Acquiring Customers via Word-of-Mouth Referrals: A Virtuous Strategy?

Constant Pieters, Aurélie Lemmens

Research output: Working paperOther research output

Abstract

Managers are increasingly using word-of-mouth (WOM) acquisition strategies, such as seeded WOM or referral programs, to acquire new customers. These strategies have proven successful in recruiting customers with higher margin and lower churn probability compared to customers acquired otherwise. However, the question remains to what extent referred customers pass on the referral they received to others—what is their referral value—and what drives this behavior.

Constant Pieters and Aurélie Lemmens collect large-scale survey data among U.S. movie viewers and find that exposure to WOM referrals is non-random. Customers who were exposed to WOM referrals are systematically different than customers who were not exposed to WOM referrals. Ignoring this self-selection mechanism leads to an overestimation of the effect of referral exposure on referral value. On average, customer exposure to WOM referrals did not have a significant effect on a customer’s referral value.

Furthermore, a moderated mediation analysis was performed to study the process that leads to these effects; in particular the mediation of satisfaction and the moderating effect of the referral match, which captures the extent to which the movie recommendations a customer receives in general fit her tastes. The results reveal that referred customers who receive referrals that do not fit their tastes well (badly matched referrals) end up less satisfied than non-referred customers, leading them to refer less in turn. It is posited that WOM referrals create unrealistic expectations about a movie which are likely to be disconfirmed, leading to lower satisfaction. The mediation of satisfaction explains almost 80 percent of the total effect of WOM referral exposure on referral value.

The results suggest that managers should use WOM acquisition strategies cautiously as they may be not as successful in attracting customers with a high referral value as they are in recruiting profitable customers. Moreover, managers should not expect long chains or cascades of referrals as a result of WOM acquisition strategies. Finally, companies should make sure their prospective customers have realistic expectations prior to consumption (for instance by means of information tools), and push referrers not to refer to anyone but to take the recipient’s tastes into account when referring (for instance by means of matching tools).
Original languageEnglish
Place of PublicationCambridge
PublisherMarketing Science Institute
Pages1-93
Number of pages93
Volume15
Publication statusPublished - 12 Jul 2015

Publication series

NameMSI Working Paper Series
PublisherMarketing Science Institute
No.123
Volume15

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