Faculty of Economics and Business Administration Publications Database

Do Referral Programs Increase Profits?

Authors:
Schmitt, Philipp
van den Bulte, Christoph
Source:
Volume: 5
Number: 1
Pages: 8 - 11
ISSN-Print: 1865-5866
Link External Source: Online Version
Year: 2013
Keywords: Customer Referral Programs; Customer Acquisition; Word-of-Mouth; Customer Management; Loyalty; Customer Value
Abstract:

Marketers increasingly use word of mouth to promote products or acquire new customers. But is such company-stimulated WOM effective? Are customers who are referred by other customers really worth the effort? A recent study clearly says “yes”. In a study of almost 10,000 accounts at a German bank, the referred customers turned out to be 25?% more profitable than customers acquired by other means. Over a 33-month period, they generated higher profit margins, were more loyal and showed a higher custo­mer lifetime value. The difference in lifetime value between referred and non-referred customers was most pronounced among younger people and among retail (as opposed to private banking) customers. The reward of €?25 per acquired customer clearly paid off. Given the average difference in customer lifetime value of €?40, this amount implied a return on investment (ROI) of roughly 60?% over a six-year period. The encouraging results of this study, however, do not imply that “viral-for-hire” works in each and every case. Referral programs would be most beneficial for products and services that customers might not appreciate immediately. Products and services that imply some kind of risk would also benefit to a more than average degree from referrals because prospects are likely to feel more confident when a trusted person has positive experiences. Companies should consider carefully which prospects to target with referral programs and how large a referral fee to provide. A recent study clearly says “yes”. In a study of almost 10,000 accounts at a German bank, the referred customers turned out to be 25?% more profitable than customers acquired by other means. Over a 33-month period, they generated higher profit margins, were more loyal and showed a higher custo­mer lifetime value. The difference in lifetime value between referred and non-referred customers was most pronounced among younger people and among retail (as opposed to private banking) customers. The reward of €?25 per acquired customer clearly paid off. Given the average difference in customer lifetime value of €?40, this amount implied a return on investment (ROI) of roughly 60?% over a six-year period. The encouraging results of this study, however, do not imply that “viral-for-hire” works in each and every case. Referral programs would be most beneficial for products and services that customers might not appreciate immediately. Products and services that imply some kind of risk would also benefit to a more than average degree from referrals because prospects are likely to feel more confident when a trusted person has positive experiences. Companies should consider carefully which prospects to target with referral programs and how large a referral fee to provide.

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