© Dr V.Kumar V. Kumar PROFITABLE CUSTOMER ENGAGEMENT Concepts, Metrics & Strategies

Chapter 6 Customer Referrals Chapter 6 Customer Referrals Instructor’s Presentation Slides 2

© Dr V.Kumar Word-of-Mouth Marketing  Word-of-mouth marketing is a way of building active consumer-to-consumer and consumer-to-marketer communications.  Customers are the biggest champions in an overly communicated world, so word-of-mouth marketing done by loyal customers is very valuable. 3

© Dr V.Kumar Customer Referrals and Referral Programs  Customer referrals are a type of positive word-of-mouth communication by customers of a firm regarding its products/services. 4 Customer A Customer B Customer C Customer D Customer E Customer F Customer G … … … … … … … … … … … The Customer Referral Process

© Dr V.Kumar Value of Referred Customers  A financial services firm ran a referral program.  Rewards being a €25 voucher that could be redeemed at many retailer stores.  Results:  Referred customers were more profitable than non-referred customers  Overall 25% increased profitability of customers acquired through referrals compared to other customers  Overall acquisition cost for each referred customer was around €20 less than the traditional acquisition cost per customer.  Referred customers are 18% less likely to leave, and are more attached and more loyal to the firm.  A financial services firm ran a referral program.  Rewards being a €25 voucher that could be redeemed at many retailer stores.  Results:  Referred customers were more profitable than non-referred customers  Overall 25% increased profitability of customers acquired through referrals compared to other customers  Overall acquisition cost for each referred customer was around €20 less than the traditional acquisition cost per customer.  Referred customers are 18% less likely to leave, and are more attached and more loyal to the firm. 5

© Dr V.Kumar Value of Referred Customers (Cont’d.)  Results (cont’d.):  Referred individuals have an observed value of almost €50 more than traditionally acquired customers, or they are 25% more valuable to the firm, based on their actual purchases.  CLV (without acquisition cost savings) of referred customers, for a period of six years after acquisition, was found to be almost €40 higher than the CLV of other customers, which represents a 16% higher value.  Results (cont’d.):  Referred individuals have an observed value of almost €50 more than traditionally acquired customers, or they are 25% more valuable to the firm, based on their actual purchases.  CLV (without acquisition cost savings) of referred customers, for a period of six years after acquisition, was found to be almost €40 higher than the CLV of other customers, which represents a 16% higher value. 6 Referred customers are generating higher profits for the company, through higher contribution margins, than other customers. Referred customers have higher customer value in the short as well as the long term. As compared to traditionally acquired customers referred customers were found to have as much as 25% higher CLV.

© Dr V.Kumar Intentions v/s Actual Referral Behavior 7 Item Financial Services (n = 6,700) Telecommunications (n = 9,900) Stated intention to Recommend68%81% Actually Referring33%30% Prospects Becoming Customers14%12% Prospects that are Profitable Customers 11%8% Results indicate that there is a large gap between stated intentions and following through, as well as in whether a prospect who became a customer is profitable. It is clear that using a measure for “willingness to recommend” falls short when it comes to actionable strategies to manage customers.

© Dr V.Kumar Referral Seeding Strategies 8 Hub Bridge Hub Fringe Position of hubs, fringes, and bridges in a social network Flow of referrals in high-degree seeding strategy Flow of referrals

© Dr V.Kumar Referral Seeding Strategies (Cont’d.) 9 Flow of referrals in low-degree seeding strategy Flow of referrals in high-degree seeding strategy Flow of referrals

© Dr V.Kumar Need for CRV  Companies can effectively communicate their referral programs and incentives to achieve the highest possible successful referrals.  It follows that the referring customers that manage to bring more customers are highly valuable to the firm.  Hence, we need a metric such as CRV to determine the value of a customer’s ability to spread word-of-mouth by building referrals.  After quantifying the referral value into the CRV metric, it can be used as a key input in identifying the most valuable customers. 10

© Dr V.Kumar Defining CRV Customer Referral Value (CRV) of a current customer is defined as the net present value of the future profits of new customers who purchased products/services due to the referral behavior of the current customer. 11 Applied in a B2C setting

© Dr V.Kumar Measuring CRV 12  The indirect value that a customer brings in through his or her referral behavior is measured by the CRV metric. Where, T = the number of periods that will be predicted into the future (e.g., years) n 1 = the number of customers who would not join without the referral n 2 – n 1 = the number of customers who would have joined anyway A ty = the gross margin contributed by customer y who otherwise would not have bought the product a ty = the cost of the referral for customer y M ty = the marketing costs needed to retain the referred customers ACQ1 ty = the savings in acquisition cost from customers who would not join without the referral ACQ2 ty = the savings in acquisition cost from customers who would have joined anyway r = discount rate

© Dr V.Kumar Maximizing CRV  To maximize CRV, firms should implement  Creative customer referral programs  Provide incentives  In order to achieve this firms need to define;  The value of the referral incentives, and  Type of the incentives  To maximize CRV, firms should implement  Creative customer referral programs  Provide incentives  In order to achieve this firms need to define;  The value of the referral incentives, and  Type of the incentives 13

