Even though word of mouth moves consumer markets more than any time in history, many marketers are still having a hard time turning social media into profits. Here’s what they need to know.

By Russ Fradin, contributor

FORTUNE — I’m fascinated by the story of Francesco Gonzaga, the Marquis of Mantua at the end of the 15th century. For many years, Gonzaga had been viewed as a young, untested leader. Then, he went off to fight for Italy against the French and, depending on whom you talked to, scored an impressive victory at the Battle of Fornovo in 1495. Eager to enhance his reputation as a valiant soldier and liberator throughout northern Italy, Gonzaga commissioned an aging but accomplished artist named Andrea Mantegna to paint him in a most flattering light. This indelible image — now hanging in the Louvre — was seen by thousands of 15th and 16th century visitors to the Renaissance church in Mantua each year, and it helped solidify Gonzaga’s political power far and wide. Mantegna’s ability to change the conversation for Gonzaga has real relevance today; and, as the following piece shows, modern marketers and social network influencers can benefit by joining forces in order to win over the consumers who currently inhabit our brand-hungry world.

Unlike Renaissance Italy, America is a land of many consumer brands. It’s also a nation that loves to talk about those brands. Indeed, one recent reckoning from The Keller Fay Group indicates that more than two billion conversations focus on products and services every day in the United States. No wonder, then, that eMarketer says that nearly 90% of all Americans get their product information from trusted sources like families and friends, or that McKinsey believes that word of mouth is the primary factor behind 20% to 50% of all the purchase decisions we make.

Technology, in the form of the current social media revolution, is clearly accelerating this trend.

The growth of social networking, online video, micro-blogging, blogs, podcasts, and a wide variety of other user-generated content — as evidenced by the successes of YouTube, Facebook, Tumblr, Twitter, and others — allows, encourages and inspires an almost infinite number of one-to-many word-of-mouth conversations. As a result, explains a study from Starcom MediaVest Group and ShareThis Network, sharing now generates more than 10% of all Internet traffic, almost half the volume of online search activity.

The powerful impact that these non-stop digital discussions are having on both people and products helps explain why brand after brand is now turning to social marketing. But even though word of mouth moves markets, many marketers are still having a hard time achieving the four key goals necessary for success with this new brand-building approach:

• Identifying and evaluating category influencers and brand supporters.
• Forming authentic, lasting relationships with these individuals, and developing them into brand advocates.
• Collaborating with these advocates to generate brand mentions and recommendations in social media.
• Measuring the results of these collaborations, and scaling them up to maximize the brand’s social reach.

In a nutshell, the real challenge for marketers is building and managing brand communities, and turning social relationships into valuable company assets. This can be especially problematic, because, according to Forrester Research, nearly 66% of interactive marketers aren’t measuring their social marketing efforts, and, according to a Bazaarvoice Software survey, only 40% tie their social marketing efforts back to revenue.

That’s why I believe that marketers will benefit immeasurably from technology infrastructure, or a CRM-like platform, that helps increase efficiencies as social media relationships between brands and influencers are formed and nurtured.
The need is clear here.

In every type of marketing — except word-of-mouth marketing — there are systems for marketers to manage the workflow and measure the results. This absence of a workflow and measurement system currently results in serious inefficiencies for brand marketers. And the pain of these inefficiencies is most acute when brand marketers try to coordinate the efforts of independent influencers and fans for the purpose of brand advocacy. It’s a cliché, but it is like herding cats.

Practically speaking, the lack of a workflow and measurement system means that many brand marketers have been unable to justify scaling up their spending on word-of-mouth marketing, even though they recognize what a powerful opportunity it represents. From my perspective, the most helpful workflow and measurement system must work across all social networks, because marketers want to reach people wherever they are. Without this type of broad-based solution, however, word-of-mouth marketing simply won’t be able to take its place as a primary component of the overall marketing mix.

