Understanding the effectiveness of word-of-mouth: an elasticity perspective

Purpose - With the increasing usage of social networking sites, there has been considerable interest in Word-of-Mouth (WOM) research. The purpose of this paper is to propose that economic elasticity theory can be applied to evaluate WOM effects and serve as the basis for cross-product comparison. The practicality of the proposed methodology is demonstrated through a case study. It is hoped that the result of this study solves the argument of WOM effects as shown in past research. Design/methodology/approach - In order to remove restrictions of measuring WOM objectively, the research asked consumers to form their positive evaluation of WOM about a product or service. In the event that consumers can assess feelings accurately, the WOM consumption function can be constructed and the marginal effect of WOM estimated. The study uses a self-reported questionnaire to estimate WOM elasticity for 13 products. In total, 465 valid questionnaires were collected. Findings - Empirical results demonstrate that: first, for all 13 product categories, a significant percentage of respondents are very sensitive to the WOM of product they want to buy; and second, the WOM elasticity of the 13 product categories is between 0.24 and 1.31; the average elasticity was 0.84 for service product and 0.43 for physical goods. Originality/value - This study may lead to a better understanding of the effectiveness of WOM. WOM elasticity provides an alternative view to examine WOM effects across different products; moreover, it offers an opportunity to re-evaluate the results of past research.