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 advertisements, and 49% fewer people find that advertisements are entertaining. Word-of-mouth communication strategies are appealing because they combine the prospect of overcoming consumer resistance with significantly lower costs and fast delivery—especially through technology, such as the Internet. Unfortunately, empirical evidence is currently scant
Michael Trusov is Assistant Professor of Marketing, Robert H. Smith School of Business, University of Maryland (e-mail: mtrusov@rhsmith. umd.edu). Randolph E. Bucklin is Peter W. Mullin Professor, Anderson School of Management, University of California, Los Angeles (e-mail: email@example.com). Koen Pauwels is an associate professor, Ozyegin University, Istanbul, and Associate Professor of Business Administration, Tuck School of Business, Dartmouth College (e-mail: firstname.lastname@example.org and email@example.com). The authors thank the three anonymous JM reviewers and participants of the 2006 Marketing Dynamics Conference and the 2007 DMEF Research Summit for helpful comments. The authors are also grateful to the anonymous collaborating firm for providing the data used in this study. Katherine N. Lemon served as guest editor for this article.
regarding the relative effectiveness of WOM marketing in increasing firm performance over time. This raises the need to study how firms can measure the effects of WOM communications and how WOM compares with other forms of marketing communication. Word-of-mouth marketing is a particularly prominent feature on the Internet. The Internet provides numerous venues for consumers to share their views, preferences, or experiences with others, as well as opportunities for firms to take advantage of WOM marketing. As one commentator stated, “Instead of tossing away millions of dollars on Superbowl advertisements, fledgling dot-com companies are trying to catch attention through much cheaper marketing strategies such as blogging and [WOM] campaigns”...