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Economic Impact of Word-of-Mouth Calculated Using Net Promoter Model

Customer word-of-mouth (WOM) behaviors have strong financial positive and negative impact on customer loyalty, ultimately affecting company growth, according to a SatMetrix Systems whitepaper.

The report, which highlights the business-to-consumer (B2C) computer hardware industry, is the first in a series that uses the Net Promoter economic model to quantify the impact of word-of-mouth.

Net Promoter categorizes customers into Promoters - those who are highly likely to recommend a company and/or its products - or Detractors - those who are unlikely to recommend a company and/or products.

Below, an introduction to and some key findings from the study.

Buyer and Referral Economics

“Buyer economics” refers to how much a customer spends over a given period of time. “Referral economics” refers to the amount of new business that is gained or lost due to messages that customers share with others. Buyer and referral economics can be used to determine total customer value:

“When customer experiences are positive - and loyalty is high - we expect customers to spend more on average and to generate new business via positive word-of-mouth,” said Dr. Vince Nowinski, principal methodologist at Satmetrix.

“Conversely, when customer experience is poor and loyalty is low, we expect lower purchasing value (perhaps even defection), as well as the potential loss of new business through negative word-of-mouth.”

Computer Hardware Industry

Of all industries considered in the study - financial services, high-tech, internet and telecommunication - high-tech’s B2C computer hardware manufacturer segment had the highest Net Promoter score, at 27%.

Within that segment…

• Approximately half of all customers were Promoters (likely to recommend companies with which they’d had a transaction in the previous year); about one-fifth were Detractors (likely to make negative referrals); and a little less than one-third were Passives (no referrals).
• The average spend among all customers was $1615:

• Promoters account for roughly half of a new customer acquired through positive word-of-mouth.
  • They spent $203 more than the average.
  • But they had a total worth of $2,634 (after adding in the value of positive referrals).

• Detractors cost a business 0.84% of a new customer through negative word-of-mouth.
  • They spent $158 less than average.
  • But they had a total customer worth of just over $100 - or some $2,500 less than Promoters. (The lost business associated with negative referrals subtracts nearly the entire value of purchase behavior.)

“While Detractors’ spend lags the average customer by only $158, their negative word-of-mouth behavior represents a significant hidden cost and net drain on future revenue,” said Nowinski.

About the whitepaper: Data used for this report originated from the Satmetrix Net Promoter Benchmark Database; it consists of 285,000 responses collected over a period of seven years from four industries and 14 segments.