Professional Documents
Culture Documents
Networking Site
Author(s): Michael Trusov, Randolph E. Bucklin and Koen Pauwels
Source: Journal of Marketing, Vol. 73, No. 5 (Sep., 2009), pp. 90-102
Published by: American Marketing Association
Stable URL: http://www.jstor.org/stable/20619048
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The authors study the effect of word-of-mouth (WOM) marketing on member growth at an Internet social networking
site and compare it with traditional marketing vehicles. Because social network sites record the electronic invitations
from existing members, outbound WOM can be precisely tracked. Along with traditional marketing, WOM can then
be linked to the number of new members subsequently joining the site (sign-ups). Because of the endogeneity
among WOM, new sign-ups, and traditional marketing activity, the authors employ a vector autoregressive (VAR)
modeling approach. Estimates from the VAR model show that WOM referrals have substantially longer carryover
effects than traditional marketing actions and produce substantially higher response elasticities. Based on revenue
from advertising impressions served to a new member, the monetary value of a WOM referral can be calculated;
this yields an upper-bound estimate for the financial incentives the firm might offer to stimulate WOM.
Keywords: word-of-mouth marketing, Internet, social networks, vector autoregression
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zlin 2004).
Research Background
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TABLE 1
Comparison of Empirical Studies on the Effectiveness of WOM
WOM Inference
Initial (Katz and
most studies
Self-report from
surveys
Indirect Effects
of WOM and/or
Customer Acquisition Traditional Marketing Traditional Marketing
Effect of WOM on
Comparison with
reports on relative
influence
Not analyzed
personal selling,
seven times more
than print
advertisements
Customer lifetime value
Hanssens 2008)
customer's self-report
Not analyzed
Customers acquired
through WOM add
value of customers
acquired through
Customers acquired
through WOM spread
more WOM and bring
in twice as many new
customers
traditional marketing
Social contagion
(Coleman, Katz, and
Menzel 1966; Van
2006)
Not analyzed
Directly: person's
Expected
None
Not analyzed
setting
transmitter's decision
None
Not analyzed
None
Not analyzed
Compare immediate
Demonstrate indirect
decision to transmit
the model
responsiveness of
WOM in experimental WOM recipient drives
to pass WOM
Higher number of
reviews leads to
higher relative sales
Directly: though
Directly: through
referrals sent
e-mails sent
2008)
This article
disappear when
traditional marketing
effects are included in
2001)
(Stephen and
Lehmann 2008)
Contagion effects
traditional marketing
Determinants of WOM
transmissions
Difficult to attribute
observed contagion
to WOM versus
indirect effects of
of WOM and
traditional marketing
WOM activity
sites each have more than one million registered users, and
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Modeling Approach
indicate).
The links represented in Figure 2 can be tested by inves
FIGURE 1
FIGURE 2
Modeling Framework
flMf/* Hotmair
m^tmiml
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the Appendix).
new sign-ups.)
Tests for both endogeneity and evolution enable us to
specify the VAR model in Equation 1. In this model, new
sign-ups and marketing actions are endogenous?that is,
they are explained by their own past and the past of the
other endogenous variables (Dekimpe and Hanssens 1999).
Specifically, the vector of endogenous variables?sign-ups
(Y), WOM referrals (X), media appearances (M), and pro
by
(1)
Tx
xH + D
Ym
XT +
M,
LVEJ
JE J
L"E J
& Hi ?4
& & <t>23 <>24
i=i
Hi
)>32
<t>33 4>34
't-j
Je.
fcY,t
DX,t
M,_j
DM,t
DE,t
2 A wrong choice for the number of lags in the test may erro
neously conclude the absence of Granger causality (e.g., Hanssens
1980). Because we are applying these tests to investigate the need
causality.
Empirical Analysis
Data Description
We applied our model to data from one of the major social
networking sites, which prefers to remain anonymous. The
data set contains 36 weeks of the daily number of sign-ups
and referrals (provided to us by the company) along with
marketing events and media activity (obtained from third
party sources). The data cover the period in 2005 from Feb
ruary 1 to October 16. Table 2 provides descriptive statistics
for the variables.
TABLE 2
Descriptive Statistics (Daily Data)
Maxi- Mini
M Mdn mum mum SD
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Equation 1).
actions.
(for details, see the Appendix). The IRFs trace the incre
mental effect of a one-standard-deviation shock in WOM,
events, and media on the future values of sign-ups. These
enable us to examine the carryover effects of each activity
on sign-ups while fully accounting for the indirect effects of
these activities in a dynamic system. Figure 4 plots the three
IRFs for the effect of WOM referrals, media, and events on
FIGURE 3
Model Fit: Tracking Plot
Model Estimation
We estimated the VAR model of Equation 1 with two lags
(the optimal lag length selected by the Akaike information
criterion) and found good model fit (e.g., R2 = .89). We also
TABLE 3
Results of the Granger Causality Tests (Minimum
Dependent
Variable Is
cance level.
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FIGURE 4
TABLE 4
3n
2.5
.S> 1.5
co
?i
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Days
o> 1.5
Q.
ii
55
? IT I
Z
.5
1 3x5-T^3TriTlTl7 19 21 23 25 27 29
Days
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TABLE 5
In-Sample and Out-of-Sample Performance for Alternative Models
Managerial Implications
Managers should be able to make use of our research in
several ways. These include obtaining improved metrics for
for events and media obtained from the VAR model (Table
4Van den Bulte and Lilien (2001) raise the question whether
WOM effects are significant after marketing actions are accounted
for in a contagion model. To investigate this further, we estimated
two additional VAR models. In the first, we dropped the traditional
marketing variables, media and events, leaving all else unchanged.
nity to test and refine the message. The firm could also
Word-of-Mouth Versus Traditional Marketing / 97
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WOM.
WOM programs.
Conclusion
The purpose of this study was to increase the understanding
of the effects of WOM marketing by taking advantage of
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personal search.
Finally, our model is in a reduced as opposed to struc
tural form. This implies that the long-term impact calcula
new customers and that WOM can have larger and longer
lasting effects than traditional marketing activity.
(A2) Yt = ??wX,
_, + ? ?2 mMt _ m + ? ?3,?Et _ ?
/ = 1 m = 1 n = 1
i=i
j=i
Bass model are obtained only if the data include the peak
for the noncumulative adoption curve, which is difficult to
Appendix
Testing for Evolution or Stationarity: Unit-Root
Tests
+ 5>jYt-J+Er
j=l
1986).
Z 6
where
t = day index,
m = number of eventual members (market capacity),
p = coefficient of innovation (external influence),
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l m
\ 6
+ ?2Et' i+]TYidi+eHt'
= i
where
AY X
Model Comparison
observations).
6In our data set, the ratio of daily average number of sign-ups to
the daily average number of WOM referrals is close to one (Table
2). Accordingly, the estimation of long-term marginal effect of
WOM (.52) appears to be not significantly different from the esti
mation of WOM elasticity (.53). Additional details on the simula
tion and estimation of alternative models are available on request.
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REFERENCES
University.
Box, George E.P. and Gwilym M. Jenkins (1970), Time Series
Analysis: Forecasting and Control. San Francisco: Holden
Day.
241-63.
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293-306.
617-29.
B3A.
org/wiki/List_of_social_networking_websites].
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