Introduction

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Mass Advertisements versus Word-of-Mouth of Advertising

Background of Traditional Advertising

Advertising has come a long way since its roots in the 1800's. It first came in the form of flyers which were placed in newspapers and magazines. By paying for a large portion of the printing costs, advertisers made newspapers affordable to everyone. Today, commercial media still look to advertisers to pick up the slack of operating costs. Supporting all the major television networks, newspapers, radio stations, magazines and almost every other imaginable form of media are advertisers.
The most common formula for deciding which media are best is called CPM, short for cost per thousand. For example, if airtime for a radio advertisement costs 7.2 cents per thousand listeners, and if space for a magazine costs 7.3 cents per thousand readers, and both will reach the targeted audience, the lower CPM will be the medium of choice. Media buyers have the difficult task of deciding which medium to place their ads for the best results.

The four most popular media sources are:

Newspapers: This is a hot commodity because it is theorized that newspaper readers are predisposed to consider information in advertising seriously.
Magazines: As another print medium, magazines have many of the advantages of newspapers, plus a longer shelf life, which is an advertising term for the amount of time that an advertisement remains available for readers.
Radio: Radio stations with narrow formats offer easily identified targeted audiences. Time can be bought on short notice, with changes possible almost until airtime.
Television: As a moving and visual medium, television can offer unmatched impact, and the rapid growth of both network and local television advertising, far outpacing other media, indicates its effectiveness in reaching a diverse mass audience.

However, being the shrewd devils that they are, companies are constantly on the prowl for other methods of maximizing profits without shelling out millions of dollars for mass advertising. A recent article in the Chicago Tribune proclaimed "Mass advertising may be gasping its final breaths." We know that's a bold statement considering how awash our society is in mass ads everywhere we look. However, there are many research studies which show that mass advertisements are in fact not very effective at all. According to the world's fifth-largest advertising agency network, Euro RSCG's report ("Wired & Wireless: High-Tech Capitals Now and Next"), word-of-mouth is 10 times more effective in generating excitement for new technology products than either print or television advertising. The report found that mass advertising is the least effective way for technology marketers to reach their target audience. The most effective tactic: word-of-mouth.

Statistics from Euro RSCG's Report:

How consumers get most of their information about technology products:
- 13% from advertising
- 20% from Web sites
- 34% from word-of-mouth

What "generated excitement" about a tech product or service:
- 0% from radio
- 1% from billboards
- 4% from TV ads
- 4% from print ads
- 15% from magazines
- 40% from referrals by colleagues or family

The reasons behind this phenomenon are complex and varied. The globalization of commerce has produced an economy rich with choices and many consumers have begun to feel overwhelmed with the multitude of available options. Thus, marketers and ad agencies feel the need to scream louder and more often just to be heard. Research by Yankelovich Partners released in 2000 found that the average person is exposed to more than 3,000 advertisements per day. As a defense mechanism, many consumers have become immune to the cacophony of advertising messages.

The purpose of our model was to compare and represent the effect of mass advertisements versus word of mouth advertising (WOM). By modeling the differences between these two, we aimed to:
1) determine in which situations it would be advantageous to use one method over the other
2) investigate the interaction between the two methods when used in conjunction

The theory of Word-of-Mouth was originally presented by Katz (1975) and relies on the social network through which word-of-mouth flows. According to this view, WOM is a dynamic social process with four key characteristics which distinguish it from other forms of marketing communication:
1. Non-marketing source
2. Face to face exchange
3. Free exchange of information
4. Two-way flow
Due to these characteristics, WOM generates higher order beliefs and thus stronger attitudes because it is believed to have come from an unbiased and more credible source than traditional mass media ads. It is thus used frequently by customers as a risk reduction strategy. One study showed that 40% of Americans seek the advice of others before buying a product or a service (Griffen, 1995), and even more commonly in situations when perceived risk and uncertainty has not been sufficiently reduced by formal sources, and which involvement is high enough to justify seeking information through these informal routes (Cox 1963). This has been shown in several studies, which demonstrates that word of mouth is the most important source of risk reducing information and has greater impact than other forms of mass media (Arnt 1967; Dichter 1966).

Word-of-mouth is a type of a viral marketing since it encourages the audience to pass on a marketing message to others, creating the potential for exponential growth in the message's exposure and influence. The name "viral" marketing was coined because it utilizes people as the "hosts" to carry the advertising message in a similar way as virus operates. The idea is to make your message "contagious" so it infects others that your company may not yet have come in direct contact with through the use of "hosts". Advertising costs are kept to a minimum since they are usually indirect costs such as time and materials used in the effort to engage its customers in recommending its products. This expense is usually miniscule compared to the cost of acquiring customers though any other advertising medium. While the initial exposure is slim, when spread effectively, the area of influence rapidly expands by exponential growth.

