Barak Libai lecture WIM UK April 2010


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Professor Barak Libai of Tel Aviv University looks at the latest research into the value and ROI of consumer WOM.

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Barak Libai lecture WIM UK April 2010

  1. 1. Prof. Barak LibaiProf. Barak Libai 1 ASSESSING THE VALUE OF CUSTOMERS’ WORD–OF–MOUTH Prof. Barak Libai Tel Aviv University WOM UK , London, April 2010
  2. 2. By 2010, most mangers are informed about the power of customer word of mouth
  3. 3. Prof. Barak Libai We also know that assessing the economic contribution of word of mouth is critical  Understanding the real value of customers What is the “social value” of a person?
  4. 4. Prof. Barak Libai 4 value of advertisingrealUnderstanding the
  5. 5. Prof. Barak Libai 5 • Valuing investments in social networks and social media in general  Planning and valuing WOM campaigns  E.g., should we target “influentials”?
  6. 6. Prof. Barak Libai Yet for many, the way WOM turns into ROI stays a mystery
  7. 7. Prof. Barak Libai 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 effect on the value of the cash flows from other customers  We need to see the larger network. Because word of mouth creates a complex effect, its impact should take into account the larger social system, and not only close neighbors  We want to understand the value of time.  Early is often MUCH better.
  8. 8. The value a customer brings us via WOM Current Approaches  Indirect measures  do no assess monetary value  Direct aggregate measures  Measures for a “social value” of a customer Prof. Barak Libai 8
  9. 9. Indirect measures A) How do customers talk?  Or are willing to recommend?  E.g, Net Promoter Scores Prof. Barak Libai 9
  10. 10. Prof. Barak Libai 1010 Keiningham, B Cooil, TW Andreassen, L Aksoy - Journal of Marketing, 2007 Conclusions are not straightforward
  11. 11. B) How do customers listen?  How did you hear of us? How much were you affected by word of mouth?  Possibly used with brand equity measures  Recent research found that the long term value of customers that had arrived via WOM was higher than that of customers that had arrived via advertising. Prof. Barak Libai 11
  12. 12. Direct “aggregate” measures How word of mouth affects overall sales  Experiments  Before and after a WOM campaigns  In different areas Prof. Barak Libai 12
  13. 13.  Advanced statistical regressions  Especially as data on sales, WOM activities and other customer data is available from websites  Issues of “identification”:  For example, WOM may be affected by advertising which may affect the level of WOM  People may behave the same because there are similar, or were affected by the same external phenomenon, and not because they talked Prof. Barak Libai 13
  14. 14. The problems with the previous approaches  We still do not understand the “how” in terms of value creation  Monetary value of the individual is not assessed Prof. Barak Libai 14
  15. 15. Prof. Barak Libai The “social value” of a customer  The extra monetary value a customer adds (or subtracts) to the firm due to social interactions with others  Three issues to be discussed: Lifetime Value, Network, Time
  16. 16. Issue 1: “where the money is”? Prof. Barak Libai 16
  17. 17. The “regular” profitability of customers  Customer Lifetime Value (CLV) - the net present value (NPV) of the future cash streams from a customer Prof. Barak Libai 17 Time $ $ $ $ $
  18. 18. The money that comes from a customer’s word of mouth is in other customers’ regular lifetime value! Prof. Barak Libai 18 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
  19. 19.  Often, we consider the social effect of in acquiring new customers  What is their lifetime value?  Do friends have a similar lifetime value?  But it can also be an issue of costs  E.g., via reduced customer support in online communities  A case of customer “development”- cross sell or up-sell  Or affecting the probability of customer defection  The effect of retention (defection) on customer lifetime value is very strong! Prof. Barak Libai 19 Where’s the money?
  20. 20. Reichheld: The Loyalty Effect
  21. 21. Recent research in the telecommunication industry ‫חברתית‬ ‫בתקשורת‬ ‫שיווק‬-‫פרופ‬'‫ליבאי‬ ‫ברק‬ 21 Exposure to Defecting Neighbors - Defecting and Non-Defecting Customers 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 Mar08 Apr08 May08 Jun08 Jul08 Aug08 Sep08 Oct08 Nov08 Dec08 Average number of defecting neighbors Month Defectors Non-Defectors
  22. 22. Prof. Barak Libai 22 How the social effect of a defection decreases with time
