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Referred customers are more
profitable and more loyal.
9Case Study / Vol. 5, No. 1, 2013 / GfK MIR
Consumers love to share experiences within their social
networks. Just about anything – from photos to jokes or
instructional material – is passed on and exchanged, either
electronically or in person. Unsurprisingly, marketers increas-
ingly use word of mouth (WOM) 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” /// We compared two
groups of customers acquired by a leading German bank over
a three year period. All of the fi rst group were customers
acquired through the bank´s referral program. The second
group comprised a random sample of customers acquired
through other means such as direct mail or advertising
over the same period of time. An analysis of almost 10,000
accounts over a 33-month period showed that those referred
by other customers generate higher profi t margins, are more
loyal and show a higher customer lifetime value (CLV).
Referred customers are more profi table /// Referred
cus tomers are, on average, 4.5 cents per day more profi table
than other customers. The gap is even larger after control-
ling for differences in customer demographics and time of
acquisition. Whereas the average contribution margin of
non-referred customers is 30 cents/day, customers acquired
through the referral program have a margin 7.6 cents/day
higher, an increase of about 25 %. The difference in contribu-
tion margin is the highest in the fi rst year after the acquisition,
but decreases over time.
Do Referral Programs
Increase Profits?
Philipp Schmitt, Bernd Skiera and Christophe Van den Bulte
keywords
Customer Referral Programs,
Customer Acquisition, WOM (Word-of-Mouth),
Customer Management, Loyalty,
Customer Value
•
the authors
Philipp Schmitt,
graduate of the Business and Economics doctoral program
at Goethe University, Frankfurt, Germany
pschmitt@wiwi.uni-frankfurt.de
Bernd Skiera,
Chaired Professor of Electronic Commerce at
Goethe University, Frankfurt, Germany
skiera@wiwi.uni-frankfurt.de
Christophe Van den Bulte,
Professor of Marketing at the Wharton School of the
University of Pennsylvania, USA
vdbulte@wharton.upenn.edu
10 GfK MIR / Vol. 5, No. 1, 2013 / Case Study
Referred customers are more loyal /// The speed at
which referred customers churn and leave the bank is, on
average, about 18 % lower than that of other customers. In
contrast to the eroding difference between referred and non-
referred customers in the contribution margin, there is no
such erosion in customer retention.
The difference in customer lifetime value varies
according to customer /// The lifetime value of referred
customers, measured over a six-year horizon, was 16 %
higher, on average, than that of non-referred customers with
similar demographics and time of acquisition. Breaking down
the data by age (see Figure 1) shows that the difference in
lifetime value between referred and non-referred customers
is most pronounced among younger people and among retail
(as opposed to private banking) customers.
The referral program pays off /// Every existing customer
who brought in a new customer received a reward of € 25.
Given the average difference in customer lifetime value of € 40,
this amount implies a Return on Investment (ROI) of roughly
60 % over a six-year period. And this calculation does not even
take into account that the total acquisition costs of referred
customers are around € 20 lower than those of other custom-
ers. The 60 % ROI is therefore a rather conservative estimate.
Can these results be generalized? /// Though the fi nd-
ings pertain to a single company from a single industry,
there are several reasons to expect referred customers to be
more valuable than other newly acquired customers.
> First, people prefer to keep an even balance in their social
exchanges. Because referring customers receive a reward,
customers are likely to feel obliged to bring in new custom-
ers who they think may be valuable to the company. Second,
even apart from any monetary incentives, people feel better
if they generate a match that works for both the company
and the referred person. Most people would recommend a
product to a friend or family member only if they believe it
to be relevant and useful for the other person.
> Further, having a person close to oneself who is a customer
of the same company should increase one’s trust in the
company and strengthens the emotional bond they have
with it. This effect implies that referred customers are less
likely to churn than non-referred customers, provided that
their referrer does not churn either (which is usually the
case for customers who are willing to recommend a product
or service).
> Finally, acquisition through referral can also result in infor-
mational advantages, making referred customers more
profi table than other customers. Referred customers are
likely to have discussed the company’s offerings with their
referrer. As a result, they are likely to use its products
more extensively than novice customers who take a more
cautious approach in building involvement.
The encouraging results of this study, however, do not imply
that “viral-for-hire” works in each and every case. Referral
programs should be most benefi cial for products and services
that customers might not appreciate immediately. Products
and services that imply some sort of risk should also benefi t
more than average from referrals because prospects are likely
to feel the risk is lower when a trusted person has positive
experiences.
Managerial implications /// The study shows that refer-
ral programs can help companies to selectively acquire more
valuable prospects and to retain them longer at lower cost.
However, companies should think carefully about which
prospects to target with referral programs and how big of
a referral fee to provide. For the program we analyzed, we
found that the customer value differential is much larger in
some segments than in others. Hence, instead of the cur-
rently practiced “all in” approach, companies should design
and target referral programs such that attractive customers
are more likely to be pulled in. Additionally, a referral should
be monitored closely to see if it is effective at identifying
good prospects and if acquisition costs do not exceed the
subsequent value of the customers.
»
The speed at which referred customers
churn and leave the bank is,
on average, about 18 % lower than that
of other customers.
«
11Case Study / Vol. 5, No. 1, 2013 / GfK MIR
—
Managerial summary of the “Journal of Marketing”
article that received the 2011 MSI/H. Paul Root Award
for making the most signifi cant contribution to the
advancement of the practice of marketing:
Schmitt, Philipp; Skiera, Bernd; Van den Bulte, Christophe
(2011), “Referral Programs and Customer Value,” Journal of
Marketing, Vol. 75 (January), pp. 46 – 59.
Schmitt, Philipp; Skiera, Bernd;
Van den Bulte, Christophe (2011):
“Why Customer Referrals Can Drive Stunning Profi ts”,
Harvard Business Review,
Vol. 89 (June), p. 30.
FURTHER READING
figure 1:
Percentages di erences in customer lifetime value
Private Banking Customers
Retail Banking Customers
Female Customers
Male Customers
> 65 years of age
56 – 65 years of age
46 – 55 years of age
36 – 45 years of age
26 – 35 years of age
< 25 years of age
15 %
18 %
– 3 %
22 %
24 %
22 %
2 %
23 %
36 %
10 %
