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

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