Referrals
Most managers welcome potential customers who are referred by one of the company’s existing customers. The reasons are obvious and include:
1. Referred potential customers are much more likely to become actual customers than prospects contacted in other ways, for example, advertising, direct mail or search engine clicks.
2. Customers acquired via referral are more trusting of the company and are more likely to place larger initial orders.
3. Establishment costs, on average, are lower for referred customers.
4. And, most importantly, their acquisition cost is close to zero.
As will be discussed in future postings the more loyal customers are to the company the more referrals they will make compared to the simply satisfied customer. It is this fact that drives internal marketing plans aimed at the improving the 3 key elements of Customer Lifetime Value (CLV): retention and referral rates and purchases (share of wallet). The table below illustrates this point.
Virtually all companies get customers by referral so companies often take receiving them for granted. In fact referrals can be increased by implementing programs designed to encourage existing customers to refer others – central to these program is converting simply satisfied customers into loyal ones.
It is important to collect customer referral data so that the progress of referral programs can be monitored and so that this data can be used to improve decision making in, for example, marketing planning and budgeting. This data is part of the wider new customer data collection. The source of every new customer must be noted: from advertising, direct mail (specific initiatives), the internet etc. and of course referrals. This data will make possible vital information such as the cost to acquire a new customer by source and by continuing customer tracking to know the margin generated by customers by acquisition source. So, for example, the data can compare the cost of acquiring a new customer and the margins generated by the source,e.g. advertising, and direct mail essential data if resources are to be used in ways to create maximum profits.
The customer data required for potential customers acquired by referral includes:
1. The existing customer who made the referral so that an appropriate “Thank you” gesture can be made.
2. Tracking to determine if the referred potential customer became an actual customer.
3. A running analysis to determine the % of referred customers who became actual customers.
4. Thereafter tracking sales/margins to referred customers.
The importance of referrals and the different contributions made by satisfied vs. loyal customers is illustrated by the following table.
|
Satisfied vs. Loyal Customers | ||
|
|
Satisfied |
Loyal |
|
Years with company |
3 |
6 |
|
Referrals (sale closed) / year |
1 |
2 |
|
NPV (Net Present Value)** |
1298 |
2927 |
|
Lifetime Referrals * |
3 |
12 |
|
Value of referrals @ $1,398 |
3894 |
15576 |
|
Customer Total Value (NPV) |
5192 |
18503 |
|
* No acquisition cost ($100) |
||
|
NPV = Discounted Customer Lifetime Value (CLV) | ||
|
** NPV from table in the Sept 1 posting |
||
The table shows both the increased NPV of a customer retained for 6 years vs. 3 years and the added value that accrues to the NPV of loyal customers because they often act as advocates for the company and refer more potential customers than do satisfied customers.
These change from company to company but the principle remains – that the CLV is greatly affected by the number of referrals made. Customer data, properly collected will indicate the number of referrals made by various customer segments.
Frank Friend
Email friend@ffauk.com
Next posting Sept 11 2008
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