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Referred customers are more  

profitable and more loyal.

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Case Study / Vol. 5, No. 1, 2013 / GfK MIR

Consumers love to share experiences within their social 

networks. Just about anything – from photos to jokes or 

instructional material – is passed on and exchanged, either 

electronically or in person. Unsurprisingly, marketers increas-

ingly use word of mouth (WOM) to promote products or 

acquire new customers. But is such company-stimulated 

WOM effective? Are customers who are referred by other 

customers really worth the effort?



A recent study clearly says “yes”

  

///



  We compared two 

groups of customers acquired by a leading German bank over 

a three year period. All of the first group were customers 

acquired through the bank´s referral program. The second 

group comprised a random sample of customers acquired 

through other means such as direct mail or advertising 

over the same period of time. An analysis of almost 10,000 

accounts over a 33-month period showed that those referred 

by other customers generate higher profit margins, are more 

loyal and show a higher customer lifetime value (CLV). 



Referred customers are more profitable

  

///



  Referred 

cus tomers are, on average, 4.5 cents per day more profitable 

than other customers. The gap is even larger after control-

ling for differences in customer demographics and time of 

acquisition. Whereas the average contribution margin of 

non-referred customers is 30 cents/day, customers acquired 

through the referral program have a margin 7.6 cents/day 

higher, an increase of about 25 %. The difference in contribu-

tion margin is the highest in the first year after the acquisition, 

but decreases over time. 

Do Referral Programs  

Increase Profits? 



Philipp Schmitt, Bernd Skiera and Christophe Van den Bulte

keywords


Customer Referral Programs,  

Customer Acquisition, WOM (Word-of-Mouth),  

Customer Management, Loyalty,  

Customer Value

the authors



Philipp Schmitt, 

graduate of the Business and Economics doctoral program 

at Goethe University, Frankfurt, Germany

pschmitt@wiwi.uni-frankfurt.de



Bernd Skiera, 

Chaired Professor of Electronic Commerce at  

Goethe University, Frankfurt, Germany

skiera@wiwi.uni-frankfurt.de



Christophe Van den Bulte

Professor of Marketing at the Wharton School of the 

University of Pennsylvania, USA 

vdbulte@wharton.upenn.edu

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GfK MIR / 

Vol. 5, No. 1, 2013 /

 

Case Study



Referred customers are more loyal

 

 



/// 

 The speed at 

which referred customers churn and leave the bank is, on 

average, about 18 % lower than that of other customers. In 

contrast to the eroding difference between referred and non-

referred customers in the contribution margin, there is no 

such erosion in customer retention. 

The difference in customer lifetime value varies 

according to customer

  /// 


 The lifetime value of referred 

customers, measured over a six-year horizon, was 16 % 

higher, on average, than that of non-referred customers with 

similar demographics and time of acquisition. Breaking down 

the data by age (see Figure 1) shows that the difference in 

lifetime value between referred and non-referred customers 

is most pronounced among younger people and among retail 

(as opposed to private banking) customers.

 

The referral program pays off

  /// 


 Every existing customer 

who brought in a new customer received a reward of € 25. 

Given the average difference in customer lifetime value of € 40, 

this amount implies a Return on Investment (ROI) of roughly 

60 % over a six-year period. And this calculation does not even 

take into account that the total acquisition costs of referred 

customers are around € 20 lower than those of other custom-

ers. The 60 % ROI is therefore a rather conservative estimate.



Can these results be generalized? 

 

///



 

 Though the find-

ings pertain to a single company from a single industry, 

there are several reasons to expect referred customers to be 

more valuable than other newly acquired customers. 

>

  First, people prefer to keep an even balance in their social 

exchanges. Because referring customers receive a reward, 

customers are likely to feel obliged to bring in new custom-

ers who they think may be valuable to the company. Second, 

even apart from any monetary incentives, people feel better 

if they generate a match that works for both the company 

and the referred person. Most people would recommend a 

product to a friend or family member only if they believe it 

to be relevant and useful for the other person.



>

  Further, having a person close to oneself who is a customer 

of the same company should increase one’s trust in the 

company and strengthens the emotional bond they have 

with it. This effect implies that referred customers are less 

likely to churn than non-referred customers, provided that 

their referrer does not churn either (which is usually the 

case for customers who are willing to recommend a product 

or service).

>

  Finally, acquisition through referral can also result in infor-

mational advantages, making referred customers more 

profitable than other customers. Referred customers are 

likely to have discussed the company’s offerings with their 

referrer. As a result, they are likely to use its products 

more extensively than novice customers who take a more 

cautious approach in building involvement.

The encouraging results of this study, however, do not imply 

that “viral-for-hire” works in each and every case. Referral 

programs should be most beneficial for products and services 

that customers might not appreciate immediately. Products 

and services that imply some sort of risk should also benefit 

more than average from referrals because prospects are likely 

to feel the risk is lower when a trusted person has positive 

experiences.



Managerial implications

 

 



///

  

The study shows that refer-



ral programs can help companies to selectively acquire more 

valuable prospects and to retain them longer at lower cost. 

However, companies should think carefully about which 

prospects to target with referral programs and how big of 

a referral fee to provide. For the program we analyzed, we 

found that the customer value differential is much larger in 

some segments than in others. Hence, instead of the cur-

rently practiced “all in” approach, companies should design 

and target referral programs such that attractive customers 

are more likely to be pulled in. Additionally, a referral should 

be monitored closely to see if it is effective at identifying 

good prospects and if acquisition costs do not exceed the 

subsequent value of the customers. 

» 

The speed at which referred customers  



churn and leave the bank is,  

on average, about 18 % lower than that  

of other customers.

«

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Case Study / Vol. 5, No. 1, 2013 / GfK MIR



— 

 

Managerial summary of the “Journal of  Marketing” 

article that received the 2011 MSI/H. Paul Root Award 

for making the most significant contribution to the 

advancement of the practice of marketing:

Schmitt, Philipp; Skiera, Bernd; Van den Bulte, Christophe 

(2011), “Referral Programs and Customer Value,” Journal of 

Marketing, Vol. 75 (January), pp. 46 – 59.



Schmitt, Philipp; Skiera, Bernd;  

Van den Bulte, Christophe (2011): 

“Why Customer Referrals Can Drive Stunning Profits”, 

Harvard Business Review,  

Vol. 89 (June), p. 30.

FURTHER READING

figure 1: 

Percentages differences in customer lifetime value

Private Banking Customers

Retail Banking Customers

Female Customers

Male Customers

> 65 years of age

56 – 65 years of age

46 – 55 years of age

36 – 45 years of age

26 – 35 years of age



< 25 years of age

15 %


18 %

– 3 %


22 %

24 %


22 %

2 %


23 %

36 %


10 %

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