Word-of-mouth programs show short-, long-term effectiveness: study

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Word-of-mouth marketing programs are effective in both the short and long term, showing up to a 60% return on investment, according to an academic study.

Word-of-mouth referral programs bring new customers in cheaply, and those customers prove more loyal, according to researchers from the Wharton School at the University of Pennsylvania and Goethe University in Frankfurt, Germany. The researchers studied the long-term value of customers gained by a German bank that gave customers a 25-Euro bonus for each referral. The researchers studied a database of 10,000 bank customers, half of them brought in via the referral bonus, over nearly three years.

Managers trying to boost their return on marketing investment are frustrated by doubts about the benefits of word-of-mouth programs, says the study. However, the researchers tallied the value of referred customers and found it's higher than that of other customers, and the difference in value more than makes up for the cost of the bonus.

Referrals work in the short term, because people tend to believe others like them, and they won't recommend a product they don't like themselves, said Christophe Van den Bulte, a professor at Wharton, via e-mail.

However, the study also found that new customers were more loyal in the long term. Unhappy customers will ask friends for alternatives, and a customer is bound to like what his or her friends like, too, said Van den Bulte.

“It is the psychological principle behind ‘friends of my friends are my friends,'” he said.

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