Key Concept

Marketers may be underestimating the impact of their marketing campaigns, which, a new study shows, impacts not only the target customers, but also the social connections of those customers.

Idea Summary

The results of the study showed a 35% increase in usage by the targeted customers and a 10% increase in usage by the connections of the targeted customers. In addition, suspensions decreased for both target customers and their connections, and churn decreased for the connections (the study did not include the targets’ pre-paid churn, because the six-month process extended beyond the study’s time frame.)

What explains this ripple effect on the connections of targeted customers? Word of mouth is not the answer. Customers who hear about others receiving free money from a company are not likely to be inspired to spend more money with that company.

The answer, instead, lies in the concept of network externalities — a concept in which the value of a product or service is increased by the number of users of that product. For example, if Facebook were only used by a small number of customers, it would not be as valuable to its users. Facebook is valuable because so many of its customers’ friends and family also have Facebook pages. The effect of network externalities extends beyond telecommunications and social media. Online games, cloud storage and file-sharing services such as Dropbox, sharing economy services such as airBNB and Uber, and payment services such as Paypal are other examples of network-based services that benefit from positive network externalities.

In sum, by increasing the targeted customers’ usage of the cell phone plan, the marketing campaign in this study increased the value of the plan for those customers’ social connections as well. The researchers calculate that this spillover effect earned the company an extra $.85 for every non-targeted customer in the target’s network.

Business Application

Customer lifetime value is a tried-and-true measure of how much value a customer represents to a company. Today, however, the value of network externalities must also be counted when identifying profitable targets for CRM campaigns.

In addition, the researchers note that many more products and services are network-influenced than companies might think. Restaurants or gyms, for example, have a social influence element to them. A patron who favours a restaurant is likely to recommend that restaurant to friends. The value of such a patron thus extends beyond the amount that he or she spends on food.

The challenge is identifying such patrons. A restaurant’s reservations data could provide some clues. Patrons who have been part of large groups, or return with different meal companions may be the profitable social influencer you want to target.