Clients referred by word-of-mouth recommendations will produce more profit, stay longer with the firm, and have a longer customer lifetime, according to a new study "Referral Programs and Customer Value" by marketing professor Christophe Van den Bulte of the Wharton School.
"There's a lot of talk about word-of-mouth-marketing, and about making money out of social connections. Our first objective was to see if customer referral programs can indeed turn social capital into economic capital. Second, we wanted to come up with a methodology to assess the effectiveness of customer referral programs that was easy to implement with data and tools available to many managers."
Using information from a database of 10,000 customers acquired by the bank in 2006 -- about half of them through the institution's referral program and the other half through traditional marketing efforts such as direct mail and advertising -- the study tackled three questions:
- Do referred customers have higher margins than other customers?
- Do referred customers stay longer with the firm than other customers?
- Do referred customers have a higher customer lifetime value (CLV), the net present value of all the profits a customer generates over his or her entire association with the firm?
The answers, according to the study, are all positive.