Refer Madness

A recent study looked at the economic impact of a customer referral program at a German bank. The researchers tracked roughly 10,000 customers, about half of whom were acquired through customer referrals, the other half from other marketing efforts. The researchers found that over a three-year period, when compared to other customers, referred customers had a higher contribution margin and retention rate. The authors claim that their findings:

“…provide the first direct evidence of the financial attractiveness of referral programs and also provide much-needed evidence of the financial appeal of stimulated WOM in general.”

My take: If this study persuades more financial institutions to deploy customer referral programs, that’s good.

But it really shouldn’t take a study like this — i.e., one that compares the economic value of referred to non-referred customers — to convince a bank or credit union to implement a referral program.

That decision is pretty simple (conceptually): If the cost of acquisition (i.e., the referral fee) is lower than the value (i.e., profit) generated by the customer, then a referral program should be launched.

The more difficult decision to make is figuring out how much to pay for the referral.

That’s where the potential value of the study is. In finding that referred customers have higher contribution margins and retention rates, the bank in question has a basis for establishing an appropriate referral rate. And for US banks, with the growing prevalence of rewards programs for not just credit cards, but for debit cards and other bank products, banks and credit unions have an opportunity to test paying for referrals with points, not just cash.

I was surprised, however, that the study didn’t look at the value of the referrer. It would have been interesting to find out if it’s the most profitable customers who are providing referrals.

Based on the consumer research I’ve done at Aite Group, I think that’s what they would have found. In defining and measuring customer engagement, we’ve seen that customers who provide referrals are more likely to intend to grow their relationship with their bank or CU than other customers. The act of providing a referral is a sign of engagement, and an indicator of intention to expand the relationship.

One question I have regarding the study is whether or not its findings are applicable to other banks. I can’t help but wonder: Are US consumers’ relationships with banks similar to German customers’ bank relationships? How did the bank in the study perform relative to other banks during the three-year period? Is there something about the bank’s other customer acquisition efforts that contribute to them acquiring a less-profitable customer through those channels?

Regardless of the answers to these questions, it seems like a no-brainer for a bank or CU to have a customer referral program.


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