TLDR: Don’t overspend on sales and marketing – use data to gauge where the sweet spot is.
For anyone who watched the 2011 Matt Damon film Contagion – and most people who have been paying attention to the news the last 11 months – the concept of R0 (R naught) might be familiar.
I’m not going to spend lines discussing epidemiology, but I am going to borrow the concept of R0 and apply it to marketing – specifically referral marketing and when to spend on it.
Devon is the head of marketing for a start-up company that makes smart phone apps. Given a limited budget, the team has decided that broadcast advertising is off the table (or minimal at best). Devon knows that their latest app, Flucru, will live or die by word of mouth.
To simplify this scenario, we’ll use the SIR model of epidemiology which treats the word of mouth campaign like the spread of something contagious. I won’t get into the model details here – but to summarize, it deals with those who are susceptible, infected and recovered. In marketing, let’s call this potential buyers, buyers and defectors.
So what should Devon be thinking about when considering funding a word of mouth campaign? R0.
R0 in this case is the probability of referral multiplied by the probability of contact divided by the probability of defection.
Devon’s team can’t do much about the probability of customers communicating with each other – and they can’t do much to influence defections, as this is based on quality, new competition and their loyalty team.
They can influence the referral probability, but it will cost money in incentives for current users to increase their rate of referral. Should the team spend the money?
This depends on R0 and what that spending would do to it. If R0 is less than 1, the app referrals will fizzle out before they reach the total potential buyers and their app will fail. If R0 is greater than 1, referrals will grow the user base until something reduces R0 or they reach all potential buyers.
In one scenario, let’s say R0 is 1.5 – should Devon spend money to increase the referrals? The short answer is no. At this point, any spending will only serve to accelerate reaching the total market but it will not change the total size of that market and it will not impact defections. If everyone has the same life cycle of being a user, all Devon has done is move potential users forward in time and spend money to do so, reducing total profitability.
The long answer, though is maybe. Since defection rates won’t hold constant – and are likely to increase as new competition enters the market – Devon may want to move fast to stay ahead. But their team needs to be cautious about how much they spend, what the total expected profitability of the app is and myriad other factors.
Now if R0 is below 1, Devon will need to consider how much spending is necessary to increase referrals such that R0 is greater than 1. If they can’t get R0 over 1, then this campaign is doomed before it even begins and they either need to find money to conduct advertising or abandon the app altogether. So the short answer is, yes, so long as they can afford to drive referrals enough to create a contagious app.
The long answer of course is maybe not – because there is a lot more to a business than one simple model.
Epidemiology has some useful tools that can be applied to marketing in business. Of course they are only tools around which we need to apply judgment. They should be used with a variety of tools and models to make the best decisions.
Please, think carefully about sales and marketing spending, because at some point there are diminishing returns on each dollar spent!