Word-of-mouth is one of the most powerful and trusted marketing sources, and brand promoters may be worth more than was previously thought, according to a study by Satmetrix Systems of the financial impact of positive and negative customer word-of-mouth.
The study, entitled 'Net Promoter Economics: The Impact of Word of Mouth', is the first in a series and focused on the business-to-consumer (B2C) computer hardware market.
Measuring WOM's impact
"Word-of-mouth is one of the most powerful and trusted marketing sources, but measuring and more importantly, understanding its financial impact hasn't exactly been clear cut," explained Richard Owen, CEO for Satmetrix. "This study did that by examining customer behaviours and quantifying them in a larger economic picture that links loyalty with growth."
Using its Net Promoter Score (NPS) discipline, Satmetrix showed how customers impact the bottom line through their buying and referral behaviours. Co-developed by Satmetrix and Bain & Company Fellow, Fred Reichheld, Net Promoter categorises customers into two groups: 'Promoters' (i.e. those who are highly likely to recommend the company and/or its products) and 'Detractors' (i.e. those who are unlikely to recommend the company and/or products). The combined result is a single metric that serves as an indicator of customer loyalty and long-term growth.
New WOM framework
Building on Net Promoter, Satmetrix has now developed the Net Promoter WOM Economic Framework, which determines total customer value based on 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 what the customer shares with others.
"When customer experiences are positive and loyalty is high we expect customers to spend more on average and to generate new business via positive word-of-mouth. Conversely, when customer experience is poor and loyalty is low we expect lower purchasing value (and perhaps even defection), as well as the potential loss of new business through negative word-of-mouth," explained Dr Vince Nowinski, principal methodologist for Satmetrix.
Value of promoters and detractors
Recently, in applying the new framework to the computer hardware industry, Nowinski discovered that each Promoter was worth approximately US$2,634. Promoters actually spend an average of US$203 more than the industry average of US$1,615, and account for an average of about 50% of new customers acquired through positive word-of-mouth.
In contrast, each Detractor can cost a business up to 0.84% of new customers through negative word-of-mouth. The lost business associated with these customers' negative referrals cancels out nearly the entire value of their purchase behaviour, leaving a total customer worth for Detractors of just over US$100 - some US$2,500 less than Promoters. So, according to Nowinski, while average Detractor spending lags behind the average customer by only US$158, their negative word-of-mouth behaviour represents a significant hidden cost and a drain on future revenue.