But before we confront these critical process issues, marketers must clearly understand just who, exactly, the independent influencers are. A rough estimate tells us that there are millions of these influencers out there. And this is a largely untapped mid-tail market. We’re not talking about top-celebrity or high-profile bloggers, who are over-committed, over-exposed, and frequently overly demanding when they interact with brands.

No, the millions of independent influencers are an army of potential brand advocates who share enthusiastically with the consumers whose decisions determine a brand’s success. Most of these influencers are not well-known, but they have the ability to spur meaningful commercial growth and change. According to McKinsey, this group generates three times more word-of-mouth messages than non-influencers, and each of these messages has four times more impact on a recipient’s purchase decision.

Trust and transparency are of paramount importance here. Influencers’ audiences must believe that they are authentic, competent — and even expert — in their messages.

A recent eMarketer survey confirms that the quality and personalized nature of the social connection between influencers and their audiences is key to making word-of-mouth communications work. When asked what type of person is most influential in the social media space, 57% of the respondents chose someone with a handful of fans, friends, and followers that are tightly connected. Only eight percent chose someone who has millions of fans, friends, and followers with little or no connection. All of this tells us that authentic and honest connection between marketers and influencers, and between influencers and their consumer audiences, is crucial to the best brand-building today.

Russ Fradin is a digital media industry veteran with more than 15 years experience in the online marketing world. Russ co-founded and was CEO of Adify (acquired by Cox for $300M in May 2008) and co-founded SocialShield. He was also SVP of Business Development at Wine.com, EVP of Corporate Development at comScore and was among the first employees at Flycast (acquired by CMGi for $2.3B in January 2000). Russ is also an active angel investor in the digital world and is on a number of boards. Russ holds a BS in Economics from The Wharton School, University of Pennsylvania.

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Netflix is suffering after a series of public relations debacles — and now, shares are tanking on massive subscriber losses. The problem? Its chief isn’t hearing what customers are saying.

By Dan Mitchell, contributor

FORTUNE — There’s no denying that Netflix and its chief, Reed Hastings, have made serious missteps. In trying to move the company away from DVD rentals as it expands its streaming-video business and in raising prices for some customers, Netflix has suffered major setbacks one after the other. That doesn’t mean, though, that the overall strategy isn’t sound — only that Hastings has bungled the presentation and wildly misinterpreted the source of his customers’ anger. Most astonishingly, he is still refusing to do anything to do anything for his customers to make them feel better about the company.

And he’s been punished for it — severely — by both customers and investors. The future of movie rentals is clearly in streaming, and Netflix (NFLX) eventually will drop DVDs one way or another. In a since-dropped plan to split the company in two, with Netflix offering streaming and a new company, to have been called Qwikster, offering DVDs by mail, the company moved too abruptly. It alienated a lot of customers. And, it was all the worse having come just after the company changed its pricing, meaning that people who wanted both streamed movies and DVDs pay more. (That pricing is staying in place.)

Many of those customers had a righteous beef — those who wanted access to both DVDs and streams (because many movies aren’t available via streaming) would have been faced with an unnecessarily cumbersome process, having to order from two different Web sites with two separate billing systems. Others, though, had simply gotten used to having access to an extraordinary catalogue of films for an extraordinarily low price. When those prices went up, they reacted. On Monday during its third-quarter earnings conference call, the company revealed that over the past three months, it lost about 805,000 customers.

And yet, the bottom-line message from Netflix seemed to be: We’re moving to streaming, even though there are a lot of movies not yet available there, and you’re moving with us or else you’re paying a lot more. Oh, and you’re not getting more for your money; in fact, and many of you are getting less. Customers who want to continue having access to both DVDs and streamed movies are paying 60% more than they had been. They may still be better off than they would be in a world without Netflix, but they are worse off than they were before the price hike.

Some of Netflix’s problems could have been averted if the company had simply offered something for the extra money it was demanding. Perhaps even the split into two companies would have gone over. But Hastings still doesn’t seem to quite understand the nature of his customers’ rage. On Monday, he told analysts there would be no special attempt to bring back some of the customers Netflix has lost. “The focus is on bringing back our reputation and brand strength, but it won’t happen through grand gestures,” he said.

