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Assessing The Real Value of Customers Word-of-Mouth

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  • 1. BSI Assessing The Real Value of Customers Word-of-Mouth Marketing 2.0 Conference, Paris 2010
  • 2. Join the conversation MARKETING 2.0 CONFERENCE www.marketing2conference.com
  • 3. ASSESSING THE REAL VALUE OF CUSTOMERS’ WORD–OF–MOUTH Prof. Barak Libai Tel Aviv University Marketing 2.0 Conference Paris, March 2010 Prof. Barak Libai
  • 4. By 2010, most mangers are informed about the power of customer word of mouth Prof. Barak Libai
  • 5. We also know that assessing the economic contribution of word of mouth is critical  Planning and valuing WOM campaigns  Should we target opinion leaders?  Understanding the value of advertising Valuing investments in social networks and social media in general Prof. Barak Libai
  • 6. Yet for many, the way WOM turns into ROI stays a mystery ?Prof. Barak Libai
  • 7. Here are I will argue that:  The issue is not trivial. No “one number” or “one equation” you need to know  We need to “speak CRM”. The WOM value measure (“social value”) should be monetary: the change of the expected value of the cash flows from other customers  We needs to see the network. Because word of mouth creates a complex effect, its impact should take into account the whole social system, and not only close neighbors  We are making progress. While current measures are often simplistic, advancement in computer software and algorithms (“agent based models”) and the availability of social network data, will make a more comprehensive assessment of social value a reality Prof. Barak Libai
  • 8. The “regular” value of a customer  Customer Lifetime Value (CLV) - The Net Present value of cash streams associated with one customer  Customer Equity – The sum of the firm’s CLV Prof. Barak Libai
  • 9. The “social value” of a customer ?  How much money they bring the firm due to their effect on others’ lifetime value  A straightforward way: the value of the products I convinced my friends to buy. Prof. Barak Libai
  • 10. The complexity of calculating person A’s social value D A B C  If person A helps to acquire his neighbors, we need to know their regular lifetime value to calculate A’s social value Prof. Barak Libai
  • 11. The complexity of calculating person A’s social value D A B C  Person’s A word of mouth may create a “chain effect” beyond its close friends Prof. Barak Libai
  • 12. The complexity of calculating person A’s social value D A B C  If A would not talk with B, C may do it in a later time  Is social value about “customer acquisition” or “customer acceleration”? Prof. Barak Libai
  • 13. The complexity of calculating person A’s social value D A B C  Can we add the social value of A and B ? Prof. Barak Libai
  • 14. So, it is not only how many friends they have, or even how much they talk.  It is all about Net Present Value (NPV) of cash streams  Social value is about changing the regular lifetime value of other people  For example, if you have friends with low lifetime value, you may have lower social value, even if you affect more!  It needs to take into account the network structure  People in different positions in the social network will have different social value  For example, if you happen to connect different networks, your social value is higher!  It needs to take into account the fact that if it not that person, someone else may Prof. Barak Libai later substitute
  • 15. Conceptually, the social value of a customer (or a group of customers)  Is the change of the net present value of the whole social system if this person were to disappear !  Like a “shock” to a system Prof. Barak Libai
  • 16. Can it really be calculated?  We are working on it !  I’ll next present a possible approach. Prof. Barak Libai
  • 17. Stage A- Collect data on real social networks Prof. Barak Libai
  • 18. Stage b: Based on these networks create simulations in which products are sold to connected customers  For example: what would happen if a new product would begin to grow on such networks  Individual level simulations in which a “would be world” is created are sometimes called agent based models Prof. Barak Libai
  • 19. Stage 3: Conduct experiments  What is the profitability (NPV) of the system  If person A is there, or is not there  If we target “influentials” or random customers  If competition is strong or not Prof. Barak Libai
  • 20. Some recent results on the social value of WOM “seeding” programs  WOM programs create a real pioneering advantage. The social value of a program can be five time as much when a competitor does not have a program  Much of the value of seeding programs can be obtained from random targeting, yet targeting “influentials” can raise social value by 45%  The social value of a program is larger for a weaker brand than a stronger brand Prof. Barak Libai
  • 21. Thank you Merci beaucoup !  Questions? libai@post.tau.ac.il Prof. Barak Libai