Driving Profitability by Encouraging Customer Referrals: Who, When, and How

Abstract Many firms are now using referral marketing campaigns to harness the power of word of mouth and to increase referrals to acquire new customers. Prior research has identified a method of computing the value of referrals using only a customer's actual past referral behavior to compute customer referral value (CRV). In this article, the authors develop and test a new four-step approach to compute CRV. In addition, they determine the behavioral drivers of CRV and then identify the most effective methods of targeting the most promising customers on the basis of their customer lifetime value (CLV) and CRV scores. The authors illustrate and test this approach through four separate field experiments with firms from two industries: financial services and retailing. They find that to maximize profitability, it is critical to manage customers in terms of both their CLV and CRV scores and that understanding the behavioral drivers of CRV can help managers better target the most profitable customers with their...

[1]  S. Helm,et al.  Calculating the value of customers’ referrals , 2003 .

[2]  V. Kumar,et al.  Practice Prize Report - The Power of CLV: Managing Customer Lifetime Value at IBM , 2008, Mark. Sci..

[3]  Robert P. Leone,et al.  How valuable is word of mouth? , 2007, Harvard business review.

[4]  N. Ravishanker,et al.  Multichannel Shopping: Causes and Consequences , 2007 .

[5]  Linda L. Price,et al.  The market maven: A diffuser of marketplace information. , 1987 .

[6]  David Godes,et al.  Firm-Created Word-of-Mouth Communication: Evidence from a Field Test , 2009, Mark. Sci..

[7]  H. Håkansson,et al.  Dyadic Business Relationships within a Business Network Context , 1994 .

[8]  P. Verhoef Understanding the Effect of Customer Relationship Management Efforts on Customer Retention and Customer Share Development , 2003 .

[9]  Lawrence Feick,et al.  A Penny for Your Thoughts: Referral Reward Programs and Referral Likelihood: , 2007 .

[10]  Katherine N. Lemon,et al.  Quantifying the Ripple: Word-of-Mouth and Advertising Effectiveness , 2004, Journal of Advertising Research.

[11]  Rajkumar Venkatesan,et al.  A Customer Lifetime Value Framework for Customer Selection and Resource Allocation Strategy , 2004 .

[12]  Katherine N. Lemon,et al.  What Is the True Value of a Lost Customer? , 2003 .

[13]  Dominique M. Hanssens,et al.  The Impact of Marketing-Induced versus Word-of-Mouth Customer Acquisition on Customer Equity Growth , 2008 .

[14]  David Sibbet,et al.  75 years of management ideas and practice 1922-1997 , 1997 .

[15]  Denish Shah,et al.  Building and sustaining profitable customer loyalty for the 21st century , 2004 .

[16]  Roderick M. Kramer Caída desde las alturas , 2003 .

[17]  Bruce Cooil,et al.  A Longitudinal Examination of Net Promoter and Firm Revenue Growth , 2007 .

[18]  Tom J. Brown,et al.  Reassessing the Impact of Television Advertising Clutter , 1993 .

[19]  Gregory S. Carpenter,et al.  Late Mover Advantage: How Innovative Late Entrants Outsell Pioneers: , 1998 .

[20]  Shankar Ganesan Determinants of Long-Term Orientation in Buyer-Seller Relationships , 1994 .

[21]  S. Chib Bayes inference in the Tobit censored regression model , 1992 .

[22]  R. Chandy,et al.  Managing the Future: CEO Attention and Innovation Outcomes , 2007 .

[23]  Donald B. Rubin,et al.  The Calculation of Posterior Distributions by Data Augmentation: Comment , 1987 .

[24]  V. Mahajan,et al.  Diffusion of New Products: Empirical Generalizations and Managerial Uses , 1995 .

[25]  J. Petersen,et al.  Are Product Returns a Necessary Evil? Antecedents and Consequences , 2009 .

[26]  W. Wong,et al.  The calculation of posterior distributions by data augmentation , 1987 .

[27]  Baohong Sun,et al.  Product Strategy for Innovators in Markets with Network Effects , 2004 .