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Prof. Barak LibaiProf. Barak Libai 1
ASSESSING THE VALUE OF
CUSTOMERS WORDOFMOUTH
Prof. Barak Libai
Tel Aviv University
WOM UK , London, April 2010
By 2010, most mangers are informed about the power of
customer word of mouth
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?
Prof. Barak Libai 4
value of advertisingrealUnderstanding the
Prof. Barak Libai 5
 Valuing investments in social networks
and social media in general
 Planning and valuing WOM
campaigns
 E.g., should we target influentials?
Prof. Barak Libai
Yet for many, the way WOM turns into ROI
stays a mystery
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.
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
Indirect measures
A) How do customers talk?
 Or are willing to recommend?
 E.g, Net Promoter Scores
Prof. Barak Libai 9
Prof. Barak Libai 1010
Keiningham, B Cooil, TW Andreassen, L Aksoy - Journal of
Marketing, 2007
Conclusions are not straightforward
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
Direct aggregate measures
How word of mouth affects overall sales
 Experiments
 Before and after a WOM campaigns
 In different areas
Prof. Barak Libai 12
 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
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
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
Issue 1: where the money is?
Prof. Barak Libai 16
The regular profitability of customers
 Customer Lifetime Value (CLV) - the net present value
(NPV) of the future cash streams from a customer
Prof. Barak Libai 17
Time
$
$
$
$
$
The money that comes from a customers
word of mouth is in other customers
regular lifetime value!
Prof. Barak Libai 18
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
 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
Wheres the money?
Reichheld: The Loyalty Effect
Recent research in the telecommunication industry
廨廬廬 廬廡廩廨廬 廩廡-廚廨廚' 廨廡 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
Prof. Barak Libai 22
How the social effect of a defection decreases with time
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
$
$
$
$
$
$
$
$
$
$
My conclusion on this issue
 The same way that CRM people start talking social
Prof. Barak Libai 24
 Social people should start talking CRM
Issue 2: Where is the network?
Prof. Barak Libai 25
Prof. Barak Libai
The complexity of calculating person As social value
A
B C
 Is it the lifetime value of the people s/he affected?
D
Prof. Barak Libai
The complexity of calculating person As 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
Prof. Barak Libai
The complexity of calculating person As social value
A
B C
 Person A s word of mouth may create a chain effect
beyond the neighbors
D
Prof. Barak Libai
The complexity of calculating person As 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
Prof. Barak Libai
The complexity of calculating person As social value
A
B C
 Can we add the social value of A and B ?
D
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
Prof. Barak Libai
Can it really be calculated?
 We are working on it !
 Ill next present a possible approach.
Prof. Barak Libai
Stage A- Collect data on real social networks
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
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
In the absence of tools such as agent
based models
 Try to better understand social network analysis
Prof. Barak Libai 36
廨廬廬 廬廡廩廨廬 廩廡-廚廨廚' 廨廡 4
Prof. Barak Libai 37
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)
Googles 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?
Issue 3: The Value of Time ?
Prof. Barak Libai 38
 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
Prof. Barak Libai 40
0
100
200
300
400
500
600
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
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!
Thank you !
 Questions? libai@post.tau.ac.il
Prof. Barak Libai 42
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
The classic view of word of mouth
Prof. Barak Libai 44
?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速, June 5th 2006 through February 3, 2008
Source: The
Keller Fay group
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
What about observational learning?
 We may be seriously
under-estimating the
value of social
interactions!
Prof. Barak Libai 47
I use the term word of mouth (WOM)
 But the issues covered largely include various kinds of
social interactions
Prof. Barak Libai 48

More Related Content

Barak Libai lecture WIM UK April 2010

  • 1. Prof. Barak LibaiProf. Barak Libai 1 ASSESSING THE VALUE OF CUSTOMERS WORDOFMOUTH 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
  • 5. Prof. Barak Libai 5 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 Prof. Barak Libai 17 Time $ $ $ $ $
  • 18. The money that comes from a customers word of mouth is in other customers regular lifetime value! Prof. Barak Libai 18 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
  • 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 Wheres the money?
  • 21. Recent research in the telecommunication industry 廨廬廬 廬廡廩廨廬 廩廡-廚廨廚' 廨廡 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
  • 22. Prof. Barak Libai 22 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 As 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 As 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 As 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 As 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 As 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 ! Ill 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 廨廬廬 廬廡廩廨廬 廩廡-廚廨廚' 廨廡 4
  • 37. Prof. Barak Libai 37 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) Googles 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
  • 40. Prof. Barak Libai 40 0 100 200 300 400 500 600 700 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速, 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