Referral Programs and Customer Value

2010 March 01

Jours fixes take place on the first monday of the month, starting at 5:00 p.m., in the House of Finance (Campus Westend).

[Philipp Schmitt, E-Finance Lab]

Referral programs have become a popular way to acquire customers. Yet, there is no evidence to date as to whether customers acquired through such programs, referred customers for short, are more valuable than non-referred customers. We investigate to what extent the former are more profitable and more loyal than the latter, and discuss two possible explanations advanced in economics and sociology, better matching and social enrichment. Using a panel dataset of roughly 10,000 customers of a leading German bank, we find that (i) referred customers have a significantly higher contribution margin though this difference erodes over time, and that (ii) the retention of referred customers is significantly higher and this difference persists over time. Hence, referred customers are more valuable both in the short and long run. The average value of a referred customer during the whole observation period of 33 months is at least 58 Euros higher than the one of a non-referred customer with comparable demographics. For the bank, this represents a return on the reward given to the referrer of nearly 130%.