  23. 23. It can also be mere acceleration of cash flows  “Discount rate” plays a large role in customer lifetime value  A customer starting to buy today may be worth much more than a customer starting to buy later Prof. Barak Libai 23 $ $ $ $ $ $ $ $ $ $
  24. 24. My conclusion on this issue  The same way that CRM people start “talking social” Prof. Barak Libai 24  Social people should start “talking CRM”
  25. 25. Issue 2: Where is the network? Prof. Barak Libai 25
  26. 26. Prof. Barak Libai The complexity of calculating person A’s social value A B C  Is it the “lifetime value” of the people s/he affected? D
  27. 27. Prof. Barak Libai The complexity of calculating person A’s social value A B C  How many of them could we get via advertising?  If this is the case, we should look only at savings in advertising expenses D
  28. 28. Prof. Barak Libai The complexity of calculating person A’s social value A B C  Person A ’s word of mouth may create a “chain effect” beyond the neighbors D
  29. 29. Prof. Barak Libai The complexity of calculating person A’s social value 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”? D
  30. 30. Prof. Barak Libai The complexity of calculating person A’s social value A B C  Can we add the social value of A and B ? D
  31. 31. Prof. Barak Libai Conceptually, the real social value of a customer if weonlyor a group of customers) can be assessed(  Let the customer disappear  And measure the change of the net present value of the whole social system
  32. 32. Prof. Barak Libai Can it really be calculated?  We are working on it !  I’ll next present a possible approach.
  33. 33. Prof. Barak Libai Stage A- Collect data on real social networks
  34. 34. Prof. Barak Libai Stage b: Based on these networks create simple 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
  35. 35. Prof. Barak Libai 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
  36. 36. In the absence of tools such as agent based models  Try to better understand social network analysis Prof. Barak Libai 36 ‫חברתית‬ ‫בתקשורת‬ ‫שיווק‬-‫פרופ‬'‫ליבאי‬ ‫ברק‬ 4
  37. 37. Prof. Barak Libai 37 •Degree Centrality -the number of direct connections a node has •A node with high degree centrality is a “Hub” •We can also differentiate between in and out degree •Eigenvector centrality – Gives weights to the centrality of the nodes that are direct connection ( the “degree”) •Google’s “PageRank” is a variation on this •Closeness centrality – the sum of shortest paths to all others •The shorter the better •Betweenness Centrality - How many shortest paths between others pass through that person Who is important to us?
  38. 38. Issue 3: The Value of Time ? Prof. Barak Libai 38
  39. 39.  My (and others’) research has repeatedly indicated that being early in the market has long lasting effects due to word of mouth Prof. Barak Libai 39
  40. 40. Prof. Barak Libai 40 0 100 200 300 400 500 600 700 0 1 2 3 4 5 6 7 8 9 10 L o s s ($ ) Year Since Introduction Indirect effect direct effect VALUE OF ONE LOST CUSTOMER IN THE ONLINE BANKING INDUSTRY WOM Regular purchases
  41. 41. Prof. Barak Libai Some recent results on the social value of WOM “seeding” programs  Using agent based models based on 12 real networks  WOM programs create a real pioneering advantage among competitors. The social value of a program can be five time as much when a competitor does not have a program  It is very worthwhile to be first, and alone!
  42. 42. Thank you !  Questions? Prof. Barak Libai 42
  43. 43. How much value a customer creates via word of mouth?  What is “value”?  Even before that: What is “word of mouth”? Prof. Barak Libai 43
  44. 44. The classic view of “word of mouth” Prof. Barak Libai 44
  45. 45. ?Online or Offline  The vast majority of recent knowledge on social interactions comes from online environments  Yet much of the action may still be offline Prof. Barak Libai 45 Other, 2% E-mail, 3% IM/Text, 3% Chat/Blog, 1% Face-to-Face, 73% Phone, 17% Source: OMD/Keller Fay Group proprietary report based on TalkTrack®, June 5th 2006 through February 3, 2008 Source: The Keller Fay group
  46. 46. “Organic” or “Amplified”?  Can we transfer knowledge from firm incentivized campaigns to “natural” word of mouth ? Prof. Barak Libai 46 Kumar, Petersen and Leone, HBR 2007
  47. 47. What about “observational learning?”  We may be seriously under-estimating the value of social interactions! Prof. Barak Libai 47
  48. 48. I use the term “word of mouth” (WOM)  But the issues covered largely include various kinds of social interactions Prof. Barak Libai 48