Benefits of referral programs


A study conducted by the Goethe University Frankfurt and the University of Pennsylvania, on referral programs and customer value which followed the customer referral program of a German bank that paid customers 25 euros for bringing in a new customer, was released in July 2010. According to Professor Van den Bulte, this is the first ever study published on the financial evaluation of customer referral programs. The study found that referred customers were both more profitable and loyal than normal customers. Referred customers had a higher contribution margin, a higher retention rate and were more valuable in both the short and long run.

On whether customer referral programs are worth the cost, the study says that it records "a positive value differential, both in the short term and long term, between customers acquired through a referral program and other customers. Importantly, this value differential is larger than the referral fee. Hence, referral programs can indeed pay off."

There are two types of rewards provided by referral programs.

In one option, current customers are given an incentive. The referral rewards can be in different forms, such as cash, prizes, discounts, shopping vouchers, or redeemable points.For example, mobile phone operators give a referring customer a one-time reward and add long-term savings depending on his or her individual usage. The operators also offer a lower rate for interactions between customers than for interactions with noncustomers.

The second program is where the referrers benefit from existing customers by having increased visibility or recognition as a specialist or by gaining special treatment, especially if the customers become the partners of company.

Advantages :

Referral-based customers are better matched. The referred customers are likely interacting with people similar to themselves. 

Existing customers know the purpose of marketing and understand the need for potential clients. The referrers can measure a good fit between the two and the well-matched customers can help the company produce more profits at a lower cost.

The value and contribution of customers acquired through referral campaigns are higher than those of non-referred customers.

Referral programs are a good method to define consumer satisfaction. If comparatively few consumers are willing to act as referrers, a company's customer satisfaction may be low.

Referral programs help the company establish long-term relations with customers. The company can match motivations with consumer expectations and raise the effectiveness of market programmes. Referral reward programs can also be regarded as a tool for retaining current customers.


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