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<p>Marketers increasingly use word of mouth to promote products or acquire new customers. But is such companystimulated WOM effective? Arecustomers 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 profi table than customers acquired by other means. Over a 33-month period, they generated higher profi t 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 confi dent 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.</p>
</abstract>

Marketers increasingly use word of mouth to promote products or acquire new customers. But is such companystimulated WOM effective? Arecustomers 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 profi table than customers acquired by other means. Over a 33-month period, they generated higher profi t 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 confi dent 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.

Do Referral Programs Increase Profits

Graduate of the Business and Economics doctoral program at Goethe University, Frankfurt, Germany

Chaired Professor of Electronic Commerce at Goethe University, Frankfurt, Germany

Professor of Marketing at the Wharton School of the University of Pennsylvania, USA

NIM Marketing Intelligence Review

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

{"article-title":"Do Referral Programs Increase Profits"}

Marketers increasingly use word of mouth to promote products or acquire new customers. But is such companystimulated WOM effective? Arecustomers who are...

Do Referral Programs Increase Profits

Published Online: Jul 16, 2014

Page range: 8 - 11

DOI: https://doi.org/10.2478/gfkmir-2014-0020

© 2014

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.