Save it or spend it? Advertising decisions amid consumer word-of-mouth

Most people have seen or heard from a friend, neighbor or family member about a product or service they've used and how their experience was. It's called observational learning or word-of-mouth. These communications don't provide an unbiased assessment of true quality. Given this, businesses are faced with the difficult decision of determining when and how to spend their ad dollars. New research in the INFORMS journal Marketing Science finds when consumers learn about products/services from other consumers, a business may actually want to spend more money to credibly signal its quality.

The study, "When Consumers Learn, Money Burns: Signaling Quality Via Advertising with Observational Learning and Word of Mouth," details that word of mouth and advertising are not the same. Word of mouth is believed to be "free" advertising; but this may not always be the case. In fact, the opposite may be true when the role of advertising is to credibly signal product quality to consumers.

Word-of-mouth interactions may involve underreporting (not everyone shares experiences), positive reporting (when positive experiences are communicated more widely than negative ones) or negative reporting (when negative experiences are communicated more widely than positive ones).

"While both word of mouth and advertising can provide information regarding quality to consumers, one would suspect a high-quality business should have to spend less on advertising as it would benefit from word of mouth," said Yogesh Joshi, a professor at the University of Maryland. "However, this research shows that word of mouth, rather than softening the need for spending on advertising, may require a high-quality business to allocate more resources to these quality signaling efforts."

Joshi and his co-author Andres Musalem of the University of Chile and Instituto Sistemas Complejos de Ingeniería (ISCI) say the benefits for a low-quality business force a high-quality one to spend more on advertising, to prove their worth and that their quality is better than the low-quality business that's getting traction from word of mouth.

"When all consumers share their experiences, a high-quality business may be better served by reducing its investment in advertising, and in certain cases by a lot," said Joshi. "Further, as more negative experiences are shared, it can be optimal for a high-quality business to spend more on advertising because as the sharing of negative experiences increases, some late consumers who would have otherwise been exposed to no experiences are now exposed to complaints."

When quality differences across types are not too strong, and consumers share more complaints, the researchers say a high-quality business may need to allocate more resources to its quality-signaling advertising efforts

Imagine what strategic advertisement can do for your product opinion. Well, Word-of-Mouth (WOM) does it nine times better! It has the power to alter customer decisions before, during and after the buying process.

Although 90% of it still happens offline, the online sphere is growing exponentially in reputation.

More than ever, consumers are looking towards their peers to make the right decision or find confirmation in what they bought. In this post, we will discuss three influential stages WOM has on consumer psychology. More specifically on their:

• Ethos or personal involvement
• Pathos or emotional involvement  
• Logos or rational involvement.

What seems to be a simple recommendation from a friend can have lasting effects on how we perceive our purchases.

Ethos is our personal involvement, it guides consumers into purchases that make sense for them. Often, even before we enter the buying process, we don't always have all the necessary information at hand.

In this digitised age, consumers rely increasingly on others and their experience with certain products. A first step many of us take is to ask our friends, family or our social media circles.

One study conducted on the effects of WOM with moviegoers shows how the lack of pre-information can alter consumers perception.

Consumers are often led by WOM because they feel it is a credible source of information. It is difficult to categorise the quality of a product or service before any given experience. Without being able to estimate your opinion, relating to someone else is helpful.

The next step in the buying process - when consumers already have an image of what the product will be- is where Pathos comes into play. Through our emotional involvement, we weigh out our options and see which one fits us.

In another study, two groups were presented with cookies. One group was presented with information on a leaflet that showed the cookie was of high quality. The other group was given a leaflet with information about the cookie being a cheap store-brand. During the tasting, there were two undercover scientists standing in front of the groups, also tasting the cookies.

Printed advertisements are great at guiding our opinion.

The logos is our rational understanding with purchases. It functions as a reasoning for why we buy a product. That is why WOM can also affect our post-purchase perception. Once we acquired the item we were looking for, we should be governed by our own logical conclusions. But that is not always the case.

The last study we will discuss is one that revolves around two groups of students, asked to listen and judge the performance of a tape recorder. Both groups are led by two undercover scientists.

When there is a consensus between two consumers, the power of WOM becomes stronger. Even more so when one of the consumers mentions their expertise. Somebody with knowledge about a product is more effective at changing our opinions.

The act of understanding that we made the right purchase is our logos. In the end, we want to conclude that what we bought is the best solution to our a problem. Surprisingly, WOW still affects our post-purchase-satisfaction.

Our logos, or rational involvement with a purchase, is satisfied when the product solves our problem but that feeling grows stronger when others confirm we made the right decision.

On different levels in our behaviour and in different stages of the buying process, WOM is a game changer. Whether you have knowledge about the product or not, listening to others changes our perception.

• Ethos: people want purchases that make personal sense to them.
   
• Pathos: consumers want to feel satisfied with their purchase.
   
• Logos: looking back to understand we made the right decision that solves our problem.  
   

Due to the rising online sphere of WOM, brands no longer have to sit on the sidelines. Brands can identify people that deliver powerful WOM about their products and invite them to an advocate community.