Referral Programs: Who Should You Reward? (Study)
Referral programs bring you better customers that spend more + are more loyal. But how exactly should you structure the incentives? Who should you reward?
This is the question that researchers from Goethe University Frankfurt and University of Pennsylvania set out to answer in their paper "Referral Programs and Customer Value" (pdf here).
Profit margins, retention rates and lifetime customer value were significantly higher for referred customers.
Here are some of the key insights:
Referred customers started out with profit margins that were more than 25% higher than non-referred customers. The researches had two hypotheses as to why:
These advantages did gradually diminish over time as the bank accumulated the same amount of information about both referred and non-referred customers. More importantly, non-referred customers who weren't a good match for the bank were more likely to leave as time went by.
Even though profit margins became equal over time, the study still found that the average lifetime customer value of referred customers was 16% higher than that of non-referred customers.
The research showed that the probability of remaining a customer by the end of the study was 82% for referred customers and 79.2% for their non-referred counterparts. Analyzing this data, researchers found that customers acquired through the referral program were 18% less likely to defect than non-referred customers.
If you're hungry for more details, you should definitely check the full paper here.