Effects of Word-of-Mouth versus Traditional Marketing: Findings from an Internet Social Networking Site

TLDR

Social network sites record electronic invitations, enabling precise tracking of outbound word‑of‑mouth. The study examines how word‑of‑mouth marketing influences member growth on an Internet social networking site and compares its impact to traditional marketing vehicles. The authors link WOM and sign‑ups, use a vector autoregressive model to address endogeneity, and compute the monetary value of a WOM referral based on advertising revenue per new member. VAR estimates reveal that WOM referrals generate longer carry‑over effects and higher response elasticities than traditional marketing actions.

Abstract

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.