UNC Kenan-Flagler Insights

How to harness the power of word-of-mouth marketing

April 25, 2011 By Heather Harreld

wordofmouthmarketingThe best way to reach customers? Personal referrals. So Harness the power of word-of-mouth marketing – and get ready to meet new people.

By Margot Carmichael Lester

There’s a lot of buzz about using social media to reach customers and prospects — and almost as much confusion about how to do it. New research by J. Andrew Petersen, assistant professor of marketing and assistant director for the Center for Integrated Marketing and Sales, indicates that B2C companies can get the most benefit by using social channels to drive referrals.

“Word-of-mouth and referral marketing are extremely interesting topics to most B2C firms right now, given the rise of social networking among consumers,” Petersen said. “I think the appeal is how fast word can move through a social network and create enormous value — at a relatively inexpensive marketing investment.”

One effective way to leverage the power of social networking is through consumer recommendations.

“Your most valuable customers are often those who make regular referrals,” he said. Here’s why:

The multiplier effect: The customers who join from a referral are more likely to make referrals than customers who join as a result of traditional marketing channels. They’re also “more likely to refer others who are a good fit with the company’s offerings,” he said.

Long-term value: Customers acquired through referrals are more likely to be more valuable to the firm over time than customers acquired through traditional marketing channels. Referred clients tend to be more satisfied, buy more and stay longer with the company. “The referring customer usually doesn’t want to recommend a friend to purchase unless it’s likely that the friend will find the product useful.”

Petersen studied the value of a single customer referral by looking at both direct (those referred by the original customer) and indirect (those referred by the referred customers) referrals. “The value quickly grew exponentially,” he said. “You can quickly see how if I refer two people and those two people refer two people and so on, it could lead to a lot of


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So how do you create more of these very valuable “referrers”? Here are Petersen’s tips:

1. Aim at customers who’ve only given a few referrals. The most active referrers don’t need an incentive to do what they’re already doing. “It’s like offering a coupon to a customer who was going to buy the product already without the coupon,” he said. “There’s better ROI in asking sometime referrers to suggest you to others more often.”

2. Keep referral marketing separate from product/service promotions. “Don’t mix the message with appeals for customers to make purchases for themselves,” he said. “If you just send out mass marketing to all customers, they’ll stop listening to everything you say.” This is especially important because your customers who buy the most from you are not usually the customers who create the most value from referrals. This makes it imperative to target the right customer with the right marketing message.

3. Adapt your marketing. Use the customer transaction and referral data “to improve your capabilities for predicting customer transaction and referral value,” Petersen said. “Then each future campaign can become more targeted and more effective.”