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

Abstract

PurposeWith 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/approachIn 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.FindingsEmpirical 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/valueThis 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.