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Word of Mouth EQUITY: A Simple Formula

January 31st, 2011 · Add Comment

The traditonal research suggest that WOM is the primary factor behind 20 to 50 percent of all purchasing decisions. The rise of online communities and communication has dramatically increased the potential of word of mouth (“word of mouse”). As I am doing my reseaerch on Viral Marketing and word of mouth, I have found several descriptions and calculations of customer life time value and his/her referral value, etc. However, I have not found a simple formula to calculate word of mouth equity yet. So, here is my attempt. I hope you fill find this formula useful and easy to use.

Word of Mouth (WOM) equity = C * p * r * i * M

C = actual number of your company’s customers (for any given product, product category or brand)
p = percentage of your customers who talk about company’s product to their friends (“evangelists”)
r = average number of recommendations given by your “evangelist”
i = influence factor: average probability that the potential customer will act on recommendations and buy the product
M = average profit (contribution margin) for any given product, product category or brand during certain period of time

Suppose your company is providing services and it has 2000 customers (C). Ten percent of your customers actually talk to their friends and recommend your services (p). In average , they (your “evangelists”) will talk to three of their friends (r). However, only 20% (i) of those recommendations will result in new profits (margin – M) averaging $5,000 over certain period of time. So your WOM equity is:

WOM equity = C * p * r * i * M = 2000 * 10% * 3 * 20% * $5,000 = $600,000

This is how much additional business you get just based on word of mouth referrals!

The next step would be to try to manage and maximixe your word of mouth by encouraging more customers (“p”) to talk to more of their friends (“r”) in more effective and more enthusiastic way (“i”) . How? The simplest answer: by creating the wow! factor. By GIVING them more value than they EXPECT.

More complex formula for calculating the WOM equity will follow on this blog.. The formula will take into consideration the possible negative effects of word of mouth, as well as the customer life time value.

Tags: New Business Trends · New Marketing Trends · Viral Marketing

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