Professor Barak Libai of Tel Aviv University looks at the latest research into the value and ROI of consumer WOM.

1. Prof. Barak LibaiProf. Barak Libai 1
ASSESSING THE VALUE OF
CUSTOMERS’ WORD–OF–MOUTH
Prof. Barak Libai
Tel Aviv University
WOM UK , London, April 2010

2. By 2010, most mangers are informed about the power of
customer word of mouth

3. Prof. Barak Libai
We also know that assessing the economic
contribution of word of mouth is critical
 Understanding the real value
of customers
What is the “social value” of a
person?

4. Prof. Barak Libai 4
value of advertisingrealUnderstanding the

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• Valuing investments in social networks
and social media in general
 Planning and valuing WOM
campaigns
 E.g., should we target “influentials”?

6. Prof. Barak Libai
Yet for many, the way WOM turns into ROI
stays a mystery

7. Prof. Barak Libai
Here are I will argue that:
 The issue is not trivial. No “one number” or “one equation” you
need to know
 We need to “speak CRM”. The WOM value measure (“social
value”) should be monetary: The effect on the value of the cash
flows from other customers
 We need to see the larger network. Because word of mouth
creates a complex effect, its impact should take into account the
larger social system, and not only close neighbors
 We want to understand the value of time.
 Early is often MUCH better.

8. The value a customer brings us via WOM
Current Approaches
 Indirect measures
 do no assess monetary value
 Direct aggregate measures
 Measures for a “social value” of a customer
Prof. Barak Libai 8

9. Indirect measures
A) How do customers talk?
 Or are willing to recommend?
 E.g, Net Promoter Scores
Prof. Barak Libai 9

10. Prof. Barak Libai 1010
Keiningham, B Cooil, TW Andreassen, L Aksoy - Journal of
Marketing, 2007
Conclusions are not straightforward

11. B) How do customers listen?
 How did you hear of us? How much were you affected by word of
mouth?
 Possibly used with brand equity measures
 Recent research found that the long term value of
customers that had arrived via WOM was higher than
that of customers that had arrived via advertising.
Prof. Barak Libai 11

12. Direct “aggregate” measures
How word of mouth affects overall sales
 Experiments
 Before and after a WOM campaigns
 In different areas
Prof. Barak Libai 12

13.  Advanced statistical regressions
 Especially as data on sales, WOM activities and other
customer data is available from websites
 Issues of “identification”:
 For example, WOM may be affected by advertising which may
affect the level of WOM
 People may behave the same because there are similar, or were
affected by the same external phenomenon, and not because
they talked
Prof. Barak Libai 13

14. The problems with the previous
approaches
 We still do not understand the “how” in terms of value
creation
 Monetary value of the individual is not assessed
Prof. Barak Libai 14

15. Prof. Barak Libai
The “social value” of a customer
 The extra monetary value a customer adds (or subtracts)
to the firm due to social interactions with others
 Three issues to be discussed: Lifetime Value, Network,
Time

16. Issue 1: “where the money is”?
Prof. Barak Libai 16

17. The “regular” profitability of customers
 Customer Lifetime Value (CLV) - the net present value
(NPV) of the future cash streams from a customer
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Time
$
$
$
$
$

18. The money that comes from a customer’s
word of mouth is in other customers’
regular lifetime value!
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$
$
$
$
$
$
$
$
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19.  Often, we consider the social effect of in acquiring new
customers
 What is their lifetime value?
 Do friends have a similar lifetime value?
 But it can also be an issue of costs
 E.g., via reduced customer support in online communities
 A case of customer “development”- cross sell or up-sell
 Or affecting the probability of customer defection
 The effect of retention (defection) on customer lifetime value is
very strong!
Prof. Barak Libai 19
Where’s the money?

20. Reichheld: The Loyalty Effect

21. Recent research in the telecommunication industry
‫חברתית‬ ‫בתקשורת‬ ‫שיווק‬-‫פרופ‬'‫ליבאי‬ ‫ברק‬ 21
Exposure to Defecting Neighbors - Defecting and Non-Defecting
Customers
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
Mar08 Apr08 May08 Jun08 Jul08 Aug08 Sep08 Oct08 Nov08 Dec08
Average number of
defecting neighbors
Month
Defectors
Non-Defectors

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How the social effect of a defection decreases with time

23. It can also be mere acceleration of cash
flows
 “Discount rate” plays a large role in customer lifetime
value
 A customer starting to buy today may be worth much more than
a customer starting to buy later
Prof. Barak Libai 23
$
$
$
$
$
$
$
$
$
$

