Your customer referral program is actually profitable.

by | Sep 21, 2015 | Advertising, Fierce Excerpts

Now Reading | Why Customer Referrals Can Drive Stunning Profits 

If you are wondering if your customer referral program really works, the answer is yes according to research done by Harvard Business Review. Not only do they say it can be profitable, but strikingly profitable. Let’s check out why.

We studied 10,000 accounts in a large German bank over a period of three years, and found that customers obtained through referrals are both more loyal and more valuable than other customers. After controlling for such factors as age and gender, we calculated that referred customers are, on average, about 18% more likely than others to stay with the bank. We also projected that they generate 16% more in profits (amounting to €40 each). Thus, the bank earns a return of about 60% on its €25 referral reward.

When Fierce has worked with bank clients, I have always wondered if the new accounts were truly profitable accounts over the long term. Here is what they say:

The profit margins from referred customers are substantially higher only at the beginning; the difference decreases over time and vanishes after about two and a half years.

This is helpful information when planning for marketing and advertising campaigns and timing.

Breaking down our data by age, we found that the most-pronounced difference in overall value between referred and nonreferred customers is among young people. It’s about €80 for customers 26 to 35 years old, €58 for those 36 to 55 years old, and slightly negative for those over 55. We believe this is another effect of good matchmaking. Because young customers have short credit histories and financial track records, data-mining techniques are not very effective at identifying the best prospects among them. Referrals appear to generate customers for whom the bank is a good fit regardless of age.

Here’s the extent to which referred customers are more profitable: 

Age 26-35: +35.5%

Age 36-55: +22.7%

Age 56: -0.5%

Read the entire article here: