A Holistic Approach to the Measurement of WOM

WORLDWIDE MULTI MEDIA MEASUREMENT 2009 pART 5 / THE pOWER OF SOCIAL MEDIA A HOLISTIC AppROACH TO THE MEASUREMENT OF WOM Its Impact on consumer’s decIsIons Ed Keller Barak Libai INTRODUCTION some marketers are developing integrated approaches to drive word of mouth advocacy, deploying “new” numerous research studies conducted over the past few and “old” media in combination. For example, some of years show that word of mouth is the most important the most successful super Bowl ads in recent years consumer touch point when it comes to decisions about have relied on social media and pr to drive consumer products, services, and brands. media agency Zenith awareness and engagement in advance of the super optimedia, for example, released research results in Bowl ad, thereby raising awareness and anticipation, 2008 that concluded, “recommendations from family while the ad itself spurs further conversation during and friends trump all other consumer touch points and following the game. often there is a consumer when it comes to influencing purchases,” according promotion tie-in that further extends the opportunity to a report on the research in the april 9, 2008, issue for consumer engagement. of Advertising Age. Beyond recognition of the power of word of mouth and With the recognition of the power of word of mouth, a the influence it has on consumers, brands are motivated growing number of brand marketers – and the agencies to find ways to tap the power of consumer word of that serve them – are investing in marketing approaches mouth in response to the current economic realities they designed to stimulate word of mouth advocacy. as a face. often, out of economic necessity, the marketing result, word of mouth marketing has emerged as one community is moving away from strategies that of the fastest growing media sectors. according to one emphasize mass reach to strategies that involve targeting estimate by media forecasters pQ media (pQ media, fewer people with a message that is more relevant and 2008), u.s. spending on consumer-generated media is compelling and thus more likely to be acted upon. It is growing faster than any other type of alternative media a change that emphasizes efficiency and effectiveness segment (out of 18 measured). over scale. a wide variety of strategies to encourage word of mouth today’s tougher economic climate also brings with it a are being employed. many marketers are increasingly demand for roI in marketing, and as a new approach, focused on the opportunities afforded by digital media word of mouth requires such proof. While many people to facilitate the people’s growing desire to express intuitively accept the philosophy of Wom, the need themselves (e.g., social media platforms, online ratings to justify investments in promoting word of mouth and review sites, etc). others are employing offline word programs is a key challenge faced by the word of mouth of mouth approaches (e.g., the deployment of word of marketing industry. a critical issue in this regard is the mouth evangelists for brands, house parties, experiential lack of a structured approach to measure the economic marketing, and the like). Copyright © ESOMAR 2009 1

WORLDWIDE MULTI MEDIA MEASUREMENT 2009 pART 5 / THE pOWER OF SOCIAL MEDIA value of word of mouth. While research can document MEASURING WORD OF MOUTH: QUANTITY, the rising importance of word of mouth to consumers, QUALITY, AND INFLUENCES and point to strategies to help companies generate the source of primary data for this article is an ongoing more Wom, this is not always enough. In order to justify series of studies from the Keller Fay Group known as marketing investments, managers need to understand talktrack®. every week since June 2006, talktrack® how word of mouth actually affects the bottom line. interviews a fresh, nationally representative sample of this paper reports on the findings of a unique approach 700 americans ages 13 to 69 about the “conversations” to word of mouth measurement, developed by the Keller they participated in the day before the interview. this Fay Group, and a unique methodology to quantify the translates into 36,000 interviews per year, with data impact of word of mouth on a firm’s profitability based on collected about 350,000 brand conversations annually. modeling work by professor Libai. (note: throughout this the surveys are administered online. the participants paper, we cite statistics and insights that come from the are presented initially with a two-page diary they use authors. unless otherwise indicated, all statistics related to keep track of conversations in 15 product categories to the quantity, quality, and drivers of consumer word for a single day. a primary purpose of the diary – of mouth come from talktrack®, the Keller Fay Group’s beyond reminding respondents of the areas that we ongoing system for measuring both online and offline are interested in studying – is to help respondents to Wom; all statistics relating to the economic value of Wom remember the brands they talk about during the study comes from work by Barak Libai, either independently or day. the following day they complete a 20-minute as co-author with professor eitan muller and professor questionnaire in which they list the brands that came renana peres.) up in conversation and then answer detailed questions Keller Fay’s word of mouth research takes a holistic about their conversation regarding each brand. approach, measuring all word of mouth – both offline talktrack® collects continuous data related to the quantity, as well as online word of mouth; all