Hastings might understandably be nervous about grand gestures, since he hasn’t had much luck with them recently. But things are different when a grand gesture is actually a benefit to customers, as opposed to being simply a way to extract more money from them. And now that Netflix is entering a period of greatly increased costs and increased competition from the likes of Amazon (AMZN), the company can’t afford to rely on its brand alone.

In announcing earnings on Monday, the company forecast that profits will fall to between $19 million and $37 million in the coming fourth quarter. That’s quite a range, but at either end if it, it would be considerably down from the $62.5 million in profits Netflix reported for the third quarter, which were up 63% from the year-ago period. Investors are punishing the company severely, with shares trading more than a third lower in late-morning trading on Tuesday.

Netflix has its eye on the long-term future — a future of movies streamed over the Internet — and a future that lies largely overseas. That’s a good thing. “But the plans to sacrifice short-term profits concerned some people on Wall Street,” the Wall Street Journal reported on Monday.

If Hastings had handled its recent moves more deftly, it might not have lost so many subscribers. As it is, Hastings has put himself in the position where any criticism of him and his company is considered valid. It will take more than brand management to turn that around; he’s going to have understand what’s behind customer rage.

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These days, Yahoo seems to be more about generating rumors than solid prospects for the future. So why would Google ever want to risk getting involved? Here are six potential reasons.

By Kevin Kelleher, contributor

FORTUNE — If a company stays on the auction block long enough, rumors about its fate will eventually begin to repeat themselves. In 2008, while Yahoo co-founder Jerry Yang insisted the web giant wasn’t for sale, Microsoft emerged as a suitor. Then Google got involved.

Fast forward to 2011 and here’s Jerry Yang again downplaying reports of a Yahoo (YHOO) acquisition. Among the suitors is, again, Microsoft (MSFT), only this time it’s reportedly bankrolling a deal by joint buyers. And as the day follows the dawn, reports followed quickly that Google (GOOG) is also interested in financing private investors looking to buy Yahoo.

There are plenty of reasons a Google-backed deal would not pan out. First, the Wall Street Journal story reporting the possibility was based on a single source — that elusive “person familiar with the matter” — who said that “Google may end up not pursuing a bid.” Then there are the antitrust concerns: the Department of Justice shot down the 2008 search partnership Google wanted to arrange with Yahoo. The government would surely take a close look at any moves backed by Google. And then there are the strategic reasons — or lack of them. Much of Google’s future is focused on social and mobile — and Yahoo is weaker in both.

Still, that doesn’t mean there’s no virtue for Google in saving Yahoo. Here are six possible scenarios in which it might actually be a good idea:

Google is throwing sand in the gears of another deal. The most cited theory is that Google wants to drive up the price for Microsoft or another bidder. A simple phone call by someone familiar with the matter to a reporter is all it would take. Yahoo’s stock rose 4% Monday following the report. The risk in this move is that this slight rise in Yahoo’s share price won’t last long. In other words, this report would at best delay a Microsoft-backed deal. Much more likely is that Google would try to get into the Yahoo-takeover mix to give Microsoft second thoughts — or even drive it away if it’s on the fence. It could also deter smaller third parties from pursuing their own bid at all.

Google wants a bigger presence in display ads. Revenue from display ads are disappointing at Yahoo but they’re growing at Google, which is making $2.5 billion a year from them. Yahoo, however, has deep relationships with the web’s biggest advertisers as well as many popular sites. If putting Google’s money into Yahoo could open up access to Yahoo’s display customers, Google could see more display growth. Such a move would surely set off antitrust alarms.

Yahoo could bring more users to Google+. For most people, Facebook is still the go-to place to socialize with friends online. Google+ has signed up 40 million users in a few months, but that’s only 5% of Facebook’s 800 million active users. What Google needs is access to more active accounts — and Yahoo still has a lot of them. Yahoo, meanwhile, is even further behind Google when it comes to having a social-networking infrastructure. Since social networks rely on big numbers of users, corralling Yahoo members into Google+ would help Google build a strong rival to Facebook.

Google wants a closer look at Yahoo. When investors enter serious takeover talks with a company, they often demand a look at its financials and performance metrics. By backing some private equity investors who might otherwise have trouble raising money, Google can have access to all that data, even if the talks eventually fall through. There may not be much of Yahoo’s data that is crucial for Google to know, but there’s plenty that could be helpful: How is Yahoo’s search partnership with Microsoft really faring? Where is Yahoo’s display business strong, and where is it weak? What insights does Yahoo have in international markets, particularly Asia? What’s more, if Microsoft is involved in a takeover bid, it may have access to this same data. So why shouldn’t Google have access too?

Yahoo offers Google a backdoor to China. Google’s history in China is a rocky one, culminating in the company’s decision to shut down its China operations last year. But one of Yahoo’s strengths is its assets in China, including its 40% stake in Alibaba.

The truly speculative will consider this: If Google owned a stake in Yahoo, it would indirectly own a stake in Alibaba, one of China’s Internet giants. That could offer a way back into a growing market. It could also derail any chance that Alibaba would buy Yahoo. If Jack Ma controlled Yahoo, he could undercut Google on everything from online payment fees to search and display ad rates. Far-fetched? Sure, but coincidentally or not, Google said Monday that China renewed its operating license in the country. And the former head of Google China said on Quora that Alibaba and Ma aren’t suited to manage Yahoo. It’s hard not to read that and think, “but Google is.”

Investing in Yahoo will keep antitrust regulators off Google’s back. Google may be interested in helping Yahoo to thrive to lessen its chance of becoming a search monopoly. Without Yahoo around, Google could become so powerful in search and display ads that antitrust regulators end up doing more harm than a revitalized Yahoo ever could.

There is a precedent for such a move. In 1997, Microsoft invested $150 million in a struggling Apple (AAPL). Ostensibly, the investment was to encourage Apple to install Office and Internet Explorer onto Mac computers, but it also served to keep antitrust regulators at bay. (A side note: Microsoft later sold off its Apple shares, which would be worth several billion dollars today).

Yahoo’s future is unpredictable, so much so it seems like any outcome is possible at this point: A merger with AOL (AOL), a takeover by Jack Ma, a buyout by private equity firms financed in part by Microsoft, or Google, or someone else. But one thing that is growing less likely is the scenario that Jerry Yang wants — an independent Yahoo.

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Fortune’s curated selection of newsworthy tech stories from the last 24 hours. Sign up to get the round-up delivered to you every day.

Tony Fadell’s redesigned thermostat.

* Bloomberg reports that Apple (AAPL) may be developing a television set sporting what Steve Jobs told Walter Isaacson is “the simplest user interface you could imagine.” Piper Jaffray analyst Gene Munster predicts such a device could go on sale next year or in 2013. (Bloomberg)

* The “father of the iPod,” Tony Fadell, shows off his latest project: a redesigned thermostat. (Fortune)

* Will Amazon’s Kindle Fire become for the video industry what the iPod was for music? (Streaming Media)

* Netflix (NFLX) saw its shares plunge 40% yesterday after the company warned of more subscriber cancellations over its price plan changes and other controversial moves, like the introduction of and backtracking on the separation of its DVD business. (Reuters)

* Why it’s crunch time for Nokia, which will likely unveil the first of its Windows-based smartphones later this week. (The Wall Street Journal)

* HP (HPQ) CEO Meg Whitman joined the board of Zaarly, a startup being billed as the “mobile Craigslist.” (VentureBeat)

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He helped build the massively popular iPod and iPhone. Now, he’s turned to something very different: thermostats.

FORTUNE — Tony Fadell has defied skeptics before. Ten years ago, when a slick gadget he conceived and helped to build hit the market, most analysts shrugged, saying the new tech toy would be irrelevant to most people. The prediction ranks among to top bloopers in the history of tech punditry. Fadell’s gadget, the iPod, sold more than 300 million units and, in the process, revolutionized the music industry.

Now Fadell, who has been called the “father of the iPod,” is hoping to prove skeptics wrong one more time. After leading the team that built the iPod and playing a key role in the development of the iPhone, Fadell left his executive role at Apple (AAPL) in 2008. For the past two years, he has been hard at work quietly building a new electronic gadget. Like the iPod, it is controlled through a simple dial. And like the iPod, it’s likely to be greeted with skepticism. It is, after all, a thermostat.

But if the iPod was no ordinary music player, the thermostat built by Nest Labs, Fadell’s startup, is nothing like the drab plastic devices that control heating and air conditioning in millions of American homes. For starters, the device, which is being introduced on Tuesday and will be available in mid-November, has the kind of elegant, minimalist design that Fadell learned while working for his former boss, Steve Jobs. More important, just like the iPhone made cellphones smart, Nest wants to bring intelligence to thermostats: the device programs itself based on your daily routines and the temperatures you set. It constantly refines itself, senses your comings and goings to adjust accordingly, and automatically turns itself off when you are away.

Fadell says Nest was built on ideas that he learned at Apple, where the iPhone was conceived not as a cell phone with smarts, but rather as a computer that could make phone calls. “This is not a thermostat with a bunch of communications features,” Fadell said during a recent interview in the company’s unmarked offices in Palo Alto. “It is a computer and communications platforms with a little bit of thermostat.” And it is designed to help people cut their energy bills, he said.

The idea for Nest came out of frustration. Fadell was building an energy-efficient home near Lake Tahoe. When his contractor showed him his thermostat choices, Fadell balked. “There has to be something better,” he said. While thermostats manage roughly 50% of a home’s energy use, they haven’t changed much in years. Millions of homes are stillequipped with manual thermostats. The more advanced programmable thermostats are difficult to use and require constant adjustments. “If you want to do any kind of energy savings, you are programming them all the time,” Fadell says.

With a team of veterans from Apple, General Magic, Sling Media and Web TV, and with financing from Kleiner Perkins Caufield & Byers, Google Ventures (GOOG) and others, Fadell set out to design and build the Nest thermostat. The device, which will be sold directly to consumers at electronic stores like Best Buy (BBY) for $249, comes in an elegant box and is easy to install. In the first week, it relies on manual adjustments. But after that, algorithms designed by machine learning experts, set the temperature automatically. Those algorithms refine themselves every time you manually adjust the temperature. Sensors constantly monitor temperature and humidity, as well as ambient light and activity near the device or farther away in the house. “We can see if there is anyone in your home,” says Fadell. “We learn your schedule and your temperature preferences over a week. And we adapt continuously over time.”

Adjusting the Nest thermostat is easy: you simply rotate the outer ring up or down. Pushing on the display opens a set of intuitive menus. It also can connect to your home’s Wi-Fi network, allowing you to control it remotely from a phone or tablet. PC and mobile apps allow you to monitor your energy use and savings. Fadell says that energy savings will help buyers recoup the cost of device in about a year.

While the Nest thermostat is clearly aimed at early adopters in the iPhone generation, Fadell says the potential market is large. There are some 150 million thermostats in American homes and another 100 million in small offices and businesses. Every year, some 10 million new units are sold. “That’s as many as bicycles are sold in the United States,” he says.

That may be true. But bicycle are toys that people love to play with and many fans will pay good money for bicycles they can show off. Thermostats? Not so much, which makes it all the more difficult to handicap’s Nest future.

Regardless, Fadell plans to push his company beyond thermostats. As the name Nest suggests, the company will continue to be focused on products for the home. “It’s our first product,” he says. “We have ambitions for more. There is a lack of innovation in the home and we can apply our design talents to things other than thermostats.”

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