Effects of Word-of-Mouth versus Traditional Marketing: Findings from an Internet Social Networking Site
University of Maryland - Robert H. Smith School of Business
Randolph E. Bucklin
UCLA Anderson School of Management
Koen H. Pauwels
April 24, 2008
Robert H. Smith School Research Paper No. RHS 06-065
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 sent out by existing members, outbound WOM may be precisely tracked. WOM, along with traditional marketing, can then be linked to the number of new members subsequently joining the site (signups). Due to the endogeneity among WOM, new signups, and traditional marketing activity, the authors employ a Vector Autoregression (VAR) modeling approach. Estimates from the VAR model show that word-of-mouth referrals have substantially longer carryover effects than traditional marketing actions. The long-run elasticity of signups with respect to WOM is estimated to be 0.53 (substantially larger than the average advertising elasticities reported in the literature) and the WOM elasticity is about 20 times higher than the elasticity for marketing events, and 30 times that of media appearances. 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 word-of-mouth.
Number of Pages in PDF File: 49
Keywords: Word-of-Mouth Marketing, Internet, Social Networks, Vector Autoregression
JEL Classification: M31, B23, C22, C32
Date posted: May 8, 2008 ; Last revised: June 19, 2014
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