marketing strategy (Misner 1999). Marketers are particularly interested in better understanding WOM because traditional forms of communication appear to be losing effectiveness (Nail 2005). For example, one survey shows that consumer attitudes toward advertising plummeted between September 2002 and June 2004. Nail (2005) reports that 40% fewer people agree that advertisements are a good way to learn about new products, 59% fewer people report that they buy products because of their
Effects of Word-of-Mouth Versus Traditional Marketing: Findings from an Internet Social Networking Site
The authors study the effect of word-of-mouth (WOM) marketing on member growth at an Internet social networking site and compare it with traditional marketing vehicles. Because social network sites record the electronic invitations from existing members, outbound WOM can be precisely tracked. Along with traditional marketing, WOM can then be linked to the number of new members subsequently joining the site (sign-ups). Because of the endogeneity among WOM, new sign-ups, and traditional marketing activity, the authors employ a vector autoregressive (VAR) modeling approach. Estimates from the VAR model show that WOM referrals have substantially longer carryover effects than traditional marketing actions and produce substantially higher response elasticities. Based on revenue from advertising impressions served to a new member, the monetary value of a WOM referral can be calculated; this yields an upper-bound estimate for the financial incentives the firm might offer to stimulate WOM.
Keywords: word-of-mouth marketing, Internet, social networks, vector autoregression
ord-of-mouth (WOM) marketing has recently attracted a great deal of attention among practitioners. For example, several books tout WOM as a viable alternative to traditional marketing communication tools. One calls it the world’s most effective, yet least understood marketing strategy (Misner 1999). Marketers are particularly interested in better understanding WOM because traditional forms of communication appear to be losing effectiveness (Nail 2005). For example, one survey shows that consumer attitudes toward advertising plummeted between September 2002 and June 2004. Nail (2005) reports that 40% fewer people agree that advertisements are a good way to learn about new products, 59% fewer people report that they buy products because of their
References: Ansari, Asim, Oded Koenigsberg, and Florian Stahl (2008), “Modeling Multiple Relationships in Online Social Networks,” working paper, Columbia Business School, Columbia University. Box, George E.P. and Gwilym M. Jenkins (1970), Time Series Analysis: Forecasting and Control. San Francisco: HoldenDay. Chevalier, Judith and Dina Mayzlin (2006), “The Effect of Word of Mouth on Sales: Online Book Reviews,” Journal of Marketing Research, 43 (August), 345–54. Coleman, James S., Elihu Katz, and Herbert Menzel (1966), Medical Innovation: A Diffusion Study. Indianapolis: Bobbs-Merrill. Compete.com (2008), “Site Analytics. Profile: MySpace.com and Facebook.com,” (accessed December 22, 2008), [available at http://siteanalytics.compete.com/facebook.com+myspace.com/ ?metric=uv]. comScore Media Metrix (2006), “Total Number of Unique Visitors to Selected Social Networking Sites, as of March 2006,” (accessed May 26, 2009), [available at http://www.emergence marketing.com/2006/05/05/social-networking-sites-drawtremendous-traffic/]. De Bruyn, Arnaud and Gary L. Lilien (2008), “A Multi-Stage Model of Word of Mouth Through Viral Marketing,” International Journal of Research in Marketing, 25 (3), 143–225. Dekimpe, Marnik G., Philip Hans Franses, Dominique M. Hanssens, and Prasad A. Naik (2006), “Time-Series Models in Marketing,” ERIM Report Series Research in