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

49 Pages Posted: 8 May 2008 Last revised: 19 Jun 2014

Michael Trusov

University of Maryland - Robert H. Smith School of Business

Randolph E. Bucklin

UCLA Anderson School of Management

Koen H. Pauwels

Ozyegin University

Date Written: April 24, 2008

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 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.

Keywords: Word-of-Mouth Marketing, Internet, Social Networks, Vector Autoregression

JEL Classification: M31, B23, C22, C32

Suggested Citation

Trusov, Michael and Bucklin, Randolph E. and Pauwels, Koen H., Effects of Word-of-Mouth versus Traditional Marketing: Findings from an Internet Social Networking Site (April 24, 2008). Robert H. Smith School Research Paper No. RHS 06-065. Available at SSRN: https://ssrn.com/abstract=1129351 or http://dx.doi.org/10.2139/ssrn.1129351

Michael Trusov (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742
United States
(301) 405-5878 (Phone)
(301) 405-0146 (Fax)

HOME PAGE: http://www.emodeler.us

Randolph E. Bucklin

UCLA Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
310-825-7339 (Phone)

Koen H. Pauwels

Ozyegin University ( email )

Kusbakisi Cd. No: 2
Altunizade, Uskudar
Istanbul, 34662
Turkey

HOME PAGE: http://www.marketdashboards.com

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