If you ask any business, they’ll tell you that their best advertising comes from word of mouth. But despite this age-old wisdom, way too often referral programs become haphazard and companies chase cold leads.
One of the main reasons that businesses forget about their referral strategy is that they don’t know the value of a referred customer. While it may seem difficult to quantify word-of-mouth, a recent study from the Wharton School of the University of Pennsylvania was able to measure the power of referrals and financial benefits of a referral program.
The study, entitled “Referral Programs and Customer Value”, set out to discover if there was a financial return on word of mouth. Researchers looked at the records of over 10,000 customers at a bank over a 3-year period. Half of the customers were acquired through the bank’s referral program and the other half through other marketing methods (direct mail, advertising, promotions, etc). The study asked:
- If referred customers have higher profit margins
- If referred customers are more loyal
- If referred customers have a higher customer lifetime value.
The study found that the financial benefits of the referral program were quantifiable and significant. Referred customers generated 16% more profits than their non-referred counterparts. The researchers attributed this to better matching between the bank and the referred customer – because the existing customer knew both the bank and the prospect, they could better assess if there was a good fit between the two. Essentially, current customers were better at finding qualified leads than the bank was.
The study also found that referred customers were 18% more likely to stay with the bank than non-referred customers. This was attributed to the fact that customers make referrals to friends and family that would truly benefit from the bank, and because people tend to have a stronger bond with organizations that their friends and family are also customers/members of.
Accounting for both the higher profits and greater loyalty of referred customers, the study found that the customer lifetime value of a referred customer can be up to 25% greater than the customer lifetime value of a non-referred customer. Better yet, the ROI the bank earned on the investment in its referral program was 60%. Therefore, they weren’t guessing about advertising investments – they were running a highly profitable and quantifiable client acquisition strategy.
So, if your business wants to capitalize on social proof and leverage your best customers, there are clear financial benefits of a referral program. What creative ways do you use to increase referrals?
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