Elements of an Effective Viral Marketing Strategy:
1. Gives away products or services
2. Provides for effortless transfer to others
3. Scales easily from small to very large
4. Exploits common motivations and behaviors
5. Utilizes existing communication networks
6. Takes advantage of others' resources

"Free" is the most powerful word in a marketer's vocabulary. Most viral marketing programs give away valuable products or services to attract attention. The following successes show the effectiveness of WOM over glossy magazine or flashy TV ads in certain cases.

· HotMail. Instead of marketing their product, they gave away free email accounts to anyone who wished to sign up. The only catch was each email message they sent from their Hotmail account was accompanied with a little notice in the footer telling people how they could get their own free Hotmail account with a clickable hyperlink. This led their user base to explode as people who used this email system continued to spread the word whenever they emailed friends or associates.

· MP3s. This popular music format was an overnight success. WOM first passed through a network of college students. Within 6 months, the phenomenon spread to all campuses across the US and now has become a common household acronym. All this without a single penny spent in advertising funds.

· Amazon.com. Amazon.com has a "share the love" program in which you can send friends a 10 percent discount on any book you have bought. If your friends bought the book, you would receive credit toward future purchases. The credit consists of the actual dollar amount of the 10% discount I saved my friend. Using viral and word-of-mouth techniques, "Share the Love" employs standard refer-a-friend techniques but with an added kicker: You share goodwill of letting your friends know about a great book, and you get paid for doing it.

· Krispy Kreme Doughnuts does not spend any money on advertising. Instead, it relies on strong word-of-mouth that is generated by the thousands of free donuts it gives away in the neighborhoods of its new locations. Since its debut on the NYSE in April 2000, Krispy Kreme Doughnuts Corp. has gone through two stock splits and continues to exceed all financial expectations.

The success of WOM led to the establishment of new companies specializing in creating WOM, such as NewGate:
"Our Core Word-of-Mouth Campaign proactively generates buzz about your offerings by seamlessly integrating your product's key selling points into ongoing discussions relevant to your industry. NewGate has a full-time staff dedicated to monitoring these discussions, looking for opportunities to begin conversations and answer questions about your company while disseminating compelling information about your offerings. Once group members start talking about your brand and products, word-of-mouth gains momentum. The end result: increased sales and improved online and offline awareness."
Not only do they try to duplicate the extremely personal effect of WOM, they even have sneakier techniques for creating positive buzz surrounding your products by such methods as their whisper campaign:
"Our Whisper Campaign is designed to piggyback on the publicity surrounding your competitors. We begin by closely monitoring the Internet to locate conversations about products or services competing for your audience's attention. Wherever we locate these mentions, we incorporate praise of your offerings into the discussion. We never denigrate or criticize the competition, but rather add to the conversation by "whispering" useful reminders about the advantages of your offerings."

Mathematical Formulas and Graphs:
Mass advertising
Geometric growth is typically the result of mass advertisments. If an advertisement is aimed at generating specific business (as opposed to developing corporate image) and if it is done well, then one can generally predict and track the number and value of sales resulting from it. Furthermore, if increments to the advertising are planned and done just as well, then there will generally be a roughly linear relationship between the dollars spent and the business generated. If $100,000 worth of ads generates $1 million worth of business, then, if done right, spending another $100,000 may be expected to generate another $1 million. That is geometric growth. It works that way because each placement of an ad can be counted on to motivate a purchase reaction in a certain number of people. You spend a dollar to motivate a certain number of dollars of purchasing.
The mathematics of broadcast advertising can be represented as follows. Suppose
· We start with N0 customers on day 0.
· We spend $x per day on advertising with an effectiveness of acquiring q new customers per dollar spent.
· Each customer spends (or has a lifetime value of) $v.
then our customer population on day t, as resulting from this campaign, will be
N = N0 + xqt
and the value generated between days 0 and t is
V = $ (xqtv)

New-Customer Viral
If the customer is more strongly motivated to talk about the product during an initial period after getting it, then we can model the growth in terms of the impact of new customers alone. Suppose
· We start with N0 customers on day 0, m of whom are new (by some appropriate definition).
· Every new customer, on average, motivates n other people to become customers within d days.
· Each customer spends (or has a lifetime value of) $v.
then our customer population on day t, as resulting from this virality, will be
N = N0 + m * nt/d + 1 - n n - 1
and the value generated between days 0 and t is
V = $ m * nt/d + 1 - n n - 1 * v

Continuing Virality
If there is a level of enthusiasm or other motivation for talking about the product that can be maintained throughout ownership, or if passive transmission provides ongoing virality, then growth is modeled on the basis of leveraging the entire customer base. Suppose
· We start with N0 customers on day 0.
· Every customer, on average, motivates n other people to become customers every d days.
· Each customer spends (or has a lifetime value of) $v.
then our customer population on day t, as resulting from this virality, will be
N = N0 (1 + n)t/d
and the value generated between days 0 and t is
V = $ N0 ( (1 + n)t/d - 1) * v

