Sometimes the human connection is the best form of advertising, all it takes is a study like this to prove it.

Word of Mouth

Customers are increasingly using social media when making purchasing decisions, and this paper seeks to explore in the influence that traditional word of mouth (WOM) and various forms of electronic word of mouth (eWOM) can have respectively. Meuter, Brown McCabe & Curran (2013), define WOM as, “any unpaid interpersonal communication between people, that affects attitude and purchase behaviour.” WOM recommendations come from personal connections and is therefore a key driver of success. Meuter, Brown McCabe & Curran (2013), define eWOM as, “any statement made by customers about a company that is available to many via the internet.” Social networking sites are aiding consumers in strengthening their networks, which means they have a wider audience (Meuter, Brown McCabe & Curran, 2013). This study was developed to investigate whether WOM is more influential then eWOM.

The Study

The study began with a qualitative phase, in which interviews were conducted with a small set of university students, who are desirable subjects due to their exposure to WOM and eWOM. Insights were taken from this step, such as the commonly used types of eWOM, and the key outcome variables were identified. The types of eWOM to be used in the study are Facebook, Yelp, and reviews on the businesses website. As well, the outcome variables to be used in the study are purchase intention, trust in WOM and attitude towards the firm.

Next they move onto the qualitative phase where students were the sample. The context of the survey scenario given was a restaurant located in a city that the respondent had never been. The only information given was from the four types of WOM. In order to compare the influence of each form of WOM, there were also different numbers of positive recommendations included. They outcome variables were each measured on a seven-point scale.

Interesting Findings

Overall, the study found that traditional WOM is more influential than eWOM. WOM was found to lead to customers having higher intentions of eating at the restaurant, higher levels of trust in WOM and more positive attitudes towards the restaurant. However, there was a difference in the impact that eWOM had. Facebook and Yelp were more influential than reviews on the company’s website. However, there was little difference between Facebook’s and Yelp’s outcomes which was interesting because of the personal connection that Facebook has. It proven that Facebook and Yelp were merely seen are unbiased sources of information. As well, it was found that the number of positive reviews from each WOM channel had little impact, which further proves that the platform is the influential component.

Real World Implications and Further Research

An interesting application of this study is how firms spend their marketing budgets. Companies spend a lot of time and energy on things like Facebook pages, but it was proven that interpersonal connections have the biggest overall impact. Firms can take this insight and apply it by encouraging more traditional WOM amongst consumers instead of focusing their entire effort on online tactics. Firms should especially not pursue new eWOM strategies at the expense of encouraging interpersonal eWOM. It is not that eWOM is completely ineffective, and eWOM strategies should still be maintained, but it is suggested that the focus merely be shifted to traditional WOM. A successful example of this is Bell, a Canadian telecommunications company, who through their Bell Let’s Talk campaign encourage customers to speak to each other about mental health, and by extension Bell (Quigley, 2016).

For further research it would be interesting to see if providing negative instead of positive WOM would have the same pattern that was shown in this study or if the results would be entirely different because consumers would be viewing the information from a different perspective.

By Noa Zaifman

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Sources

Matthew L. Meuter , Deborah Brown McCabe & James M. Curran (2013) Electronic Word-of-Mouth Versus Interpersonal Word-of-Mouth: Are All Forms of Word-of-Mouth Equally Influential?, Services Marketing Quarterly, 34:3, 240-256

Quigley, J. (2016, January, 27). Bell Let’s Talk Day lifted ‘cloak of secrecy’ around mental illness, say advocates. CBC News.

Retrieved from:

http://www.cbc.ca/news/health/bell-let-s-talk-day-mental-health-1.3419194

 

Have you ever wondered why on crowdfunding platforms some great projects do not receive funding while bad projects do? Crowdfunding success depends on several factors, and this academic analysis will serve as an explanation.

Introduction to Crowdfunding, Theory, and Value Co-Creation

According to Parker (2014), crowdfunding platforms allow the public to make small investments into entrepreneurial ventures. The very nature of crowdfunding insinuates that there are elements of consumer value co-creation incorporated into every aspect of the business model. Crowdfunding platforms are merely an intermediary for people to provide funding to businesses who in return create value for the investors and public. This particular study was unique as it focused on signals of project quality and how they can cause information cascades to form. The study shows that due to information asymmetry between informed and uninformed investors and information cascades, it is not always the best projects that receive funding. An information cascade occurs when a person observes the actions of others, and despite their own private information, engages in the same behaviour (Eftekhar, Ganjali & Koudas, 2013). This is especially true in crowdfunding, as suggested by Parker (2014), irrational herding occurs because people tend to fund the projects that already have the most funding. This creates an interesting paradigm and can end up having positive or negative outcomes, depending on the number of good projects and informed investors that are present in a pool.

The Study

In a random order investors were asked to commit one dollar to one project of their choosing. Investors make a return if they commit to a good project and it reaches the funding threshold, but receive back their contribution if their project does not move forward. There are people present who know which projects are good, but are unable to signal to other investors directly which ones they are.

Important Findings

The model and simulation were created on the premise that logically, there are more uninformed than informed investors, and the uninformed tend to follow the few investors who predominantly back good projects (Parker, 2014). However, it was found that sometimes there are not enough informed investors to back projects. Without sufficient backing needed for the uninformed investors to create the information cascade, the projects will not get funded. It was also interestingly noted in the study that certain projects have higher funding thresholds than others and for that reason more of certain types of projects end up receiving funding. For example, 60% of arts projects reach the funding threshold compared to only 29% technology projects because arts projects are simply less expensive.

The study found that having more good projects in the pool was not necessarily associated with higher funding of good projects, and similarly it was found that having a higher number of informed investors does lead to better projects being funded. This is due to the crowding out effect whereby when too many good projects available, resources get spread too thinly and few projects receive funding (Burtch, Ghose & Wattal, 2013). It was also because uninformed investors are the most active promoters of information cascades, and without them the functionality of the crowdfunding platform decreases.

Real World Implications and Further Research

Overall, the most interesting aspect and practical application of this study is that it proves how equity crowdfunding platforms could have diminishing returns on efforts to improve the quality of projects and investors (Parker, 2014). For future research in this area it would be beneficial to determine the optimal balance between bad and good projects in order to get as many good projects funded as possible.

By Noa Zaifman

468357

Sources

Eftekhar, M., Ganjali, Y., & Koudas, N. (2013). Information Cascade at Group Scale. Association for Computing Machinery, 1, 401-409.

Burtch, G., Ghose, A., & Wattal, S. (2013). An Empirical Examination of the Antecedents and Consequences of Contribution Patterns in Crowd-Funded Markets. Information Systems Research, 24, 499-519.

Parker, S. (2014). Crowdfunding, cascades and informed investors. Economics Letters, 125, 432-435.