Driving Profitability by Encouraging Customer Referrals: Who, When, and How

Abstract

Many firms are now using referral marketing campaigns to harness the power of word of mouth and to increase referrals to acquire new customers. Prior research has identified a method of computing the value of referrals using only a customer's actual past referral behavior to compute customer referral value (CRV). In this article, the authors develop and test a new four-step approach to compute CRV. In addition, they determine the behavioral drivers of CRV and then identify the most effective methods of targeting the most promising customers on the basis of their customer lifetime value (CLV) and CRV scores. The authors illustrate and test this approach through four separate field experiments with firms from two industries: financial services and retailing. They find that to maximize profitability, it is critical to manage customers in terms of both their CLV and CRV scores and that understanding the behavioral drivers of CRV can help managers better target the most profitable customers with their referral marketing campaigns.

Referral marketing: Harnessing the power of your customers

“…Of the prospects that did become customers, only 8% of the telecom customers and 11% of the financial services firm customers proved profitable (Kumar et al, 2007). Likewise, in the second financial services firm study cited earlier, 42% of these referral attempts for the financial services firm resulted in a prospect making a purchase and 77% of these referrals were profitable (Kumar et al, 2010).…”

“…Second, a study by Kumar, Petersen, and Leone (2010) found that high lifetime-value customers are not necessarily good recruiters of referred customers. This research classified consumers into four groups based on their lifetime value (low versus high) and their customer referral value (low versus high).…”

“…Another study of 14,160 customers of a major financial services firm also found a big gap between customers' stated willingness to refer and their actual referring behavior. While 70% of customers stated that they intended to make referrals, only 44% actually made a referral (Kumar et al, 2010). Three major studies identified consumer groups that would serve as excellent referrers.…”

“…Despite the widespread use of referral marketing, few studies have examined the value of word of mouth on referral behavior or how referral-based information can be used to more effectively secure new customers (Kumar et al, 2010). There has also been little academic research on when referral rewards should be used or the optimal design of referral programs (Xiao, Tang, & Wirtz, 2011).…”

Driving shareholder value with customer asset management: Moving beyond customer lifetime value

“…In addition to the five above-mentioned revenue drivers, the customer asset management literature widely acknowledges the importance of customer referrals and word-of-mouth in augmenting CLV (cf Kumar et al, 2010a;Kumar, Petersen, & Leone, 2010b;Villanueva, Yoo, & Hanssens, 2007). Note, though, that we exclude customer referrals and positive word-or-mouth from our conceptual framework, as these factors do not directly contribute to shareholder value formation.…”