By Jacques Bughin, Jonathan Doogan and Ole Jørgen Vetvik, 29 July 2010 11:22
ANALYSIS
Consumers have always valued opinions expressed directly to them. Marketers may spend millions of dollars on elaborately conceived advertising campaigns, yet often what really makes up a consumer's mind is not only simple but also free: a word-of-mouth recommendation from a trusted source. As consumers overwhelmed by product choices tune out the ever-growing barrage of traditional marketing, word of mouth cuts through the noise quickly and effectively.
Indeed, word of mouth is the primary factor behind 20 to 50 per cent of all purchasing decisions. Its influence is greatest when consumers are buying a product for the first time or when products are relatively expensive, factors that tend to make people conduct more research, seek more opinions, and deliberate longer than they otherwise would. And its influence will probably grow: the digital revolution has amplified and accelerated its reach to the point where word of mouth is no longer an act of intimate, one-on-one communication. Today, it also operates on a one-to-many basis: product reviews are posted online and opinions disseminated through social networks. Some customers even create websites or blogs to praise or punish brands.
As online communities increase in size, number and character, marketers have come to recognise word of mouth's growing importance. But measuring and managing it is far from easy. We believe that word of mouth can be dissected to understand exactly what makes it effective and that its impact can be measured using what we call "word-of-mouth equity" - an index of a brand's power to generate messages that influence the consumer's decision to purchase. Understanding how and why messages work allows marketers to craft a co-ordinated, consistent response that reaches the right people with the right content in the right setting. That generates an exponentially greater impact on the products consumers recommend, buy, and become loyal to.
A consumer-driven world
The sheer volume of information available today has dramatically altered the balance of power between companies and consumers. As consumers have become overloaded, they have become increasingly sceptical about traditional company-driven advertising and marketing and increasingly prefer to make purchasing decisions largely independent of what companies tell them about products.
This tectonic power shift toward consumers reflects the way people now make purchasing decisions. Once consumers make a decision to buy a product, they start with an initial consideration set of brands formed through product experience, recommendations, or awareness-building marketing. Those brands, and others, are actively evaluated as consumers gather product information from a variety of sources and decide which brand to purchase. Their post-sales experience then informs their next purchasing decision. While word of mouth has different degrees of influence on consumers at each stage of this journey it's the only factor that ranks among the three biggest consumer influencers at every step.
It's also the most disruptive factor. Word of mouth can prompt a consumer to consider a brand or product in a way that incremental advertising spending simply cannot. It's also not a one-hit wonder. The right messages resonate and expand within interested networks, affecting brand perceptions, purchase rates, and market share. The rise of online communities and communication has dramatically increased the potential for significant and far-reaching momentum effects. In the mobile-phone market, for example, we have observed that the pass-on rates for key positive and negative messages can increase a company's market share by as much as 10 per cent or reduce it by 20 per cent over a two-year period, all other things being equal. This effect alone makes a case for more systematically investigating and managing word of mouth.
Understanding word of mouth
While word of mouth is undeniably complex and has a multitude of potential origins and motivations, we have identified three forms of word of mouth that marketers should understand: experiential, consequential, and intentional.
Experiential
Experiential word of mouth is the most common and powerful form, typically accounting for 50 to 80 per cent of word-of-mouth activity in any given product category. It results from a consumer's direct experience with a product or service, largely when that experience deviates from what's expected. (Consumers rarely complain about or praise a company when they receive what they expect.) Complaints when airlines lose luggage are a classic example of experiential word of mouth, which adversely affects brand sentiment and, ultimately, equity, reducing both receptiveness to traditional marketing and the effect of positive word of mouth from other sources. Positive word of mouth, on the other hand, can generate a tailwind for a product or service.
Consequential
Marketing activities also can trigger word of mouth. The most common is what we call consequential word of mouth, which occurs when consumers directly exposed to traditional marketing campaigns pass on messages about them or brands they publicise. The impact of those messages on consumers is often stronger than the direct effect of advertisements, because marketing campaigns that trigger positive word of mouth have comparatively higher campaign reach and influence. Marketers need to consider both the direct and the pass-on effects of word of mouth when determining the message and media mix that maximises the return on their investments.
Intentional
A less common form of word of mouth is intentional - for example, when marketers use celebrity endorsements to trigger positive buzz for product launches. Few companies invest in generating intentional word of mouth, partly because its effects are difficult to measure and because many marketers are unsure if they can successfully execute intentional word-of-mouth campaigns.
What marketers need for all three forms of word of mouth is a way to understand and measure its impact and financial ramifications, both good and bad.
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McKinsey Quarterly is the business journal of McKinsey & Company
