Word of Mouth Marketing: Showing me the money

Word-of-mouth (WOM) marketing, also known as referral marketing, is growing in popularity as a customer acquisition strategy.  Basically, referral programs use financial incentives to encourage existing customers to solicit their friends or family to purchase a new product. While such programs have been used for decades, WOM marketing is now being adopted in a wide range of industries including financial services, newspapers, hotels and automobiles.  Although many managers intuitively understand the power of referral marketing, they have had little third-party research to validate the ROI.  Thanks to a first-of-its-kind study, “Referral Programs and Customer Value” (to be published in the Journal of Marketing), companies can now understand how customer referral programs turn social capital into financial capital.   These findings are timely given the rapid growth of community-building social media and viral tools and the increasing cost of traditional media.   And, this research is helpful in providing many marketers with a methodology to study WOM effects that can work with their existing data and tools.

The study analyzed information from a database of 10,000 customers acquired by a German bank in 2006. Approximately, half of the customers came through the firm’s referral program and the other half came through traditional marketing efforts such as direct mail and advertising.  There were some important conclusions:   

Referred customers are more profitable in the short term

Referred customers generated higher margins than other customers. This difference was quite sizable at first, but eroded over time and came down to zero after about 1,000 days. The differences traced to the lower marketing spend per referred customer – even with a referral bounty – versus customers acquired via traditional marketing efforts.

Referred customers are more loyal

Referred customers were about 18% more likely to stay with the bank than other customers, and that gap did not fade over time. This occurs because individuals tend to have a stronger attachment to a company or brand if their friends or acquaintances also share a bond to the same organization.  Moreover, referrer behavior is a good example of the superior-match theory: An existing customer knows both the company and the prospect, and so has superior information to assess to what extent there is a good fit between the two.  In other words, people only refer prospects who they feel will match well with their own brand.

Referred customers have higher lifetime value to the firm

The margin advantage combined with higher customer retention creates a significant net gain in long-term customer value of 16% to 25% (read: the net present value of all the profits a customer generates over his or her entire association with the firm). This higher value traces to the presence of the “superior match” phenomenon as well as the fact that referred customers are less expensive to acquire. 

Despite these findings, some marketers may not completely buy into all WOM programs.  For example, there are concerns over cheating whereby opportunistic customers bring in unprofitable or problematic new customers just to earn a referral fee. (The research, however, indicates that the financial benefits of a customer referral program will still outweigh these negatives.) Secondly, referral programs will likely remain a B2C practice since paying referral fees to B2B customers’ employees could be conceived as a bribe. Of course, the absence of financial pay-outs does not mean that customer referrals are any less important in B2B markets. Companies just have to be more creative in finding proper incentives enabling them to capitalize on their existing customers’ networks.

Given their compelling benefits, marketers should look to deploy WOM marketing programs – where it makes strategic and brand sense – to grow their business.

 For more information on our services and work, please visit the Quanta Consulting Inc. web site.


2 comments so far

  1. Tanpa Modal Besar on

    Hai, I am new at internet marketing.Your blog and article is very useful.Thank you

  2. Simonne Lofte on

    Thanks for posting, I like this blog!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: