|Leone's research on referral advertising
featured in Harvard Business Review
High-spending loyal consumers are traditionally the most coveted by corporations. However, new research in the October issue of Harvard Business Review by a Fisher professor shows that some customers who spend considerably less could be more valuable because of their vast social networks and their ability to to communicate their positive experiences with a company.
Corporations have long relied on consumers word-of-mouth referrals to capture new customers. Firms that effectively identify customers who generate the most referrals could expand their revenue streams by millions of dollars annually, according to Robert P. Leone, the Berry Chair of New Technologies in Marketing and co-author of the study.
The study, conducted along with University of Connecticut marketing professor V. Kumar and doctoral student J. Andrew Petersen, is the first to track the value corporations gain from this unofficial sales force of satisfied customers. It also examined how companies build marketing campaigns to motivate customers to refer new customers.
Working with managers at a telecommunications firm and a financial services firm, the researchers polled a sampling of customers on their referral intentions and then tracked the consumer’s actual spending and referral habits.
The researchers found that it would be a critical mistake to offer referral incentives only to its highest spending customers. The companies risk alienating key ambassadors, who are in the medium and low spending groups, which could offend them to the point they would actually spread negative word-of-mouth.
At the telecommunications company, its key influencers (those with high word-of-mouth and large social networks) only spent an average of $180 per year with the firm, but they generated an average of $670 of business through referrals. Meanwhile the company’s most avid customers who spent an average of $1,219 per year yet only referred an average of $49 in new business. The difference between the two groups annually is only $418 per customer.
“A lot of companies do very little to keep customers who don’t spend very much because they think that the marketing costs to hold on to these customers are too high even though the word-of-mouth value can be very large,” Leone said. “Unknowingly they create bad feelings on the part of these customers and in some situations these very influential advocates then use their social networks to spread negative reviews about the firm actually hurting their business.”
The researchers implemented three one-year marketing campaigns for both the telecommunication and financial services firms to boost sales and referrals in three market segments. They customized the campaigns to bolster a customer’s lifetime value or their referral value.
By encouraging members of these market segments to refer more customers or spend more money with the firm, the telecommunications company experienced increased profits of $486,090 or $62 per customer from the three marketing campaigns. If the campaign was expanded to the firm’s 40 million customers it could increase the value of its customer base by approximately $50 million, Leone said.
“$62 per customer might not look that large, but when you consider the number of customers this firm has in their database the impact to the bottom line is in the millions of dollars,” Leone said. “This can be achieved with very little effort on the part of the company in terms of the size of the incentives."