Faculty of Economics and Business Administration Publications Database

Referral Programs and Customer Value

Schmitt, Philipp
van den Bulte, Christophe
Volume: 75
Number: 1
Pages: 46 - 59
Month: January
ISSN-Print: 0022-2429
Link External Source: Online Version
Year: 2011
Keywords: Customer referral programs; Customer loyalty; Customer value; Customer management; Word of mouth; Social networks
Abstract: Referral programs have become a popular way to acquire customers. Yet there is no evidence to date that customers acquired through such programs are more valuable than other customers. The authors address this gap and investigate the extent to which referred customers are more profitable and more loyal. Tracking approximately 10,000 customers of a leading German bank for almost three years, the authors find that referred customers (1) have a higher contribution margin, though this difference erodes over time; (2) have a higher retention rate, and this difference persists over time; and (3) are more valuable in both the short and the long run. The average value of a referred customer is at least 16% higher than that of a nonreferred customer with similar demographics and time of acquisition. However, the size of the value differential varies across customer segments; therefore, firms should use a selective approach for their referral programs. Read More: http://www.journals.marketingpower.com/doi/abs/10.1509/jmkg.75.1.46?journalCode=jmkg