After working in key Public Relations positions for many years, from managing the PR departments of national TV channels to handling the communication of major clients for my PR agency, I am the strongest proponent of Word of Mouth Communication – Why? It simply makes sense.
Let’s proceed and put the assumption that ‘Word of Mouth’ Marketing is the strongest form of communication into test, with your own personal experiences.
How Referrals work, in YOUR everyday life:
• How often do you take the recommendations of a friend on which restaurant or hote l to visit – versus an advertisement in a magazine or a billboard you have seen in the street?
• How many times have you caught yourself saying to a friend ‘I’ve seen it in the news’ (hence its considered to be true) versus the number of times you mentioned to your friends an advertisement you have seen on TV which has made an impression on you?
• Now try to remember one advertisement that you have seen during the past 48 hours which has made an impression on you – anything coming up? Then try to remember something that a friend suggested either personally to you during the past 48 hours or via their Facebook or Twitter status, while describing an experience that they recently had (ie ‘I was at X hotel last weekend having an amazing time!’). Which of the two made a more lasting impression to you?
• Finally, let us examine the popular Facebook case study and how it applies to YOU. Had you heard of Facebook 6 years ago? Of course not, because it was just being ‘launched’ by Mark Zuckerberg and his college roommates as a social network for Harvard students. Now try to remember how you joined Facebook. You have probably received e-mail invitations from one or more friends inviting you to their page in a new ‘social network’. Or you heard so many people talking about it that you decided to check it out yourself. Or you simply just gave in to peer pressure – everyone was on it, why not you! Facebook is now one of the most successful internet case studies with more than 500 million active users in July 2010 due to the recommendations of you and your friends!
Social Media and WOM Marketing
With the advent of the internet and the development of the social media as a part of our daily lives, Word of Mouth Communication is proving more and more each day to be a very profitable way of promoting products and services.
About a year ago I was introduced for the first time to Network Marketing which uses Word of Mouth communication and referral fees to promote products or services. After studying this system of marketing, I realized the amazing potential of this industry which is constantly creating extraordinary incomes for ordinary people who choose to become great at the art of ‘Word of Mouth Marketing’ especially by utilizing – together with more traditional WOM methods – the recent trend toward viral or social marketing.
How does WOM Marketing Work?
To understand how referral marketing works, let’s make a simple assumption: you are very loyal to your hairdresser, very satisfied with their work and you are a frequent visitor at their salon. Suppose that your hairstylist suggested to pay you 20 dollars for every new person you recommend as a client and then 20% of the value of whatever amount of money this new customer spends at the salon for their entire customer lifetime. Wouldn’t you be more inclined to recommend your hairstylist to your friends with excitement or even make new friends so that you would recommend your hairstylist to them?
This is the reason that referral programs have become increasingly popular the last few years as a means of promoting products and services from all kinds of industries, from cosmetics and nutritional products to travel and financial services.
Customer referral programs are a form of stimulated WOM that provide incentives to existing customers to bring in new customers. The key idea is to use the social connections of existing customers with non-customers to convert the latter. To make this conversion happen, the firm offers the existing customer a reward for bringing in new customers.
According to a new study titled ‘Referral Programs and Customer Value’ (to be published in the January 2011 issue of the American Marketing Association’s Journal of Marketing), customer referral programs are indeed a financially attractive way for companies to acquire new customers. The study was conducted over a period of three years and followed the customer referral program of a leading German bank that paid customers 25 Euros for each new customer they brought in.
The study attempted to investigate to what extent referred customers are more profitable and more loyal than others. Tracking approximately 10,000 customers of the bank for almost three years, the study went on to conclude that referred customers have a higher contribution margin, have a higher retention rate, are more valuable both in the short and long run.
Normally when you recommend a product or service to a friend, you would know which friends would be mostly interested for which product or service, so you are probably more targeted and referring the ‘best-match’ for this product or service. Longer customer retention of referral customers is also due to the fact that people tend to have a stronger attachment to an organization if their friends or acquaintances share a bond to the same establishment.
Of course there are negatives in referral programs such as the fact that there will be opportunistic customers who might abuse such programs bringing in unprofitable new customers just to earn a referral fee or the fact that targeted prospects are usually suspicious of stimulated WOM efforts, since such efforts often involve a monetary reward for the referrer who as a result may seem less trustworthy.
However, the study shows that the benefits of a customer referral program can outweigh such negatives, making the programs pay off financially. Referred customers prove to be more valuable in both the short and long run.
Why does a study on the financial benefits of customer referral programs make sense now more than ever? The recent trend toward viral, or social marketing is one reason, but there is also a general belief in the market, that the ROI on traditional marketing methods has been decreasing. Consequently, companies feel that they must find new ways to gain a bigger return out of their marketing money.