Comparison Graphs:

Graph showing three types of growth independently. All scenarios assume starting with 1 million customers and cummulating growth effects every 30 days. Values for the individual parameters are selected to achieve a similar level of growth over a two-year period.
The parameter values for the graph are chosen so that all three types of growth bring the company to double its customer base in about two years.
· Geometric (broadcast ads): $1,400 dollars a day is spent with an effectiveness of one customer acquired per dollar.
· Exponential due to new customers only: Starting with 25,000 new customers, each new customer brings in 1.04 others (or every 100 new customers bring in 104 more) after 30 days.
· Exponential due to all customers: Every customer brings in 0.03 new customers (or every 33rd customer brings in one new one) after every 30 days.
From these numbers it is easy to compare the power of the types of growth. With the given assumptions, broadcast advertising effectively purchases the new customers, requiring spending over $1 million dollars to double the customer base. The viral effects achieve the same growth by leveraging the existing customer base. (This doesn't mean this growth is free; see the Cost section above.) Between the two causes of exponential growth, the new-customer effect has to be over 300 times stronger to achieve the same level of growth as continuing viral (1.04 new customers each, versus 0.03).
In this analysis, each of the three types of growth is considered independently. The calculation for broadcast ads assumes that there is no simultaneous viral effect going on. Similarly, the numbers for each type of viral growth assume that no additional new customers are being "bought" with advertising. Furthermore, the new customer scenario assumes that there is no continuing viral effect at all after someone has been a customer for 30 days, and the continuing viral scenario assumes that customers are no more inclined to talk about the product when they are new than at any later time.

Combined Impact
The results of the above analysis are fairly impressive for viral growth. However, they do not begin to show the actual power available from exponential effects. When two or more of the three effects are combined and allowed to interact, their mutual feedback creates truly astounding growth. For example, with the parameters used above to generate a doubling of the customer base in two years, when the effects are combined and allowed to interact, and even with a 10% churn rate (the number of participants who discontinue their use of a service divided by the average number of total participants for any given period of time) factored in, the doubling occurs in less than five months. This occurs because of two reasons. First, the interaction of the effects means that new customers brought in by advertising prime the viral pump. Those purchased customers add to the base that is spreading the message. Second, customers brought in by the continuing viral effect produce enhanced viral impact while they are still new.
The results of this interaction of the effects is illustrated in the following figure. The parameter values used here are one third of those in the figure above. The four lines on the graph represent the growth realized when different combinations of the effects are allowed to interact.
Graph of three types of growth interacting. The parameters for all three effects are reduced by 2/3 from those in the above graph. In addition, a 3% churn rate is included. The dark blue line represents a combination of all three growth effects interacting, with which the customer base doubles in less than half the time of the above graph. The other three lines represent different combinations of two effects. The dramatic lesson here is the power of a continuing viral effect. Without it, the light blue line shows, broadcast ads and new-customer virality cannot sustain the company against even a modest churn rate.

The parameter values for this graph are as follows:
· Geometric (broadcast ads): $467 dollars a day is spent with an effectiveness of one customer acquired per dollar.
· Exponential due to new customers only: Starting with 25,000 new customers, each new customer brings in 0.35 others (or every 100 new customers bring in 35 more) after 30 days.
· Exponential due to all customers: Every customer brings in 0.01 new customers (or every 100th customer brings in one new one) after every 30 days.
· Churn: To balance the growth effects, 3% of the customer base is assumed to defect in every 30-day period.

WOM can also be used effectively to combat negative mass advertisements. As expected, purely negative messages decrease the chance that a consumer will buy a product. However, mixed signals interact with each other. A WOM positive message seems to overcome anything negative said in mass ads.
These findings suggest that when planning a campaign strategy, the most effective approach is one that delivers a campaign through targeted mass advertising and then reinforces that image through a more credible source of interpersonal influence. The success of a marketing communication depends largely on how the audience views the source. Past research has shown that the two primary factors impacting the effects of source credibility on attitude change are expertness and trustworthiness. By using both WOM and mass advertising strategies, it is easier to reinforce the advertising message by providing the same attributes through both outlets, thus adding to the trustworthiness factor. Although personal influence may be more persuasive than mass communications, mass communications is the best method for stimulating WOM. These two forms of advertising act in close conjunction with each other and must be intricately used together to achieve maximum spread and results.

Disclaimer: Our model is a gross simplification. It assumes that the advertising does not do anything to either leverage nor alienate an existing customer base. Furthermore, it ignores the erosion of effectiveness (and ultimately saturation) that generally occurs with repetition of an ad. Such simplifications are usually required in order to make mathematical models of phenomena as complicated as human behavior. This does not mean such models can't be useful, but it does make them dangerous to use without fully considering their limitations.

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