While the importance of social influence in marketing is clear, the fleeting and random nature of word of mouth has historically made it difficult for these communications to scale beyond an individuals personal network of relationships.  Consequently, over the last half century, the one-to-many, mass marketing model has largely replaced word of mouth as the most prevalent source of information and advice in shaping purchasing decisions. However, with tens of millions of consumers now participating in online social networks, the potential now exists for word of mouth to scale in ways not previously possible.  According to a Forrester Research report by Josh Bernoff, “three in four US online adults now use social tools to connect with each other.” And because we trust our friends and neighbors more than we do advertising, the ability of social networks to amplify word of mouth far beyond its historically limited audience could have a profound impact on traditional media.

We are all part of many social groups (e.g. friends, co-workers, neighbors, schools, religious, family etc) and within these groups there are both influencers and connectors who facilitate the exchange of information. Today, 93% of these exchanges occur in face-to-face conversations or over the phone and are mostly informal and random which makes it difficult to share them beyond their initial audience. However social marketing networks, like the ones being developed by Buzfactor, will make it far easier for consumers to share recommendations well beyond their personal network of relationships.

In fact, when compared to other forms of marketing, 70% of businesses said word of mouth had the most impact on the success of their business (3 times more than online and email marketing and 10 times more than print).

However, 40% of these companies do not currently allocate ANY of their marketing budget to word of mouth and, of those that do, the vast majority (71%) dedicate less than 10% of their marketing budget on word of mouth.  Interestingly, less than 10% of companies said budgetary concerns were the primary reason for the lack of investment in word of mouth marketing initiatives.

Businesses clearly understand the impact word of mouth has on their company’s success, however, this has yet to translate into increased marketing expenditures on programs designed to generate positive word of mouth for their business. We’ll be exploring the reasons why businesses are not making a greater investment in word of mouth marketing in an upcoming post.

While websites offering online reviews attract a lot of attention, it’s important to note that only 19% of consumers say they often or very often read online reviews, and of these 24.4% say reviews strongly influence their ultimate purchase decision.  So, the reality is that online reviews actual influence less than 5% (19% times 24.4%) of consumers. In comparison, 74.1% of consumers say recommendations influence their decisions, and, most importantly for businesses, consumers say they act on these recommendations 64% of the time which means recommendations from trusted relationships have potentially 10 times ((74.1% x 64%)/(19% x 24.4%)) more impact than online reviews on where we shop and dine and what we buy.

Interestingly, we found that customers recommend their favorite local businesses as many as 27 times per year and, with recommendations likely being acted upon 71.2% of the time, each customer evangelist a business has potentially generates 19 new customers for their business. Perhaps most important, when asked, “Are the businesses you recommend most often national chains or local businesses?”, 86% of consumers said the businesses they most often recommend are local.  With 6 of every 7 recommendations going to a local business, positive word-of-mouth represents a very effective way for local businesses to compete against the much larger advertising and marketing budgets of national chains, thus levelling the playing field.

In response to current economic conditions, 29% of small businesses have actually reduced their marketing budgets. However, businesses are continuing to shift more of their marketing online and, as a result, the majority of these cutbacks are coming at the expense of traditional media. In fact, a recent Forrester survey of more than 200 marketers found that “60% planned to increase interactive budgets by pulling back spending on traditional outlets.” According to Forrester, “the biggest victim of the trend will be direct mail, which stands to be slashed by 40%. Print will not fare much better, with spending on newspapers expected to be cut by 35%, and magazines by 28%.”

Today 25% of small businesses now regularly use online marketing and more than half (56%) frequently use email, however, the vast majority (89%) still rely most on word of mouth to find new customers.

Although word of mouth is far and away the most important factor across all businesses, digging a little deeper into the data,  it is even more important among small businesses with 90% saying it most impacts customer acquisition.  Interestingly, the results seem to indicate that larger businesses have a greater reliance on discounts and coupons while medium size companies rely more on traditional advertising - but across all segments, one thing is clear, businesses recognize positive word of mouth is critical to attracting new customers.

The search interface today is simple, powerful and effective, however, the “one size fits all” approach is beginning to show its limitations. For example, modifiers such as “best” are often included in search queries, however, depending on the situation, “best” has many different meanings.  Using restaurants as just one example, the search for the “best” choice is simultaneously influenced by many factors including time of day (lunch or dinner), occasion (business or social), group dynamics, or even weather (outdoor seating hardly works in Boston in January).  And while search engines have made great progress toward localizing information, it’s important to remember localization is not personalization. This is where our individual social networks will come into play.  Moving forward, I believe our personal network of relationships will help create new, more meaningful ways to organize and filter content and provide the context that search lacks today.

Recognizing the impact word-of-mouth has on their business, more than 90% of business owners feel customer recommendations are more effective than paid advertising. In fact, almost half of small businesses rely exclusively on word-of-mouth as their only form of marketing.

But businesses face a great challenge in leveraging word-of-mouth into measurable results. That’s why Buzfactor is developing new technologies that let businesses create word-of-mouth marketing campaigns, track their effectiveness, and measure the impact on sales right down to the customer and transaction level.  In effect, we are creating social graphs that map businesses directly to their best customers.

Over the past several months, we’ve surveyed almost 5,000 consumers in 26 major markets to learn more about how word-of-mouth affects consumer decisions. Stay tuned as we’re going through all the data now and will be posting more results soon.