Recognizing the impact recommendations have on their businesses, 92% of the companies we surveyed said customer word of mouth was very important to their businesses’ success. Our latest survey of over 200 retail and restaurant owners and managers helps explain why. Almost two-thirds of these businesses said word of mouth was responsible for generating over half their new customers and, among smaller businesses, the impact was even more pronounced with 75% acquiring the majority of their customers through word of mouth.

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.

A recent Buzfactor survey conducted by Vizu asked 300 consumers, “What factors most influence your decision to try a business for the first time?”, and found only 4.5% of consumers said it was advertising. And while online reviews are important, a business’s location or the availability of a coupon or discount both have greater influence.  However, none of these comes close to the impact recommendations have on where we shop and dine or what local service providers we select.

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.

Word-of-mouth literally occurs all around us. According to the Keller Fay Group, a projected 3.5 billion brand-related conversations occur every day. These conversations influence the brands we buy, the restaurants we try, the books we read, and the movies we see. If you are like most consumers, odds are you asked a friend or neighbor for their opinion on everything from the dentist you use to where you get your car repaired and your hair cut. In fact nearly 80% of consumers say they trust recommendations from family and friends over all other forms of advertising and marketing.”

While the importance of social influence in marketing is clear, the fleeting and random nature of word of mouth communications has made it difficult for word of mouth to scale beyond an individuals personal network of relationships. Consequently, over the last half century, mass media has aggregated ever larger audiences. As a result,  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 exists for word of mouth to scale in ways not previously thought possible. According to an October 2008 Forrester Research report by Josh Bernoff, “three in four US online adults now use social tools to connect with each other.” These social networks allow word of mouth to be amplified far beyond its traditionally limited audience.  The implication for business is significant because customers will now have the ability to share their experiences with millions of consumers.

We are all part of many societal 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, these conversations are both unstructured and fragmented which makes sharing them on any scale difficult. Technologies, like those being developed by Buzfactor,  will not only increase consumer access to to this highly valuable content but also dramatically increase the likelihood these recommendations will be shared well beyond our personal network of relationships. The impact this will have on traditional media will be profound because, very simply, we trust our friends and neighbors more than we do advertising.