© Dr V.Kumar Interrelationships – CRV & CLV 14 Affluents These customers provide value through their own transactions, but not through referrals. Strategy: Work on building CRV Affluents These customers provide value through their own transactions, but not through referrals. Strategy: Work on building CRV Champions These customers provide value through referrals and through their own transactions. Strategy: Defend, Nurture, and Retain Champions These customers provide value through referrals and through their own transactions. Strategy: Defend, Nurture, and Retain Advocates These customers do not provide value through their own transactions. Instead, they provide value through referrals. Strategy: Work on building CLV Advocates These customers do not provide value through their own transactions. Instead, they provide value through referrals. Strategy: Work on building CLV Misers These customers do not provide value through their own transactions or through referrals. Strategy: Build both CLV and CRV Misers These customers do not provide value through their own transactions or through referrals. Strategy: Build both CLV and CRV High CLV Low CLV Low CRV High CRV

© Dr V.Kumar Implementing of CRV in Business 15 A case study of a telecommunications firm.  Before implementing the referral program, measures of CLV and CRV were obtained in order to segment the telecommunications firm customers according to the 2x2 matrix presented in earlier slide  Calculate CLV and CRV of each customer in the test and control sample  Take the median split and divide these as high/low CLV and high/low CRV

© Dr V.Kumar Implementing of CRV in Business (Cont’d.) 16 Affluents 29% of customers CLV = $1,219 CRV = $49 Affluents 29% of customers CLV = $1,219 CRV = $49 Champions 21% of customers CLV = $370 CRV = $590 Champions 21% of customers CLV = $370 CRV = $590 Advocates 29% of customers CLV = $180 CRV = $670 Advocates 29% of customers CLV = $180 CRV = $670 Misers 21% of customers CLV = $130 CRV = $64 Misers 21% of customers CLV = $130 CRV = $64 High CLV Low CLV Low CRVHigh CRV Results of the campaign

© Dr V.Kumar Interrelationships – CRV & CBV 17 Admirers These customers place high value to the brand, but they do not generate substantial referrals. Strategy: Work on building CRV Admirers These customers place high value to the brand, but they do not generate substantial referrals. Strategy: Work on building CRV Enthusiasts These customers both provide value through referrals and recognize the brand as of high value. Strategy: Retain, Support, and Nurture Enthusiasts These customers both provide value through referrals and recognize the brand as of high value. Strategy: Retain, Support, and Nurture Opportunists These customers do not appreciate the brand, although they do generate value through referrals. Strategy: Work on building CBV Opportunists These customers do not appreciate the brand, although they do generate value through referrals. Strategy: Work on building CBV Benchwarmers The customers in this segment do not value the brand neither do they make referrals. Strategy: Provided that CLV is not low, build both CBV and CRV Benchwarmers The customers in this segment do not value the brand neither do they make referrals. Strategy: Provided that CLV is not low, build both CBV and CRV High CBV Low CBV Low CRV High CRV

© Dr V.Kumar Defining BRV Business Reference Value (BRV) is defined as the monetary value associated with future profits as a result of the extent of a client’s reference influencing a prospect to purchase. 18 Applied in a B2B setting

© Dr V.Kumar Measuring BRV 19  The value of a business reference is proposed as a function of three components:  the amount of influence that client references (vis-à-vis other marketing elements) had on a prospect’s adoption,  the amount of influence that a given client reference (vis-à-vis other client references) had on the prospect’s adoption, and  the profitability of the prospect after adoption. where BRV i – Business Reference Value of client reference i Ref n – Degree that references impacted the prospect n’s purchase decision DOI in – Degree of Influence of client reference i on converted prospect n CLV n – Customer Lifetime Value of converted prospect n N – Total number of converted prospect r – Discount rate (in months) t n – month that converted prospect n became a customer after the first month of the observation window

© Dr V.Kumar Measuring BRV (Cont’d.) 20  BRV is computed in three steps… Step 1 Determine whether the client references influenced adoption Step 2 Determine the influence of each client’s reference Step 3 Compute the CLV of the converted prospect

© Dr V.Kumar Drivers of BRV 21  The four key drivers of BRV are: Client firm size Length of client relationship Reference media format Reference congruency

© Dr V.Kumar Maximizing BRV 22  BRV focuses on the reference client’s ability to influence prospective clients to become new clients for the firm based on… The reference client’s characteristics The reference client’s reputation The reference client’s form of communication

© Dr V.Kumar Interrelationships – BRV & CBV 23 Diplomats These firms have high regard for the seller firm however their references do not provide high value. Strategy: Groom references from growth-oriented firms Diplomats These firms have high regard for the seller firm however their references do not provide high value. Strategy: Groom references from growth-oriented firms Allies These firms highly value the seller firm and can provide value to the seller firm through references. Strategy: Target these firms for references Allies These firms highly value the seller firm and can provide value to the seller firm through references. Strategy: Target these firms for references Aristocrats Although these firms can provide value to the seller firm through references, they do not place high value on the seller firm. Strategy: Work on building CBV Aristocrats Although these firms can provide value to the seller firm through references, they do not place high value on the seller firm. Strategy: Work on building CBV Rebels These firms do not provide value through references neither do they think highly of the seller firm. Strategy: If CLV is low, minimize investment in these firms Rebels These firms do not provide value through references neither do they think highly of the seller firm. Strategy: If CLV is low, minimize investment in these firms High CBV Low CBV Low BRV High BRV

© Dr V.Kumar Conclusion The metrics discussed in this chapter will enable managers to value customers based on their indirect impact on the firm’s profits via: Generating savings in acquisition costs The growth of new customers who were referred to the firm by existing customers. 24

© Dr V.Kumar End of Chapter – 6 25