Word of Mouth Programs – Making Money

Another thought-provoking piece of research from one of our ‘must read’ organisations, the Marketing Science Institute: 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…

Consumer Research: Poor research approaches give poor answers

This post from the Harvard Business Review’s Daily Stat on 15 February 2010 shows a surprising lack of insight into how consumers actually respond to research questionnaires.  It reports a McKinsey survey where consumers were asked what they were more interested in: core benefits or bells and whistles.

If you believe the results, consumers are more interested in core benefits.

I don’t believe the results.

The issue here is the way the survey has been undertaken.  In this case, asking customers what they want is unlikely to give you an accurate answer to your question. Not because they will not tell you the truth but because they are unlikely to act in the same way, in practice, that they say they will act, in theory.

If you really want to know what consumers want then, in this case, it’s best to look at what they actually do.  On this issue (core benefits or bells and whistles) it would be a relatively easy piece of analysis to do: compare sales of the upmarket “bells and whistles” models with the downmarket “core benefits” models.  That way you can see what customers actually do rather than what they say they do.

Poor research design like this is a common problem.

For instance, we’ve seen loyalty program research that, when asking customers if they want points or discounts, found they overwhelmingly want discounts. Then those same customers go on to collect points, respond to points promotions, etc.

And there was the set of supermarket research that asked customers if they would buy “store brands”.  When you compared actual purchase data with customer responses, many customers with baskets full of the store brand product said they would never lower their standards that low.

If you naively believed what customers told you in either of these circumstances you could easily build the completely wrong customer experience.

Consumer research is fraught with this kind of problem and when designing your research approach you need to act defensively to guard against getting incorrect or inaccurate results.  If you don’t, you will get a pretty chart that looks nice in the report but the insights in it will be just plain wrong.

Another example of this type of not believing what customers say is the “how important is feature x” type of question.  Understanding how important a service feature is to the customer is critical in designing good service processes.  So questionnaires are often used to determine which features are most important.

The problem comes if the surveys are poorly implemented.  You’ve probably seen the bad ones; they look like this (paraphrasing):

Q1: How good is our price?

Q2: How important is price?

Q3: How good is our service responsiveness?

Q4: How important is responsiveness?

Q5: How good is our feature x?

Q6: How important is feature x?

Even before I see the results I know what the answers will be.  Everything is important: 9s or 10s out of 10.  So what do you know now?  Nothing more than you knew before because everything has the same high importance.  You’re back to square 1.

Even if the results are not all 9s and 10s they will be skewed by what customers want you to think.  For instance, no customer is going to tell you that price is unimportant, lest you decide to put up their price.

There are at least two better approaches than this:

  1. Some type of forced ranking: In this approach you force the customer to rank the importance of each feature using a points approach, ranking or a best-worst approach.
  2. Infer importance: If you design the survey in the right way you can infer what is important based on the answers you get from other questions or actual customer behaviour.  This takes a bit of additional analysis but is well worth the extra effort.

Both of these alternatives will deliver a much more accurate outcome.

So, when you next look at the survey questionnaire your agency has provided, act defensively, and think about whether the answers you get will be accurate.

Have you seen other poor research approaches?  Leave a comment and let me know.

By Adam Ramshaw