Referral Programs: A Strategy for Customer Retention

Customer referral programs have been a staple of marketing plans in many organizations for years. The axiom about the marketing cost to acquire customers relative to retaining them is well known, even if it has some variation (10 times more, 8 times more, 5 times more- others?). The exact number is not as significant as the realization that targeting current customers is essential to marketing effectiveness. Thus, it is in marketers' best interests to figure out how to nurture relationships that exist already.

Tapping Customer Connections
One strategy used in customer relationship management is to tap the social connections of customers by devising referral programs. The task of acquiring customers can be made easier by enlisting the help of current customers to recommend a business to their family, friends, or co-workers. Customers become a part of your sales team, sharing their experiences with their contacts. Although many customers voluntarily refer brands to their contacts, referral programs often sweeten the pot by offering incentives for referring someone who eventually becomes a customer (e.g., cash or free product). Finding new customers is challenging enough; why not enlist people already convinced of the value of your brand to advocate on your behalf?

The Surprising Payoff of Retention Programs
Customer acquisition is a significant motivation to implement referral programs, but they also can be an effective means of increasing customer retention. In a study published in the July 2013 issue of the  Journal of Marketing, researchers Ina Garnefeld, Andreas Eggert, Sabrina Helm, and Stephen Tax examined the effects of customer referral programs on customer loyalty. Analyzing a data set from a global telecommunications company, they found that participation in a referral program has a pronounced effect on customer retention and loyalty. Defection rates among customers participating in a referral program dropped from 19% to 7% in one year. And, not only did referral program participants hang around as customers, but they spent more, too. Average monthly revenue from these customers grew by 11% compared to a control group.

Interestingly, customer tenure was negatively related to customer loyalty. Newer customers demonstrated a more positive relationship between referral program participation and attitudinal loyalty (i.e., liking and positive psychological attachment to the brand). An explanation for this finding is that \making referrals is a way for newer customers to align their attitudes ("I feel good about my cell phone provider") and behaviors. Customers that have had a longer relationship with a firm may have already achieved internal consistency in their feelings and behaviors toward a brand.

Customer Referrals: A Dual Focus
Findings from the  Garnefeld et al. study should prompt marketing managers to re-evaluate their use of customer referral programs. A tactic with a long history of being used for customer acquisition has a dual benefit of strengthening relationships with existing customers. An additional consideration in the research was reward size. Not surprisingly, a large reward (€50) had a positive effect on the interaction between program participation and attitudinal loyalty than a small reward (€5). In other words, offer sufficient value for customers to advocate on your behalf. The money invested will not only bring in new customers, but it could be instrumental in retaining current customers. Reducing customer defections is a key to improving profitability that must not be overlooked.

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