people involved quality, and drivers of word of mouth. We measure the in word of mouth – both “speakers” (what people say volume of word of mouth about products, services, and when they discuss products, services, and brands) brands, and as such are able to estimate (at any moment as well as “listeners”, and the impact Wom has on in time, or over time) how many conversations per day them; and is the only ongoing study of word of mouth about products, services, and brands consumers engage that is representative of the total u.s. population. in, which in turn allows us to monitor the absolute and In order to measure the economic impact of word of relative volume of word of mouth about thousands of mouth, professor Libai and his colleagues have used brands across 15 different product/service category areas computer simulations – including inputs from Keller – including food/dining, media/entertainment, beverages, Fay’s research – to determine the monetary value of travel services, shopping and retail, automotive, technol- an individual due to his or her word of mouth effect ogy, telecommunications, finance, health and health care, on others, or what might be labeled the social value personal care/beauty, the home, children’s products, of this customer. In addition to measuring the social household products, sports/leisure/hobbies. value of customers, this paper also focuses for the In addition, talktrack® collects data related to the first time on the word of mouth impact, from a profit medium (mode of conversation, venue, and “sender” perspective, of influencers compared to that of other demographics); to the message (positive/negative customers and finds that influencer marketing can polarity, perceived credibility); and to the audience increase long-range profitability by as much as 44%. (demographics of “receivers” and relationship to “sender”). It also identifies the drivers of brand mentions, including Copyright © ESOMAR 2009 2

WORLDWIDE MULTI MEDIA MEASUREMENT 2009 pART 5 / THE pOWER OF SOCIAL MEDIA customer experience and marketing communications, 1. Brands are important as social currency: Billions and the outcomes of those mentions, such as intention to of brand impressions created each day via WOM purchase, to get more information (“inquiries”), and to pass the most fundamental finding from our research along to other consumers what was learned (“relays”). concerns the sheer volume of word of mouth among consumers. there are 3.3 billion brand impressions our method is distinguished from other approaches used created each and every day in america via word of to study word of mouth (many of which monitor online mouth. Brands, it is fair to say, are a major currency conversation via blogs, chat rooms, message boards, and of conversation. the like) in that talktrack® measures all word of mouth (offline as well as online), all participants (both “talkers” What is significant about this figure is that it is one as well as “listeners”), and all consumers (because the indication to marketers of the “size of the prize” if they can study is designed to be representative of the total u.s. succeed in generating more and better word of mouth for population ages 13 - 69, regardless of how active they their brands. Just a single share point of additional word are in word of mouth). of mouth on a base of 3.3 billion conversations per day – or even a half share point – would yield more than 10 While the database that has been compiled over a nearly million additional conversations about that brand each day. three-year period is extensive and allows for many types of analysis and drill downs, here are five of the most the leading categories for word of mouth are food/ important – and in some cases, surprising – insights dining and media/entertainment, with a majority of all into word of mouth that have emerged as a result of americans talking about these categories on a typical this continuous study. day. Beverages, sports, and telecomm round out the top five most frequently talked about product or service categories. (see figure 1). Figure 1 FIGURE 1 Consumers Talk About Many Categories CONSUMERS TALk ABOUT MANY CATEGORIES (Percentage of respondents have 1+ conversation in category on given day) (pERCENTAGE OF RESpONDENTS HAvE 1+ CONvERSATION IN CATEGORY ON GIvEN DAY) Food & Dining 55% Media & Entertainment 51% Beverages 43% Sports, Recreation & Hobbies 40% Telecommunications 39% Technology 37% Shopping, Retail & Apparel 37% Automotive 34% Health & Healthcare 33% Financial 30% Personal Care & Beauty 25% The Home 24% Children's Products 22% Household Products 20% Travel Services 19% Base: Respondents, n=37,351 Base: Respondents, n=37,351 Source: TalkTrack®, January – December 2008 January – December 2008 Source: TalkTrack®, Copyright © ESOMAR 2009 3

WORLDWIDE MULTI MEDIA MEASUREMENT 2009 pART 5 / THE pOWER OF SOCIAL MEDIA Less frequently discussed categories – e.g., household programs when we look at results at the individual brand products and children’s products – are not unimportant level. the economic challenges that began in the fall of word of mouth categories. the reason these categories 2008 now make clear that the dynamics of conversation fall lower on the list is because conversation about are also affected at the more macro level, responding to brands in the category tend to be focused among economic circumstances. For example, word of mouth narrower market segments such as adult women and about financial services brands rose noticeably once the parents. When one looks at results for women and economy took center stage in september 2008. at the parents, the percent of people having daily conversation same time, we have seen increasing Wom about media/ rises dramatically. Further, even among the total entertainment and sports, as well – precursors of trends population, one in five or more consumers have daily toward higher box office sales for movies during the conversations about every one of these 15 categories. downturn. at the opposite end of the spectrum, we have seen declining Wom about a range of categories that We have known since the beginning of talktrack® require higher levels of expenditures, such as autos and that word of mouth is sensitive to news or marketing travel. (see table 1). TABLE 1 FINANCIAL CRISIS NOT JUST IMpACTING FINANCIAL CATEGORY MORE WOM ABOUT FINANCIAL SERvICES, SHOppING/RETAIL, AND MEDIA/ENTERTAINMENT; LESS ABOUT AUTO, BEvERAGES, AND TRAvEL (CATEGORY MENTIONS AS A pERCENTAGE OF ALL WOM MENTIONS AMONG ADULTS) (Ranked by point Change Dec 2008 vs. Aug 12 Months Sept – Dec 2008 % point Change 2008) Ending Aug 2008 Financial 5.6% 6.5% +0.9 Shopping, Retail & Apparel 9.7% 10.2% +0.5 Media & Entertainment 11.1% 11.5% +0.4 Children’s products 2.4% 2.7% +0.3 Sports, Recreation & Hobbies 6.9% 7.1% +0.2 Technology 8.2% 8.3% +0.1 personal Care & Beauty 3.7% 3.8% +0.1 Health & Healthcare 4.5% 4.5% 0 Food & Dining 12.0% 11.9% -0.1 Household products 2.5% 2.4% -0.1 The Home 1.4% 1.3% -0.1 Telecommunications 7.0% 6.8% -0.2 Travel Services 4.5% 4.2% -0.3 Beverages 10.6% 10.2% -0.4 Automotive 7.0% 6.4% -0.6 Base: All Conversational Brand Mentions (12 Months Ending Aug 2008, n=251.773; Sept-Dec 2008, n=81,274) Note: Percentage point change figures are derived from using more than just one decimal place. Percentages may round to just less than 100% because “other” is not shown. Source: TalkTrack®, September 2007 – December 2008 Copyright © ESOMAR 2009 4

WORLDWIDE MULTI MEDIA MEASUREMENT 2009 pART 5 / THE pOWER OF SOCIAL MEDIA Most word of mouth takes place offline than one in ten (8%) in a negative one. the remainder How and where do word of mouth conversations occur? is pretty evenly split between those who say the While social media and other types of digital media are conversational mentions of brands was a mixture of both often associated with the rising importance of word of positive and negative comments, and those who say the mouth, our research indicates that fully 76% of word of conversation had neither a positive nor negative tone. mouth conversations occur “face to face,” while another the mixture of positive vs. negative word of mouth 16% happen by phone. In other words, a total of 90%+ varies by category, and by brand. certainly some have take place offline. meanwhile, 7% of word of mouth takes a stronger position, and some are weaker. For any place online, of which 3% takes place via email and the individual brand, there is a need to evaluate its individual same number via instant or text message (3%), while position relative to its category and how this is changing 1% is via blogs/chat rooms. over time and to plan accordingly. these findings are significant, because for many However, the overwhelmingly positive nature of word marketers, the monitoring of internet blogs and chat of mouth is extremely important for marketers, for rooms has been used as a surrogate for measuring several reasons. First, it means that we should think offline word of mouth. Yet our research finds that these of consumers as primarily supportive of brands and conversations are a distinct minority of consumer-to- companies, in the sense that they want to help connect consumer interactions about brands. and, because good brands with good friends. While it is true that talktrack® provides a basis for measuring all word of stopping a friend from making a bad choice is a helpful mouth, online and offline, and for making comparisons act, the most helpful recommendation also offers a among modes of communications, we now know that not replacement choice, and perhaps several. second, these only is there more word of mouth that takes place offline, findings suggest that the oft-cited “risk” of participating in there are distinctly different dynamics for offline and word of mouth is likely overblown. the greater risk for online word of mouth. offline conversations are more marketers likely resides in not engaging in a conversation positive about brands, more credible (to those on the that is happening with or without the marketer’s receiving end of Wom advice), and more likely to lead to participation. purchase intention. While the trends in online conversation about brands are sometimes indicative of the trend in WOM inputs: Marketing communications drive offline conversation, most of the time they are not. one WOM reason this might be the case is that the demographic amid the recent growth in popularity of word of mouth profile of people talking about brands online is dramati- marketing, the field is often described as an alternative to cally younger than for offline conversations, with half of all “traditional” media and marketing channels. While word online conversations about brands taking place among of mouth does represent a philosophical breakaway from teens. (see more on the comparison between offline a one-way, top-down communication model, it does not and online word of mouth in Keller Fay, 2008.) necessarily mean the abandonment of traditional media and marketing channels. Indeed, about half (48%) of all Most word of mouth about brands is positive brand-related conversations include a reference to some Whereas many people are surprised by the finding that kind of media or marketing that was seen or heard by at most word of mouth takes place offline, our findings least one conversational partner. about the “polarity” of word of mouth are also surprising to many. overwhelmingly, consumers have positive these media and marketing references run a wide gamut: things to say about brands, by a margin of more than advertising, editorial and programming, company websites, six to one. across all brands in all categories, two-thirds point of purchase, coupons and other promotions, etc. (65%) were mentioned in a mostly positive light, and less By medium, television drives the largest number of Copyright © ESOMAR 2009 5

