Word-of-mouth (WOM) marketing has become cool again with marketers looking to improve acquisition rates. But many of those same marketers still look skeptically at using “stimulated” WOM (a.k.a. referrals) as opposed to its supposedly “purer” sibling, organic WOM. But a recent study published in the AMA Journal of Marketing makes it clear: referral marketing generates customers who have higher lifetime values, are more loyal, and contribute higher margins per year than other customers.
The study is from Wharton School Associate Professor of Marketing Christophe Van den Bulte, Goethe University Frankfurt Professor Bernd Skiera, and doctoral student Philipp Schmitt. It focused on Germany’s third-largest bank and the nearly 10,000 new customers gained through referrals and other means over 12 months. Overall, it tracked these customers for 33 months and determined that:
Referred customers are approximately 25% more profitable per year (though this difference does even out after about 2.5 years).
Referred customers are 18% less likely to churn than non-referred customers — and that difference remains over time.
Referred customers have approximately 25% higher customer lifetime values than non-referred customers — even when you factor in referral costs.
“In short,” the study asserts, “referred customers are more valuable in both the short and the long run.” Also interesting are the points about the social dynamics that make referred customers good matches for companies:
Customers who get a reward for a referral, and who aren’t simply opportunists, feel obliged to refer customers who they think will be valuable to the company.
People tend to interact with people like them. So good customers, in general, will know other people who can become good customers.
Put simply, offering referral incentives to your customers doesn’t just give away money. It causes them to want to deliver worthy customers in return. And who better to deliver worthy customers than people who are already worthy customers? Referral marketing builds your brand. Extole can help you generate more high-value customers by reaching out to the ones you already have. Request a free demo to find out how.