There are several success stories of products and companies that used word of mouth as the primary mode of marketing versus spending hundreds of thousands or millions of dollars on advertising.
Dropbox is a champion of word-of-mouth based marketing. They used a freemium model to get people to use their product and then offered a great incentive (more storage space) when a user referred the product to a new user. With the incentives appropriately aligned, each user now effectively turned into a word-of-mouth advertiser for the product. This led to their famous exponential growth during the crucial early stages of the company, and eventually to their current annual revenue of over $1 billion.
The effectiveness of word of mouth depends heavily on the type of product and company and there is no one-size-fits-all. Here are the ways in which word-of-mouth, when done right, outdoes traditional advertising:
When you heard from a friend about this cool new cloud-based storage service called Dropbox, did you treat this recommendation the same as you would a commercial that airs during an NBA halftime show? Odds are, probably not. Word of mouth is far more persuasive than any other form of advertisement. We trust our friends far more than a TV commercial that. While a TV commercial will only say great things about the product or company, our friends are much more credible and are likely to tell us both good things and bad things from their experiences using products.
When you used Dropbox for the first time and were incentivized to tell your friends about it, you probably told the friends that would get the most value out of it rather than just everybody you knew. We are always looking to build our social currency and the best way to do this is by offering up useful pieces of information to people who would get value out of it. We target the things we say to the people we are talking to, much unlike a TV commercial or the front page of a newspaper, which are targeted at literally everyone. Word of mouth naturally extends towards targeted sharing of the news, experience, and values of your product.
It does have to be said that there are some products and industries that this applies to more than others. Dorpbox was extremely well suited to word of mouth. Enterprise datacenter technologies like VMware and Nutanix may not benefit in the same ways. It is important to fit the qualities of word-of-mouth advertising with those of the product and company, and use the ones that will lead to successful growth. If you’d like to learn more, I’d encourage you to buy Jonah Berger’s truly enlightening classic book, Contagious.