In 1995, Ethernet pioneer and 3Com founder Robert Metcalfe articulated Metcalfe’s Law. The law states that the usefulness or value of a networked system equals the square of the number of users of the system.
The most common example used to illustrate Metcalfe’s Law is the telephone: A single telephone doesn’t do you much good, but the value of your telephone increases as the number of telephones on the network increases. Purchasing a telephone makes other telephones more useful.
The Internet thus becomes the logical fruition of Metcalfe’s vision—every new node, server and user expands the possibilities for everyone else who's already there.
This decade has seen a transformation of consumer marketing, driven by the real-world application of Metcalfe’s Law. Through the convergence of the Internet, social networking tools and mobile communications platforms, the power of the network has become manifest in the explosion of conversations, referrals and commentaries by and among consumers about their favorite products, services and brands.
In one sense, this activity is nothing new. Consumers have engaged in word-of-mouth (WOM) activity for as long as there have been products and brands. The differences between yesterday and today are those of speed and scale. Consumers now have more avenues to share product and brand opinions than ever before, and those opinions can now be shared instantly and with thousands of other consumers. The ability for even a single blogger to drive or derail a brand’s reputation has never been greater.
The value of this activity to consumers is not measured in dollars and cents or in points and miles. It is measured, rather, in terms of social capital. By alerting your extended network to a new product, a viral video or the latest adver-game, are you enhancing your reputation as a trendsetter? Are you growing your friend network on Facebook? Are you increasing page views on your blog? Consumers acquire social capital through WOM activity and spend it by expanding the size and influence of their personal and professional networks.
The corresponding explosion of viral video, Facebook and MySpace postings, text messaging and blog entries has seen an entire industry develop around the concept of fomenting, promoting and influencing the direction of consumer WOM activity. Agencies that specialize in WOM marketing have developed metrics and methodologies by which they attempt to quantify ROI on these activities.
But there are two primary challenges in effectively measuring WOM activity. First, it’s hard to identify potential WOM brand champions without spending large buckets of marketing dollars on scattershot, untargeted WOM campaigns, many of which generate short-term buzz and little else.
Second, it’s even harder to translate that spending into measurable return-on-investment. WOM marketing is in most respects a sexier version of traditional mass marketing—and like most mass marketing efforts, it’s often difficult to understand what bang you’re getting for your buck.
For many marketers and executive boardrooms, the Net Promoter Score has become an accepted WOM metric, and has even been championed as a reliable indicator of company growth. The metric is simplicity itself: Customers who answer 9-10 on a ten-point scale to the question How likely are you to recommend this product or company to a friend or colleague? are considered Promoters, while those who answer 6 or lower are considered Detractors.
To calculate your company's Net Promoter Score (NPS), take the percentage of customers who are Promoters and subtract the percentage who are Detractors.To increase revenues, say NPS practitioners, simply evaluate and reward management on their ability to increase the company’s Net Promoter Score.
But let’s think about that question for a moment: How likely are you to recommend this product or company to a friend or colleague? How many of those self-identified Promoters actually translate intent to recommend into an actual recommendation? NPS is essentially a measure of customer satisfaction, and every market researcher knows that customer satisfaction scores are at best imperfect measures of customer behavior. We can reasonably expect at least some evidence of a say-do gap in NPS, as those customers who self-identify as Promoters nonetheless fail to do any actual promoting. In those cases, NPS has the same effect as the proverbial tree falling in the forest with no one around to hear it.
Fortunately, identifying valuable customers and measuring the ROI of profitable behavior changes are the two things at which loyalty marketers most excel—in fact, they’re the foundation of the entire discipline. Loyalty marketing tactics can help you identify and build relationships with the “Champion Customers” buried within your database by rewarding them for positive WOM activity.
Without diligent effort to uncover these consumers, potential WOM benefits go unrealized. Surveys can help, but actual tracking and measurement of WOM behavior is more meaningful. All loyalty marketers should design, enable, operate and measure specific WOM behavior mechanisms within their customer databases. Few, if any, are doing this today. Tomorrow, such activity will be a prerequisite to success.
While some marketers and academics have challenged Metcalfe on the grounds that he either over- or understated the value of networks, Metcalfe's Law is more of a metaphor than an iron-clad rule. When determining the value of a network, marketers typically define “value” in terms of “utility” rather than by its economic value. The size of MySpace and Facebook has made these networks exponentially more valuable to their users without delivering a corresponding level of revenue for their owners—at least, not yet.
But the customer database has the potential to deliver Metcalfe-level value for both users and owners. Champion customers can be identified and nurtured within the database. In many cases, your proprietary reward program or coalition sponsorship can itself become your most effective tool to cultivate them. Much of this activity will be new territory for loyalty marketers. But we are first and foremost scientists who devise and test hypotheses, build on our successes and learn from our failures. Over time, we’ll learn to identify, cultivate and manage the yield of our Champion Customers. For loyalty marketers willing to harness customer word-of-mouth, the power of the customer network offers unlimited potential.
Rick Ferguson is with COLLOQUY, a LoyaltyOne company. He can be reached at rick.ferguson@colloquy.com
