Elsevier

Business Horizons

Volume 59, Issue 1, January–February 2016, Pages 19-28
Business Horizons

Referral marketing: Harnessing the power of your customers

https://doi.org/10.1016/j.bushor.2015.08.001Get rights and content

Abstract

The differences between traditional and referral marketing programs are so great that the two share little overlap in terms of appropriate target markets, marketing objectives, marketing organization, and overall planning and implementation strategies. Traditional marketing programs seek advocates among current employees to spread word of mouth, aim marketing efforts at high lifetime-value customers, focus on customer satisfaction, and use promotional programs that heavily rely on social media. In contrast, referral marketing relies on motivating satisfied/delighted customers as a referral base, seeking current customers that can provide referrals with a high lifetime value, using referral-based marketing programs to augment traditional promotions, and developing a compensation system for referrals based on either direct payment or increased visibility. Major advantages of referral marketing programs as compared with traditional marketing programs include greater credibility of friend/family member recommendations over paid advertisements, access to new customers that traditional marketing programs may not reach, and better matching of referred customers’ needs to a good or service. This article presents an eight-step process to develop, implement, and evaluate the success of a referral program. In addition, it discusses academic research findings and presents examples of successful referral program strategies from—among others—Dropbox, Roku, PayPal, Digitalis, and Omaha Steaks.

Section snippets

Getting to know customer referral programs

Customer referral programs are marketer-directed, word-of-mouth initiatives that entice existing customers to attract friends, family members, and business contacts to become new customers (Kumar, Petersen, & Leone, 2010). Unlike pure word-of-mouth programs, which are customer initiated, referral programs are marketer directed. Marketers often prefer using customer referral programs as opposed to pure word of mouth due to the ability to use incentives to stimulate referrals and to have greater

Demonstrating the value of referral programs

Based on two studies—Schmitt, Skiera, and Van den Bulte (2011) and Trusov, Bucklin, and Pauwels (2009)—this section evaluates the effectiveness of referral programs in terms of criteria such as customer acquisition costs, new customer longevity, and sales and profit impact. The first study examined the impact of a referral program at a major German bank that acquired 5,181 customers between January 2006 and September 2008. As part of this bank's referral program, every existing customer

Planning, implementing, and evaluating the success of referral programs

This section details an eight-step process that plans, implements, and evaluates the success of a referral program: (1) organizing referral programs, (2) planning budgets, (3) identifying a base of customers as referrers, (4) selecting promotional media and message content, (5) determining appropriate rewards, (6) specifying program conditions, (7) choosing program software, and (8) evaluating program success or failure (see Figure 1). This section is useful to firms that are initially planning

Summary and conclusion

Firms seeking to develop referral programs need to understand the significant differences between referral and traditional marketing programs. Unlike traditional marketing programs, which focus on consumers, referral programs target both referrers and referred consumers. Referral programs also rely heavily on databases—to identify referrers and to record purchases by referred consumers—and on social media.

Referral marketing programs are not equally effective for all firms. Referral programs are

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