WORLDWIDE MULTI MEDIA MEASUREMENT 2009 pART 5 / THE pOWER OF SOCIAL MEDIA conversations (15%), followed closely by the internet (11%). “input” tools available to marketers interested in driving By media/marketing type, advertising emerges as the word of mouth on behalf of their brands. most referenced in Wom conversation (20%). We estimate Influencers: At the center of the word of mouth that there are 716 million daily conversations about brands conversation in the u.s. that are “advertising-influenced,” and this is In the six years since The Influentials (Keller and probably a conservative estimate of advertising’s role Berry, 2003) was published, interest in word of mouth in word of mouth because it only counts conversations marketing has grown rapidly and with it has come where advertising is specifically mentioned by one or increased demand for more and better insight on the role more participants. as a result it does not include occasions of influencers in stimulating word of mouth conversations when an advertisement indirectly or unconsciously and brand advocacy. With the passage of time has come motivated or provided content to a conversation about a a counter movement as well, in which some critics have brand but where nobody directly references advertising questioned the validity of “the influencer model.” (see as a source of information in the conversation. for example, Watts 2007.) this leads to the question, when advertising influences new research on the impact of influencers on firm word of mouth, do we see different levels of efficacy? profitability will be discussed later in this paper, but in the answer is yes, in one important respect. Wom that this section we want to share data on the volume of is “ad-influenced” is about 20% more likely to bring with word of mouth among influencers vs. others to help it enthusiastic brand recommendations. Fully 46% of all illustrate the disproportionate role they play in word ad-influenced Wom involves a strong recommendation of mouth. to “buy or try” the brand versus 39% of other Wom. meanwhile, Wom that doesn’t involve a reference to We find clear and consistent evidence that influencers advertising is far more apt to have no recommendation (a group we at Keller Fay label conversation catalysts™) at all (31%) compared to ad-influenced Wom (18%). have a far greater-than-average involvement in word of mouth. compared to the average american, they have so, while many consider Wom to be part of “new media,” 80% more conversations each week about products and we now see that “traditional” media and marketing services, and are 130% more likely to engage in brand- channels can also be counted among the important specific word of mouth. (see figure 2). FIGURE 2 Figure 2 INFLUENCERS: ENGAGED IN FAR MOREInfluencers: Engaged in Far More Conversation CONvERSATION (AvERAGE # WEEkLY CONvERSATIONS AND BRAND MENTIONS*) brand mentions*) (Average # weekly conversations and Total Public Conversation Catalysts™ 145 129 80 56 Conversations Brands *Based on research in the United States on research in US *Based Copyright © ESOMAR 2009 6

WORLDWIDE MULTI MEDIA MEASUREMENT 2009 pART 5 / THE pOWER OF SOCIAL MEDIA according to our projections, conversation catalysts™ of opinion leaders, also referred to as influentials, are responsible for one-third of all the brand impressions influencers, connecters, catalysts, and hubs and by a every day in the united states via Wom, a level more than plethora of cross-discipline academic research since the two and a half times their demographic representation. 1950s that has examined the role of opinion leaders in this translates into about one billion brand impressions the spread of new ideas and the growth of innovations. that are being created each day in the united states However, the validity of this practice is still in question. as a result of word of mouth conversations involving a well-known example is a recent study by Watts and influencers. their opinions are sought out by their friends dodds (2007) based on computer simulations. In this and family, and they are far more prolific than the average study, they argue that influencers do not necessarily american in spreading the word about products, in start contagion processes that differ greatly from those category after category, for brand after brand. among begun by ordinary social system members. more consumers who are influencers at the category level broadly, they suggest that the impact of opinion leaders (e.g., Financial catalysts, or auto catalysts, etc.) word of has been much exaggerated, and that influencers are mouth levels about brands can be as much as five times not required for social epidemics. Firms are further as high as it is for the general population. a detailed advised that marketing strategies should not focus on analysis of the word of mouth of conversation catalysts™ finding influencers, but rather should be directed toward is found in Keller, Fay, and Berry (2007). helping large numbers of ordinary people