Study finds word-of-mouth's impact on loyalty

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By: Wise Marketer Staff |

Posted on March 24, 2009

In an unfavourable economic climate, companies must focus more than ever on superior customer experiences that retain customers and create positive word-of-mouth (WoM), according to the findings of a Net Promoter-based study into the B2C wireless market by Satmetrix.

The study examined the financial impact of both positive and negative WoM, and highlighted the impact that customer loyalty and WoM can have on a company's brand and bottom line.

The study was based on the Net Promoter Economic Framework, which determines total customer value based on buyer and referral behaviours of 'promoters' (customers who are likely to recommend the company or its products) and 'detractors' (customers who are unlikely to recommend the company or its products). For the study, 'buyer economics' refers to how much a customer spends over a given period of time, and 'referral economics' refers to the amount of new business that is gained or lost as a result of the customer telling others about their experience.

Applying this framework to the wireless industry, the 'Net Promoter Economics: The Impact of Word of Mouth' study discovered that each promoter was worth approximately US$1,700 and accounted for approximately one-half of a new customer acquired through positive word-of-mouth.

By comparison, each detractor accounted for the loss of 1.3 new customers through negative word-of-mouth. The lost business associated with these negative referrals was found to undo the entire value of the detractor's own purchase behaviour as well as causing the loss of a further US$300 (so a detractor is worth US$2,000 less than a promoter).

"While reported spending did not differ between promoters and detractors, the detractors' negative behaviour represents a significant hidden cost and a net drain on the bottom line," explained Dr Vince Nowinksi, director of methodology for Satmetrix.

"A company's ability to take action to increase promoters and reduce detractors has a significant impact on financial performance," concluded Dr Laura Brooks, vice president of business consulting and methodology for Satmetrix. "Companies with a business strategy focused on the customer experience tend to enjoy stronger brand affinity, improved customer retention, and increased growth."

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