Management, Erasmus Research Institute of Management. ——— and Dominique M. Hanssens (1995), “The Persistence of Marketing Effects on Sales,” Marketing Science, 14 (1), 1–21. ——— and ——— (1999), “Sustained Spending and Persistent Response: A New Look at Long-Term Marketing Profitability,” Journal of Marketing Research, 36 (November), 397–412. Dholakia, Utpal M., Richard P. Bagozzi, and Lisa Klein Pearo (2004), “A Social Influence Model of Consumer Participation in Network- and Small-Group-Based Virtual Communities,” International Journal of Research in Marketing, 21 (3), 241–63. East, Robert, Kathy Hammond, Wendy Lomax, and Helen Robinson (2005), “What Is the Effect of a Recommendation?” Marketing Review, 5 (2), 145–57. Enders, Walter (1995), Applied Econometric Time Series. New York: John Wiley & Sons. Firth, David R., Cameron Lawrence, and Shawn F. Clouse (2006), “Predicting Internet-Based Online Community Size and Time to Peak Membership Using the Bass Model of New Product Growth,” Interdisciplinary Journal of Information, Knowledge, and Management, 1 (1), 1–12. Franses, Philip Hans (2005), “On the Use of Econometric Models for Policy Simulation in Marketing,” Journal of Marketing Research, 42 (February), 4–14. Godes, David and Dina Mayzlin (2004), “Using Online Conversations to Study Word-of-Mouth Communication,” Marketing Science, 23 (4), 545–60. Granger, Clive W.J. (1969), “Investigating Causal Relations by Econometric Models and Cross-Spectral Methods,” Econometrica, 37 (3), 424–38. Hanssens, Dominique M. (1980), “Market Response, Competitive Behavior, and Time Series Analysis,” Journal of Marketing Research, 17 (November), 470–85. ———, Leonard J. Parsons, and Randall L. Schultz (2001), Market Response Models: Econometric and Time-Series Research, 2d ed. Boston: Kluwer Academic Publishers. Harvey, Andrew C. (1991), Forecasting, Structural Time Series Models and the Kalman Filter. Cambridge, UK: Cambridge University Press. Heeler, Roger M. and Thomas P. Hustad (1980), “Problems in Predicting New Product Growth for Consumer Durables,” Management Science, 26 (October), 1007–1020. Joshi, Amit and Dominique M. Hanssens (2006), “Advertising Spending and Market Capitalization,” Marketing Science Institute Report No. 04-110. Kao, Ling-Jing and Greg M. Allenby (2005), “Estimating StateSpace Models of Economic Behavior: A Hierarchical Bayes Approach,” working paper, Max M. Fisher College of Business, Ohio State University. Katz, Elihu and Paul F. Lazarsfeld (1955), Personal Influence; The Part Played by People in the Flow of Mass Communications. Glencoe, IL: The Free Press. Kozinets, Robert V. (2002), “The Field Behind the Screen: Using Netnography for Marketing Research in Online Communities,” Journal of Marketing Research, 39 (February), 61–72. Kwiatkowski, Denis, Peter C.B. Phillips, Peter Schmidt, and Yongcheol Shin (1992), “Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We that Economic Time Series Have a Unit Root?” Journal of Econometrics, 54 (1–3), 159–78. Liu, Yong (2006), “Word of Mouth for Movies: Its Dynamics and Impact on Box Office Revenue,” Journal of Marketing, 70 (July), 74–89. Misner, Ivan R. (1999), The World’s Best Known Marketing Secret: Building Your Business with Word-of-Mouth Marketing, 2d ed. Austin: Bard Press. Money, Bruce R., Mary C. Gilly, and John L. Graham (1998), “Explorations of National Culture and Word-of-Mouth Referral Behavior in the Purchase of Industrial Services in the United States and Japan,” Journal of Marketing, 62 (October), 76–87. Nail, Jim (2005), “What’s the Buzz on Word-of-Mouth Marketing? Social Computing and Consumer Control Put Momentum into Viral Marketing,” (May 3), (accessed May 11, 2009), [available at http://www.forrester.com/Research/Document/ Excerpt/0,7211,36916,00.html]. Nielsen//NetRatings (2005), “A Community Uprising,” (February 6), (accessed May 11, 2009), [available at http://www.nielsenonline.com/pr/pr_060206_uk.pdf]. Nijs, Vincent, Marnik Dekimpe, Jan-Benedict E.M. Steenkamp, and Dominique Hanssens (2001), “The Category-Demand Effects of Price Promotions,” Marketing Science, 20 (1), 1–22. Pauwels, Koen (2004), “How Dynamic Consumer Response, Competitor Response, Company Support, and Company Inertia Shape Long-Term Marketing Effectiveness,” Marketing Science, 23 (4), 596–610. ——— and Enrique Dans (2001), “Internet Marketing the News: Leveraging Brand Equity from Marketplace to Marketspace,” Brand Management, 8 (4), 303–314. ———, Dominique Hanssens, and S. Siddarth (2002), “The Long-Term Effects of Price Promotions on Category Incidence, Brand Choice, and Purchase Quantity,” Journal of Marketing Research, 39 (November), 421–39. ———, Jorge Silva-Risso, Shuba Srinivasan, and Dominique Hanssens (2004), “New Products, Sales Promotions, and Firm Value: The Case of the Automobile Industry,” Journal of Marketing, 68 (October), 142–56. Pesaran, M. Hashem, Richard G. Pierse, and Kevin C. Lee (1993), “Persistence, Cointegration, and Aggregation: A Disaggregated Analysis of Output Fluctuations in the U.S. Economy,” Journal of Econometrics, 56 (March), 57–88. ——— and Yongcheol Shin (1998), “Generalized Impulse Response Analysis in Linear Multivariate Models,” Economics Letters, 58 (1), 17–29. Word-of-Mouth Versus Traditional Marketing / 101 Reibstein, David J. and Paul W. Farris (1995), “Market Share and Distribution: A Generalization, a Speculation, and Some Implications,” Marketing Science, 14, (3, Part 2), 190–202. Rosen, Emmanuel (2000), The Anatomy of Buzz: How to Create Word-of-Mouth Marketing. New York: Doubleday. Sims, Christopher A. (1980), “Macroeconomics and Reality,” Econometrica, 48 (1), 1–48. ——— and Tao Zha (1999), “Error Bands for Impulse Responses,” Econometrica, 67 (5), 1113–55. Slotegraaf, Rebecca and Koen Pauwels (2008), “The Impact of Brand Equity and Innovation on the Long-Term Effectiveness of Promotions,” Journal of Marketing Research, 45 (June), 293–306. Srinivasan, Shuba, Koen Pauwels, Dominique M. Hanssens, and Marnik G. Dekimpe (2004), “Do Promotions Benefit Manufacturers, Retailers, or Both?” Management Science, 50 (May), 617–29. Srinivasan, V. and Charlotte H. Mason (1986), “Nonlinear Least Squares Estimation of New Product Diffusion Models,” Marketing Science, 5, (2), 169–78. Stephen, Andrew T. and Donald R. Lehmann (2008), “Recipient Characteristics and Product-Related Word-of-Mouth Transmis- sion: The Role of Social Capital,” working paper, Columbia Business School, Columbia University. Trusov, Michael, Anand Bodapati, and Randolph E. Bucklin (2008), “Determining Influential Users in Internet Social Networks,” working paper, Robert H. Smith School of Business, University of Maryland. Van den Bulte, Christophe and Gary Lilien (2001), “Medical Innovation Revisited: Social Contagion Versus Marketing Effort,” American Journal of Sociology, 106 (5), 1409–1435. Van Heerde, Harald J., Marnik. G. Dekimpe, and William P. Putsis Jr. (2005), “Marketing Models and the Lucas Critique,” Journal of Marketing Research, 42 (February), 15–21. Villanueva, Julian, Shijin Yoo, and Dominique M. Hanssens (2008), “The Impact of Marketing-Induced Versus Word-ofMouth Customer Acquisition on Customer Equity Growth,” Journal of Marketing Research, 45 (February), 48–59. Whitman, Janet (2006), “Lessons Learned: New Dot-Coms Seek Attention Cheaply,” The Wall Street Journal, (February 13), B3A. Wikipedia (2008), “List of Social Networking Websites,” (accessed August 28, 2008), [available at http://en.wikipedia. org/wiki/List_of_social_networking_websites]. 102 / Journal of Marketing, September 2009