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Word-of-Mouth: How Important Is It?

In an age of growing social media, it is important to understand how communication about a product affects buyers’ decision making. A growing body of research focuses on exploring this connection and has produced several relevant findings:

·         The decision to adopt a brand is affected by the information obtained from the brand’s users and by information from the competition’s users. It has been shown that within-brand communication has a larger effect on buyers’ adoption decision than cross-brand communication does. 

·         There is usually an advantage for the first entrant into the market, as their customers generate word-of-mouth about the brand. Hence, they grow at a larger rate than the competitor, who enters later and is only benefitting from the weaker effect of cross-brand communication generated from the first entrant’s customers. 

·         Later entrants to the market do often experience a faster initial growth than the first entrant. This is because the first entrant did not have the benefit of cross-brand communication.

Perhaps the key takeaway from the research, however, is that communication can be a bigger influence on the buying decision than several other factors, including: 

·         Price Differences, specifically reductions in price made by the first entrant when its competitor enters the market. 

·         Network Effects or special perks associated with adopting a particular brand (such as pricing schemes that offer lower rates for talking to other customers within that network). 

·         Improved technology that enables higher quality and lower cost, typically used by the later entrant.

·         Control of infrastructure by the first entrant who has had time to gain control over the resources before the entrance of the competition. 

 

The reminder for all of us is that customers are a strategic asset. It is important to remember to treat them as such; their word of mouth counts more than you might realize!

 

Jessica Gregory
Statistical Analyst
 

Reference: Libai, Barak, Eitan Muller, & Renana Peres.  2009.  "The Role of Within-Brand and Cross-Brand Communications in Competitive Growth," Journal of Marketing, May 2009, Volume 73 Issue 3, p19-34. 

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