Say What? How Customer Word of Mouth Impacts the Bottom Line

Customer Strategy
Customer Experience

As most marketers have seen, the power of word of mouth is spreading like wildfire. Every day there seems to be more research, news, blogs, etc., reporting that it is the most powerful and trusted marketing source.

According to a study by Forrester Research, the Nielsen Company, and Vizu Corporation, approximately 80 percent of customers trust word of mouth more than any other kind of information when evaluating potential purchases. Despite the evolution of advertising and marketing channels, today's consumers are still much more likely to trust a family member, friend, or peer's referral than direct sales and advertising messages.

Generally speaking, the promise of word of mouth is quite simple. As the Word of Mouth Marketing Association (WOMMA) states, "It's harnessing the voice of the customer for the good of the brand." In other words, it's about creating loyal customers and empowering them to speak positively about your company and products to generate more business. We can all agree that word of mouth is valuable, but what is it really worth to your company?

Recently, my team and I set out to examine customer word of mouth behaviors and quantify them in the larger economic picture that links loyalty and growth. To this end, we've developed an economic framework based on Net Promoter. If you aren't familiar with Net Promoter, it is a metric that assesses customer loyalty by taking the percent of Promoters (those who are highly likely to recommend your company and/or its products) and subtracts the percentage of detractors (those who are unlikely to recommend the same). Companies such as IBM, GE, eBay, and Intuit are finding it to be an effective approach to engage customers, create loyalists, and increase positive word of mouth.

Based on our findings, we created the Net Promoter WOM Economic Framework to better understand and predict a customer's total financial value. The model is based on two factors: buyer and referral economics. Buyer economics refers to how much a customer spends over a given period of time, while referral economics refers to the amount of new business that is gained or lost as a function of the opinions that customer shares with others.

Total Customer Value = Buyer Economics + Referral Economics
Applying the model to the consumer computer hardware industry yielded interesting results. Overall, we learned that promoters are more likely to repurchase, buy more, and spend more. In addition, they tend to refer at a high rate. The 78 percent of promoters who refer will recommend their chosen vendor to approximately four other people within a 12-month period.

Conversely, we learned that detractors are less likely to spend than their promoter counterparts, and while they are less likely to talk about their negative experiences (roughly a third will actively try to dissuade others from doing business with their chosen vendor), they speak to a slightly larger number of people (4.2 over a year).

Quantifying these differences helps to make the financial impact of these behaviors much more concrete. For instance, within the computer hardware industry we estimated that each promoter was worth $2,634. This figure is derived from their additional spend of $203 above the industry average ($1,615), as well as the impact of their positive referrals, which yield roughly half an additional customer per year.

By contrast, we estimated that the total customer worth for each detractor was only $105, a whopping $2,500 less than their promoter counterparts, and this is without taking into account the cost to acquire and service detractors. We arrived at this figure using a combination of their annual spend ($158 less than the industry average) as well as the impact of their negative word-of-mouth behaviors, which amount to 84 percent of a new customers lost each year. Put another way, the lost business associated with their negative referrals subtracts nearly the entire value of their purchase behavior.

There were many interesting aspects learned from our study, but the major finding was the significant financial impact of word-of-mouth behaviors. It helps to illustrate the hidden but meaningful economic impact that customer referrals-both positive and negative-have on corporate revenues.

As marketers, we hope that loyal customers will speak positively about our company and products. Borrowing from WOMMA again, we need to "acknowledge that the unsatisfied customer is equally powerful," and engage detractors so as to move them up the loyalty chain. Leveraging promoters, while minimizing the obstacles that create detractors, are essential tasks for any business hoping to maximize present and future value.

About the author: Dr. Laura Brooks is vice president of business consulting and methodology at Satmetrix.