Study: How Profitable Is Word-of-Mouth?

If a conversation costs 50 cents to generate, how much profit do marketers reap from the typical eight minutes a consumer spends talking about their favorite brands?

According to BzzAgent, a word-of-mouth marketing agency in Boston, that profit is 38 cents. The firm has pegged this amount as the “communication dividend” in a report titled Calculating Your Communication Dividend, which examines the value of word-of-mouth conversations. It builds on another report (in June) that found the average cost of an eight-minute conversation to be 49 cents.

In its latest report, BzzAgent also found 87 cents to be the value per communication. The firm arrived at both numbers by mapping standard word-of-mouth calculations onto consumer recommendation and purchase behavior. For instance, a word-of-mouth campaign comprised of 10,000 members generates approximately 616,800 individual communications over two generations of consumer advocates. (The initial influencer is tagged as generation zero, and each successive advocate is assigned a number.) Using 38 cents as the base net figure, a campaign of this size would result in a net dividend of nearly $235,000 for marketers.

BzzAgent CEO Dave Balter said the new metrics provide a template for word-of-mouth marketers. “Any company can use the same framework, plug in the cost of their conversation, see the value they generate and come up with the net value,” he said.

When applied to consumer packaged goods, the model accounts for “a percentage of people who will go and purchase a product and then those people will continue to make other recommendations, which then creates more purchases,” said Matt McGlinn, BzzAgent’s director of business intelligence.

The study’s findings show that marketers have begun to shift their focus from “does word-of-mouth matter?” to one that focuses on the bottom line, said Ed Keller, president of the Word of Mouth Marketing Association.

“Now we’re in the stage where people want to know, ‘how exactly does it work? What’s its impact in some form or another? What’s the return on investment?'” Keller said.

Max Kalehoff, vp-marketing at Clickable, a New York-based online advertising agency, said the study provides marketers with an accountable reference point for tracking the effectiveness of word-of-mouth campaigns. “You can experiment with it and . . . build upon iterations as you have that reference point to optimize over time.” With that said, however, the effectiveness of a formula like this depends on how a particular marketing agency applies the model.