Rethinking Referral Marketing (Part 6)

Harvard Business Review had an article as far back as 2007 entitled “How Valuable Is Word of Mouth?” by  V. Kumar, J. Andrew Petersen and Robert P. Leone. “The value of any one customer does not reside only in what that person buys. In these interconnected days, how your customers feel about you and what they are prepared to tell others about you can influence your revenues and profits just as much. Companies go to considerable lengths to motivate their customers to double up as salespeople.”

The authors outline a way to calculate Customer Referral Value (CRV), as a complement to Customer Lifetime Value (CLV).  They do so thus: “The obvious way to do this is to break the sample down into the four cells of a two-by-two matrix, which we’ve done for our telecom company sample in the exhibit “The Customer Value Matrix.” The customers who scored high on both measures we’ve called Champions. Those with high lifetime values but low referral values we call Affluents. Those with low lifetime values and high referral values we’ve termed Advocates. And those who score low on both measures we’ve labeled Misers. We found that the distribution of customers across the four cells was fairly even.”

Another HBR article in 2011 by Philipp Schmitt, Bernd Skiera and  Christophe Van den Bultehad entitled “Why Customer Referrals Can Drive Stunning Profits” showed the benefits: “We studied 10,000 accounts in a large German bank over a period of three years, and found that customers obtained through referrals are both more loyal and more valuable than other customers. After controlling for such factors as age and gender, we calculated that referred customers are, on average, about 18% more likely than others to stay with the bank. We also projected that they generate 16% more in profits (amounting to €40 each). Thus, the bank earns a return of about 60% on its €25 referral reward.”

There are also many books on the idea of referral / word-of-mouth marketing. Some of the titles from a list on Amazon by John Jantsch:

  • The Anatomy of Buzz Revisited
  • The Referral Engine
  • Purple Cow
  • Never Eat Alone
  • The Secrets of Word-of-Mouth Marketing
  • Endless Referrals
  • The 29% Solution
  • Get More Referrals Now
  • Word of Mouth Marketing
  • The Go-Giver

Another list by Jay Baer recommends some more:

  • Brains on Fire
  • Contagious
  • Creating Customer Evangelists
  • The Face-to-Face Book
  • Fizz
  • Made-to-Stick
  • Talk Triggers
  • The Tipping Count

In other words, there is a huge array of work that already exists. And yet, referral marketing did not seem mainstream in the marketer’s arsenal. As a customer, I was not asked for referrals by most of the brands. Why?

For me, the parallels with loyalty programs were uncanny. The ideas had been around for a long time. There were many companies offering software solutions. And yet, something was missing in the adoption and ability to drive profits.

Tomorrow: Rethinking Referral Marketing (Part 7)

Published by

Rajesh Jain

An Entrepreneur based in Mumbai, India.