How to best incentivize word-of-mouth marketing
Word of mouth can be a powerful way to build a customer base. But what’s the most effective way to generate buzz: offering free contracts so existing users see fewer hurdles to referring the product, or offering current customers rewards for referrals?
The answer could be one or both depending on the size of your audience (niche vs. mass) and how social your product is, say Haas Associate Professor Yuichiro Kamada and Aniko Öry, assistant professor of marketing at Yale School of Management.
Take, for example, Skype. Customers interact with one another to use it, making it social. It’s also a niche market—only a small fraction pays for premium services. Skype’s freemium strategy encourages new users by lowering the risk to try its product, which gives current customers a better experience (more people to interact with)—thereby inspiring their word-of-mouth recommendations.
Uber is not a social product (customers use it in isolation), but it has a mass market of people willing to pay for it. In that case, researchers found, referral rewards are typically the best way to incentivize buzz.
But sometimes, when a product is not too social but not too private either, one strategy alone doesn’t cut it. Dropbox is a niche company, and while there is a social aspect to it—users can share files if they choose—it’s not fully dependent on interaction. Before April 2010, Dropbox’s cost per acquisition was more than $200 for a $99 product. Then it initiated a referral program and increased visibility of its free option in addition to introducing file-sharing. The result was 2.8 million direct referral invites within 30 days.
The researchers caution that trying to raise awareness via word of mouth can be derailed by advertising. People are less inclined to talk about something they think you’ve already heard about.