24. My conclusion on this issue
 The same way that CRM people start “talking social”
Prof. Barak Libai 24
 Social people should start “talking CRM”

25. Issue 2: Where is the network?
Prof. Barak Libai 25

26. Prof. Barak Libai
The complexity of calculating person A’s social value
A
B C
 Is it the “lifetime value” of the people s/he affected?
D

27. Prof. Barak Libai
The complexity of calculating person A’s social value
A
B C
 How many of them could we get via advertising?
 If this is the case, we should look only at savings in advertising
expenses
D

28. Prof. Barak Libai
The complexity of calculating person A’s social value
A
B C
 Person A ’s word of mouth may create a “chain effect”
beyond the neighbors
D

29. Prof. Barak Libai
The complexity of calculating person A’s social value
A
B C
 If A would not talk with B, C may do it in a later time
 Is social value about “customer acquisition” or
“customer acceleration”?
D

30. Prof. Barak Libai
The complexity of calculating person A’s social value
A
B C
 Can we add the social value of A and B ?
D

31. Prof. Barak Libai
Conceptually, the real social value of a customer
if weonlyor a group of customers) can be assessed(
 Let the customer disappear
 And measure the change of the net present value of the whole social
system

32. Prof. Barak Libai
Can it really be calculated?
 We are working on it !
 I’ll next present a possible approach.

33. Prof. Barak Libai
Stage A- Collect data on real social networks

34. Prof. Barak Libai
Stage b: Based on these networks create simple
simulations in which products are sold to
connected customers
 For example: what would happen if a new product would
begin to grow on such networks
 Individual level simulations in which a “would-be-world”
is created are sometimes called agent based models

35. Prof. Barak Libai
Stage 3: Conduct experiments
 What is the profitability (NPV) of the system
 If person A is there, or is not there
 If we target “influentials” or random customers
 If competition is strong or not

36. In the absence of tools such as agent
based models
 Try to better understand social network analysis
Prof. Barak Libai 36
‫חברתית‬ ‫בתקשורת‬ ‫שיווק‬-‫פרופ‬'‫ליבאי‬ ‫ברק‬ 4

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•Degree Centrality -the number of direct connections a node has
•A node with high degree centrality is a “Hub”
•We can also differentiate between in and out degree
•Eigenvector centrality – Gives weights to the centrality of the nodes that
are direct connection ( the “degree”)
•Google’s “PageRank” is a variation on this
•Closeness centrality – the sum of shortest paths to all others
•The shorter the better
•Betweenness Centrality - How many shortest paths between others
pass through that person
Who is important to us?

38. Issue 3: The Value of Time ?
Prof. Barak Libai 38

39.  My (and others’) research has repeatedly indicated that
being early in the market has long lasting effects due to
word of mouth
Prof. Barak Libai 39

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0
100
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700
0 1 2 3 4 5 6 7 8 9 10
L
o
s
s
($
)
Year Since Introduction
Indirect effect
direct effect
VALUE OF ONE LOST CUSTOMER IN THE ONLINE BANKING INDUSTRY
WOM
Regular
purchases

41. Prof. Barak Libai
Some recent results on the social value of WOM
“seeding” programs
 Using agent based models based on 12 real networks
 WOM programs create a real pioneering advantage
among competitors. The social value of a program can
be five time as much when a competitor does not have a
program
 It is very worthwhile to be first, and alone!

42. Thank you !
 Questions? libai@post.tau.ac.il
Prof. Barak Libai 42

43. How much value a customer creates via
word of mouth?
 What is “value”?
 Even before that: What is “word of mouth”?
Prof. Barak Libai 43

44. The classic view of “word of mouth”
Prof. Barak Libai 44

45. ?Online or Offline
 The vast majority of recent knowledge on social
interactions comes from online environments
 Yet much of the action may still be offline
Prof. Barak Libai 45
Other, 2%
E-mail, 3%
IM/Text, 3%
Chat/Blog, 1%
Face-to-Face,
73%
Phone, 17%
Source: OMD/Keller Fay Group proprietary report based on TalkTrack®, June 5th 2006 through February 3, 2008
Source: The
Keller Fay group

46. “Organic” or “Amplified”?
 Can we transfer
knowledge from firm
incentivized
campaigns to “natural”
word of mouth ?
Prof. Barak Libai 46
Kumar, Petersen and Leone, HBR
2007

47. What about “observational learning?”
 We may be seriously
under-estimating the
value of social
interactions!
Prof. Barak Libai 47

48. I use the term “word of mouth” (WOM)
 But the issues covered largely include various kinds of
social interactions
Prof. Barak Libai 48