The 65/35 Rule and Hoping-for-the-Best

A small chain of specialty restaurants has discovered that most of its new customers (65 percent of them) come from word of mouth. The rest are a result of the owner’s advertising campaign.

Question: To get more business, should the owner invest more in advertising to reach customers who have not yet heard of him or invest in promoting more word of mouth?

The best answer is to invest in word of mouth. The math is simple. Let’s say you expect to increase business in each sector by 10 percent. That means that you’ll get 6.5 new customers per 100 if you invest in the WOM sector and only 3.5 new customers if you invest in the hope-for-the-best mass advertising.

Surprisingly, hoping to find new markets, many owners opt for the hope-for-the-best tactic and throw money at the 35 percent. However, mass media advertising is really expensive. These owners invest with the odds stacked against them from the beginning.

On the other hand, reaching an established customer base is relatively cheap and the return potential nearly double the hope-for-the-best. And you can’t beat word of mouth.

How do you stimulate WOM? Let’s think: customer discounts; targeted sponsorships; giveaways; birthday specials; strategic partnerships; it’s endless. It’s called customer retention and it’s almost always cheaper than advertising for new customers.

Posted by Harry Chittenden

Repetition: Is It Worth It?

Prashant Malaviya suggested in the June issue of the University of Chicago Journal of Consumer Research (subscription required) that people familiar with the subject of an advertisement are likely to elaborate on it in their minds relationally. That is, they think of it in terms of other products or services in the field and then move on with their lives. They take little or no action in response to the ad.

Other people might also elaborate on specific features of the product. A summary of the Chicago Journal article in Science Daily suggests that people who elaborate both on specific features and on relating to other products in the same category respond better to the ad. The article suggests that repeating ads in trade magazines whose readers are all knowledgeable about the particular “trade” might not be effective.

On the other hand, repetitive ads are effective if the readers are elaborating in their minds on both specific features of the product and relationally to other products.

For example, you see an ad about a camera. It boasts of an extraordinary filter that removes blemishes from portraits (specific feature elaboration). And the ad also says that the camera is priced to compete with other cameras (relational elaboration). Repetition of this ad in the same publication might be more effective.

The Science Daily article does not explain how Malaviya reached these conclusions. Or what to do about them except for cutting back on repetitive ads in trade pubs.

Hmmm. Who knew?

Posted by Harry