to reach and THE SOCIAL vALUE OF WORD OF MOUTH, influence others like them (Watts 2007). these claims AND OF INFLUENCERS: THE IMpACT ON FIRM have attracted wide media attention, as well as debates pROFITABILITY among marketing professionals in this industry, with the question still open. Introduction In this section we present a way to measure the word of a critical issue in this regard is the lack of a structured mouth monetary value of opinion leaders. It demonstrates approach to measure the value of opinion leaders to how the empirical data gathered in comprehensive the firm. the broad cross-discipline academic literature systems such as the Keller Fay Group’s talktrack®, on opinion leadership has historically focused on the can be integrated into simulations to enhance our characteristics of opinion leaders and their communication understanding of the non-trivial way in which customer behavior, i.e., identification of opinion leaders, how many word of mouth turn into monetary value. similar to the others are affected by them, and why. In order to justify holistic approach in getting empirical word of mouth data, marketing investments, however, managers will need to our approach to social value is holistic, and takes into further understand how opinion leaders actually affect the account multiple ways in which social interactions create bottom line. We label the monetary value of an individual profitability. due to his or her word of mouth effect on others the social value of this customer. We take two steps. First, the need to justify investments in promoting word we suggest a general approach for the analysis of the of mouth communications of customers, and opinion social value of customers. then we use this approach to leaders in particular, is a key challenge faced by the examine the value of opinion leaders in the context of a word of mouth marketing industry. a large number of new product’s growth. similar to Watts and dodds (2007), market research firms and agencies help their clients we use computer simulations to examine this question. find ways to build brand and online communities, and to However, from a monetary perspective, our conclusions identify, recruit, and affect opinion leaders in the hope differ. the main insights we suggest are: that they will further influence their social systems. this development is supported by a number of well known • the social value of a customer can be assessed as books that have drawn attention to the importance the effect that the absence of this customer will have on Copyright © ESOMAR 2009 7

WORLDWIDE MULTI MEDIA MEASUREMENT 2009 pART 5 / THE pOWER OF SOCIAL MEDIA the firm’s long-range profits, beyond that customer’s typically, managers will not be interested in the profitability direct lifetime value. of a single customer but a group of them, or all of them. • customer social value stems from two main sources: customer equity is the sum of the firm’s lifetime values additional customers that would not have purchased the from a group of customers. of special interest is the total product, and the acceleration of the purchase process. customer equity – the customer equity of all present and acceleration is an under-explored phenomenon, but future customers. In a sense, total customer equity is the can drive much value. ultimate measure of marketing, i.e., all marketing efforts • Individual-level simulations are an essential tool for are aimed at increasing total customer equity. understanding the role of word of mouth (Wom) in customer profitability measurement has historically firms’ profitability. focused on the profit to the firm from customer • Focusing a Wom customer recruiting program on transactions only. to differentiate it from other profitability opinion leaders can increase the net present value (npV) measures discussed next, we label the classical customer of the firm’s revenue considerably, due to acceleration equity measure direct customer equity. In contrast to of the adoption process. In our simulations, seeding the direct equity, we label as the social customer equity of market with opinion leaders has increased long-range a group of customers the impact on profitability of that profitability between 6% and 14% over the alternative of group because of their word of mouth effect. approaching random customers. When compared to an alternative of a no seeding program, the opinion leader to examine the social value of customers, we focus here program provided long-range surplus value of 11%- on a case wherein a firm sells a new product (much of 44%. In more recent analysis, we find that a competitive the customer-related Wom that we see in the market environment further enhances the importance of opinion is associated with the growth of some form of a new leaders. product), has some current customers (which we label adopters), and aims to acquire more. We use the term Customer Social profitability new product in a broad sense: It can be a durable good, Before getting to the value of opinion leaders, we need to a service, or even a behavior that the firm wants to consider how to measure the social value of customers drive (e.g., online banking). It can also be a new version in general. Here we tie the measurement of social value of an existing product, yet still new for customers. to what turns out to be the central metrics of modern It is the uncertainty and possible risk associated with marketing: customer Lifetime Value (cLV) and customer new products that makes Wom a major driver of their equity. growth. cLV represents the expected profit or loss of a firm consider a current customer named