The Definitive Guide to Referral Marketing

2: How Powerful Is Word-of-Mouth, Exactly? – The Definitive Guide To Referral Marketing

How powerful is word-of-mouth, exactly?

"Word-of-mouth is a force of nature." - John Cooper Clarke

Why should retailers, entrepreneurs and marketers care about word-of-mouth? There are many reasons (which we'll get into), but perhaps the most important is this:

Consumers trust word-of-mouth more than anything else.

According to the Nielsen Global Trust In Advertising Survey, 92% of people trust recommendations from friends. Look at the data:

Think about the implications for retailers. If you're not getting word-of-mouth recommendations for your business, you're missing out on the single most effective and trusted means of getting new customers.

"Word-of-mouth is the valuable currency in today's advertising-saturated world." - Jackie Huba and Ben McConnell, authors of Creating Customer Evangelists

McKinsey & Company have done some extensive research on this. The following is from A new way to measure word-of-mouth marketing, by Jacques Bughin, Jonathan Doogan, and Ole Jørgen Vetvik.

According to McKinsey & Company, word-of-mouth...

1: Influences up to 50% of all purchasing decisions.

MCKINSEY: "Word-of-mouth is the primary factor behind 20 to 50 percent of all purchasing decisions."

Can you list out the last 20 significant purchases you've made? If you do that, and you evaluate your reasons for buying them, you'll likely find that many of them were influenced by the opinions and input of others.

2: Generates more than 2X the sales of paid advertising.

MCKINSEY: "Marketing-induced consumer-to-consumer word-of-mouth generates more than twice the sales of paid advertising in categories as diverse as skincare and mobile phones."

Paid advertising is highly visible. There are awards and blogs dedicated to analyzing and celebrating ads, which are newsworthy events. In contrast, a recommendation from a trusted friend is relatively low-key.

3: Influences every single stage of the consumer's journey.

MCKINSEY: "While word-of-mouth has different degrees of influence on consumers at each stage of the consumer journey (Initial Consideration, Active Evaluation, Moment of Purchase), it’s the only factor that ranks among the three biggest consumer influencers at every step."

The strongest implication here is that word-of-mouth can be used tear consumers away from their pre-existing patterns. We're all interested to hear other people's experiences about products and services that we're thinking of buying.

4: Is the most disruptive to consumer decisions:

MCKINSEY: "Word-of-mouth can prompt a consumer to consider a brand or product in a way that incremental advertising spending simply cannot."

A person can do a tremendous amount of research on their own, and have all sorts of ideas about what to buy, where to buy it, and so on. However, if a trusted friend interrupts him with a story about her bad experience, he's very likely to reconsider his options.

5: Can increase a company's market share by as much as 10%.

MCKINSEY: "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 percent or reduce it by 20 percent over a two-year period, all other things being equal."

This actually suggests that having an edge in word-of-mouth can, over time, allow a business to climb up and over its competitors!

But how does this actually work? Consider the following:

A person who is won over by a business's value proposition becomes the owner of valuable piece of information: Product X can solve Problem Y. She's uniquely incentivized to share this information with those of her friends who will most benefit from the service.

Why? For the reasons described in Chapter 1: Because it makes her look good, and because it nurtures her relationships with those friends.

This person doesn't even need to be in your target market in order to introduce a friend to your business! A gruff, bearded motorcycle enthusiast might not be in the market for cutting-edge ballet flats, but there's a chance that he might know somebody who is.

Once you realize that you have more potential advocates than potential customers, and that these advocates can reach your potential customers better than any ad campaign ever will, the 10% increase in market share starts to sound very, very plausible.

6: Has highly variable effects (up to 50x!):

MCKINSEY: "A consumer is significantly more likely to buy a product as a result of a recommendation made by a family member than by a stranger… In fact, our research shows that a high-impact recommendation—from a trusted friend conveying a relevant message, for example—is up to 50 times more likely to trigger a purchase than is a low-impact recommendation."

No two recommendations are created equal. We all ask ourselves these questions when evaluating a recommendation: Who's the person making the recommendation? What is our relationship? What's in it for them? What background or expertise do they have in this particular space?

If we believe that the person has our interests at heart, and we trust that they have better knowledge about a particular domain, then we're much, much likelier to act on their recommendation.

Conclusion: Word-of-mouth is a subtle yet powerful force of nature that dramatically influences consumer decisions.

It's everywhere around us. We all participate in it, and we all tacitly understand its value as everyday consumers and citizens. It's often under-appreciated and under-considered by retailers because of availability bias: word-of-mouth is not as omnipresent as say, prominent advertising campaigns, Super Bowl commercials and viral YouTube videos.

But what it lacks in conspicuity, it more than makes up for in intensity. Word-of-mouth is intensely personal, and influences everybody's decisions. So it makes a lot of sense for merchants, retailers and entrepreneurs to pay very, very careful attention to it.

In the next chapter...

We know that word-of-mouth exists. How do we make sense of it? How do we interpret it, navigate it, manage it? How do we get word-of-mouth where there is none, how do we amplify the positive and how should we respond to the negative?

ReferralCandy can increase your sales with a customer referral program.



Building a referral program

Anatomy of a referral program
Using incentives effectively
Communicating your offer well
Measuring success with analytics

Running a referral program

Multiple ways to run a referral program
All the ways things can go wrong
Play the long game - give it time