The Harsh Truth About Word-of-Mouth Referrals

Three business professors did a formal experiment after reading an article about Net Promoter Scores (NPS). They did two separate studies: one involving 9,900 customers of a telecom company, and another involving 6,700 customers of a financial institution. Their conclusions were published in the Harvard Business Review (“How Valuable Is Word of Mouth?” October 2007).

Harvard Business Review formulaThe researchers devised formulas to calculate the lifetime value of referrals (Customer Referral Value, or CRV) and the lifetime value of the customers themselves (Customer Lifetime Value, or CLV). Oddly enough, neither formula accounts for the cost of goods or services, as Ron Shevlin at Epsilon noted.

Nevertheless, it is an extremely thorough examination of “intention” vs. “action” vs. “purchasing patterns” vs. “profitability.” In fact, it’s probably the only study of its kind.

Here are the highlights:

#1 Most good intentions remain just that – good intentions.

  • 68% of the financial services firm’s customers expressed an intention to refer people to the company, yet only 33% actually did
  • 81% of the telecom’s customers thought they’d recommend the company, but only 30% actually did
  • Very few referrals actually generated customers: 14% at the financial services firm and only 12% at the telecom company
  • Of referrals who became customers, only about 10% were profitable

#2 Your most loyal purchasers are not your most valuable marketers.

  • The customers who buy the most are not your best marketers. What’s more, your best marketers may be worth more than your most best customer.
  • The best referrers have remarkably low purchasing values. For the telecom company, those who spent between $200-300 (30% of all customers) made referrals worth over $1,000, while those customers who spent $2,000 (10% of all customers) made referrals worth only $40.

#3 Half of customers’ referrals are made to those who would have become customers anyway, whether they received a referral or not.

  • The article didn’t identify the profile of the typical “auto-referrer” – customers who make referrals regardless of whether there’s an incentive or not. Who are those much-coveted ‘brand disciples?’

#4 Referrals made by customers following an incentive campaign can be attributed to that campaign for about a year.

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