mr. smith. mr. smith from a customer, measured by the present value of has the potential to provide the firm with “social value” the expected customer’s cash stream over a future via one of three major avenues: relationship time period. an important input for cLV is the discount factor, which helps translate future money Incremental customers. mr. smith can help the firm to to today’s value. the idea that a future cash stream acquire, via Wom, customers that otherwise would needs to be discounted is a basic element of financial not have adopted. since each customer acquired has a management, and as we will show, has an important direct lifetime value, one can argue that the social value role in calculating the social value of opinion leaders. the of smith is the sum of lifetime value of these customers. discount rate is not only a function of interest rates in the this approach is probably the one most widely used by economy and the return on alternative investments, but marketing professionals, though often it is not the lifetime also of the risk associated with the specific industry. value of the extra customers being considered, but rather only short-range (e.g., next year) profits. Copyright © ESOMAR 2009 8

WORLDWIDE MULTI MEDIA MEASUREMENT 2009 pART 5 / THE pOWER OF SOCIAL MEDIA there are two challenges to the incremental customers by providing Wom to others, a customer accelerates approach. the first is that, in practice, it typically counts the process of adoption of the new product. this takes only the customers that mr. smith has actually affected into account the fact that that even if we assume that (the “first degree of separation”). Yet, these customers all customers eventually adopt, the absence of smith’s may in their turn add other incremental customers, and Wom will slow down the process as it will take some the process can continue further on. therefore, the value customers time to be affected by alternative sources. of mr. smith to the firm is actually higher when taking Given that customers may eventually adopt and their into account further degrees of separation. However, lifetime value taken into account, one might wonder if measurement of the full “ripple” effect is not trivial. the the delay due to the absence of one individual could reader may want to look at Hogan, Lemon, and Libai have a notable impact. Hogan, Lemon, and Libai (2003) (2004) for an approach to dealing with the calculation have used the acceleration effect to calculate Wom of a full ripple effect. value at the aggregate level, and have shown that it the other challenge to incremental customers relates to is indeed sizeable, especially in the early part of the their use. It may be argued that in many cases, people product life cycle. will eventually adopt the product without mr. smith. to see the intuition, consider a case wherein mr. smith customers are connected to multiple social networks, “disappears” and stops affecting others via word of and are affected by mass media, so eventually, if the mouth. this will alter the whole ripple effect otherwise product fits them well, they will get it anyhow. therefore, created by mr. smith. not only might adoption by it is not clear if it is justified to allocate the lifetime value those close to smith in the social system be delayed, of customers specifically to smith. but further degrees of separation may be delayed Marketing cost reduction. a certain version of the subsequently (of course, the extent depends on the exact incremental customer approach is to argue that if not structure of the social system and the nature of the acquired via Wom, customers would be acquired via product). For each adoption that is delayed, the lifetime marketing actions such as advertising. (there are other value of this late adopter is affected via the discount rate. marketing actions such as direct mail, store promotions, overall, the effect on customer equity can be substantial. and salespeople. For our purpose here, all are grouped Following the above, because of the possible long-range under the label “advertising”). therefore, instead of the effect of Wom, and due to the fact that in the absence lifetime value of the incremental customers, the savings in of a particular individual other means of communication advertising are added (Kumar, peterson, and Leon 2007). may compensate, we suggest that the way to analyze one could ask of course if advertising actually substitutes the social value of customers is to “take them out” for word of mouth. In the absence of mr. smith, some of the system, and observe the effect on profitability. consumers may eventually adopt based on word of thus, the social value of a customer can be assessed mouth from people other than mr. smith. For many, as the effect that the absence of this customer has on advertising may not be relevant at all: the large body the firm’s customer equity, beyond its direct lifetime of research on new product adoption suggests that a value. the measurement of customer equity before and considerable part of the market may not adopt a new after mr. smith “disappears” will take into account the product without some kind of social effects by others. acceleration effect, as well as any incremental acquisition While advertising can clearly support the Wom process, or advertising savings, and in all degrees of separation. it is not clear that it can replace it. The role of opinion leaders Acceleration. the third approach has had less exposure to examine the question of opinion leaders, we need to date, yet can be of much effect. the basic idea is that to build a social system wherein an individual is an Copyright © ESOMAR 2009 9

WORLDWIDE MULTI MEDIA MEASUREMENT 2009 pART 5 / THE pOWER OF SOCIAL MEDIA opinion leader, and then “take him out” to see the impact. the other is to target influencers, who have a stronger However, herein we are interested in a comparison to an effect on others via their large social networks, as well ordinary person in the social system. so the differential as their persuasiveness. some methods to get to such effect of opinion leaders is the customer equity opinion leaders include programs for identification of difference between a case wherein they are part of the and communications with influencers; recruitment social system, and the case wherein non-opinion leaders of influencers as agents in Wom programs; and the would be part of the social system in their stead. establishment of “brand communities”. such efforts may be costly; to justify them, one needs to understand the two dimensions whereby opinion leaders have to what extent the social value of an influencer is higher been historically characterized are connectivity and than that of a random customer. persuasiveness (see for example Goldenberg et al, 2006). the first is related to how many others they have the simulation we present next is part of an ongoing in their social system; the second considers to what research effort to explore the social value of customers. extent they have a stronger impact on individual others, as part of this effort, simulations will be used to examine for example through their expertise or their interest in optimal investment in Wom programs, the interaction of the subject. We will use both dimensions to construct Wom and advertising, the impact of competition on the an “opinion leader” in the following analysis. social value of customers, and related issues. Herein, however, we examine one question only: Given that a We will examine the case of a group of customers single seller that decides to affect the adoption of a group connected in a social network that together form a of customers, what will be the differential effect if it does “social system”. a firm introduces a new product, and so via opinion leaders vs. random customers? We do this social system gradually adopts it. From the firm’s not look at the costs of these programs or any other perspective, an individual’s adoption means a certain marketing effort, so we will answer questions based expected lifetime value. due to the discount rate, later on optimal investments. our simulation will focus on adopters are worth less today. the acceleration effect, i.e., we assume that the market potential users become adopters following one of two potential has been correctly identified, and thus eventually influences. First, there is a certain probability that an all potential customers may adopt the new product. individual will adopt based on advertising. second, We consider a social system with 2,000 members. via word of mouth, each adopter has a probability of to assign members to social networks in a realistic affecting non-adopters in his or her social system. way, we were assisted by the Keller Fay Group’s Beyond advertising, the firm may choose to create a talktrack®, discussed above. using talktrack® data on seeding marketing program that will impact word of the distribution of social networks, we built a similar mouth and accelerate adoption. the firm may choose a distribution of social networks for our analysis. number of potential adopters and affect their adoption the members of this social system, whom we label behavior via word-of-mouth programs, i.e., by giving influencers or opinion leaders, are a group of customers them samples and/or exposing them to information in the top 10% in terms of their social system sizes, about the brand, or promotions. the expectation is that which have been found to be about three times the if these customers adopt, it will create Wom processes surveyed average. We also assume that they have that will bring further adoption. We label this group of stronger brand-related impact. using the talktrack® targeted customers ‘seeds’. studies, Keller Fay found that catalysts, the group that the firm faces two alternatives in this regard: one is to influences others most, discuss brands twice as much acquire potential customers to the program randomly. on average compared to others. Following these findings, Copyright © ESOMAR 2009 10

WORLDWIDE MULTI MEDIA MEASUREMENT 2009 pART 5 / THE pOWER OF SOCIAL MEDIA and interviews with professionals in the Wom marketing leaders. columns 5 and 6 are the improvement of the industry, we decided to assign a double persuasiveness two programs over the no-program option. score to opinion leaders. a number of insights can be gained from these other parameters we used relate to the average effect results: of advertising and Wom on individuals, i.e., what is the a) Wom programs to encourage early adoption have probability that an individual will be affected by Wom a considerable effect on profitability. even if random or by advertising in a single period (say a year), and customers are chosen, the increase of customer equity ultimately adopt the product? We relied on previous over the no-program option is substantial. of course, one academic research in this area that established a range would have to examine the costs of such programs to of value for parameters in such simulations. For details, determine net profit. see Goldenberg, Libai, and muller (2001). b) However, getting to influencers in the Wom program We used a yearly 10% discount rate that is consistent with yields higher customer equity than do random previous studies of customer profitability. For simplicity, customers. the absolute difference between the two we assumed that an adopting customer brings the firm options increases for larger programs (3%-7% of the one unit of lifetime value (because we do not consider population) compared with small programs (0.5%-1% of costs here, the exact sum is of less importance). the population). For the larger programs, the difference between the two options in terms of customer equity is Results around 14%. the main results are presented at table 2. c) acceleration matters. note that we did not make any Looking at table 2, the left-hand column reflects the assumptions that customers will not adopt without the size of the seeding program as a percentage of the program. thus, we believe our results are conservative total population. We consider programs that use from regarding the contribution of the Wom program: If there 0.5% to 7% of the population. column 2 presents the is incremental customer acquisition, we expect the customer equity (long-range profitability) if there is no word of mouth effect to grow. Wom program. column 3 is the customer equity if the d) We see a diminishing effect of additional members in program recruits customers randomly (among them, the program. While the profits from the Wom programs of course, possible opinion leaders). column 4 is the increase with the size of the program, the effective- customer equity if the program includes only opinion ness of each dollar invested goes down. consider the TABLE 2 LONG-RANGE pROFITABILITY UNDER vARIOUS SEEDING OpTIONS 1 2 3 4 5 6 proportion of Customer Equity Customer Equity Customer Equity Improvement Improvement Seeding No program Random Seeding Influencer Random Seeding Influencer Seeding Seeding 0.5% 880 923.9 979.3 5.0% 11.3% 1% 880 961.1 1033.4 9.2% 17.4% 3% 880 1040.4 1157.4 18.2% 31.5% 5% 880 1100.2 1225.6 25.0% 39.3% 7% 880 1146.7 1268.5 30.3% 44.2% Copyright © ESOMAR 2009 11

WORLDWIDE MULTI MEDIA MEASUREMENT 2009 pART 5 / THE pOWER OF SOCIAL MEDIA improvement in influencer seeding in table 2. With a 0.5% References program, customer equity improvement is 11.3%. With a Goldenberg, Jacob; Donald R. Lehmann; Daniella Shidlovski; and Michal Master Barak (2006), “the role of expert versus social 1% program, improvement is 17.4%, which is less than opinion Leaders in new product adoption”, Marketing Science double. the meaning is that the social value of different Institute. Paper [06-124]. customers is not additive to the social equity of the group. the reason may relate to possible overlap among Hogan, John E.; Katherine N. Lemon; and Barak Libai (2003), program members in terms of social networks. this “What is the real Value of a Lost customer?” Journal of Service Research, 5(3), 196-208. diminishing returns phenomenon can help marketers plan what would be the optimal investment in Wom programs. Hogan, John E.; Katherine N. Lemon; and Barak Libai (2004), e) the next step is to move the measurement to a “Quantifying the ripple: Word of mouth and advertising competitive scenario in which a person may be affected effectiveness”, Journal of Advertising Research, 44(3), 271-280. by more than one brand. Initial simulations we con- Keller, Ed and Jon Berry (2003), the Influentials: one american ducted confirm the basic results we present here also in ten tells the other nine How to Vote, Where to eat and What in a competitive environment. In fact, that relative role to Buy. new York: Free press. of opinion leaders programs is even stronger under Keller, Ed, Brad Fay and Jon Berry (2007), “Leading the competition, which helps to explain the ubiquity of such conversation: Influencers’ Impact on Word of mouth and efforts. the Brand conversation.” Measuring Word of Mouth: Current Thinking on Research and Measurement of Word of Mouth CONCLUSIONS Marketing, pp 173-181. Womma: using simple simulations integrated with empirical Keller, Ed and Brad Fay (2008) “comparing online and offline data from the talktrack® system, we find that seeding Word of mouth: Quantity, Quality, and Impact,” Measuring Word the market with opinion leader programs can have of Mouth: Current Thinking on Research and Measurement of substantial impact on the long-range profitability of firms. Word of Mouth Marketing, pp 91 – 103. Womma. Hence, generalized claims that influencer programs are Kumar, V.; Andrew Petersen; and Robert P. Leone (2007), “How a waste of money may not reflect well the market reality. Valuable Is Word of mouth?” Harvard Business Review, 85(10), one take from the above is that in order to realize the 139-146. potential of the social value of customers, marketers PQ Media, Alternative Media Forecast: 2008-2011. Found at need to take into account the full effect on customer .http://www.pqmedia.com/alternative-media-forecast-2008. equity, and not use proxies and short-term measures, html which may be misleading. Watts, Duncan J. (2007), “the accidental Influentials,” Harvard Business Review, February, 2007, pp 22-23. Watts, Duncan J. and Peter Sheridan Dodds (2007),”Influencers, networks, and public opinion Formation”, Journal of Consumer Research, 34(4), 441-458. The Authors Ed Keller is CEO, Keller Fay Group, United States. Barak Libai is Associate Professor of Marketing, Recanati Graduate School of Business, Faculty of Management, Tel Aviv University, Israel. Copyright © ESOMAR 2009 12

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A Holistic Approach to the Measurement of WOM

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A Holistic Approach to the Measurement of WOM — Document Transcript