Refer a friend programs: are they worth it?

September 6, 2010 By 2 Comments

Refer a friend programs: are they worth it?  Yes, as it happens they are and some very recent research gives us the numbers to back it up.

Referral Programs and Customer Value was recently published by Schmitt, Skiera and Van den Boulte.  In this excellent paper, rigorous analysis was applied to a topic of discussion by marketers the world over: do ‘refer a friend’ programs make money?

Their findings: customers acquired through paid customer referral programs have a higher retention rate and higher initial contribution margin than other customers.  In other words, yes they do work.

In this post from last week “Using social effects to improve customer retention”, we looked at how client referrals can work in reverse.  Losing a client increases attrition for the people already in their social network.  Now we have proof that the positive reverse is also true.

What this means is that the effort invested into so called stimulated word of mouth (WOM) programs generate real and valuable client referrals.

The entire paper (in truth, perhaps not the statistical methods section) is interesting because of the completeness with which the authors address the question of successful referral programs.  For instance they discuss why customers acquired through client referrals are a better match (and higher margin) for the organisation than the average acquired customer:

  1. Reciprocity – the person performing the customer referral feels that they owe (because a payment is involved) the company a good customer.
  2. Triadic balance – where the propensity of two people to feel the same about an object (in this case company) make the friend in “refer a friend” more likely to like the company.
  3. Homophily – people have friends that are similar to themselves.  If I like, or am a good customer, for this company so will be my friend.

Getting back to the source data, the authors were able to access substantial (approximately 10,000) customer records and watch their progress over a 33 month period from acquistion.  This allowed them to review not just the initial margin but also look for differences in retention rate and long term margin rates.

For practical marketers the key outcomes from this paper include:

  1. Higher gross margin levels: customer referrals showed an initial 25% higher contribution margin than non customer referrals.  However, the difference reduced over time to be similar at the 29 month mark.Customer-Referral-Programs-Margin
  2. Better retention rates: customers acquired through referral programs have a higher retention rate and that difference does not reduce.Customer-Referral-Programs-Retention-Rate
  3. Client referrals generate higher value customers: taking (1) and (2) together, customers obtained through successful referral programs are of higher overall value than other customers.  For the authors that difference was 25%, i.e. customer referrals were 25% more valuable than non-customer referrals.
  4. Customer referral programs are a good investment: the net increase in value more than pays for the cost of the reward.  This is of course subject to reasonable reward costs.  In the case of this study the reward cost was 25 Euros, which was more than covered by the 25% increase in value.
  5. Abuse costs less than the increase in value: The costs of progam abuse and other negative side effects of customer referral programs were smaller than the increase in value.

In many practical ways the authors have made our lives easier as marketers by proving the value of customer referral programs.  Some of the debate can now cease and we can focus instead in creating successful referral programs for our companies.

By Adam Ramshaw

Filed Under: Customer Analytics, Customer Loyalty Management Tagged With: , ,

Using social effects to improve customer retention

August 29, 2010 By 1 Comment

It is logical to think that a person’s social network influences their buying behaviour.  If my friend likes company X they will probably tell me about it and I too may like them enough to become a customer.  Indeed, leveraging this idea has long been used in the endless variety of “friend-get-friend” programs used in customer acquisition campaigns.

However, if something works forwards (getting customers) it may also work backwards (losing customers).  Do people stop being your customer if their fiends stop?  Yes, as it turns out, they do.

This recent paper by the Marketing Science Institute (Social Effects on Customer Retention) shows that defecting customers can indeed take others in their social network with them.

To summarize their findings:

a [social] network neighbor increases a customer’s hazard of defecting…exposure to a defecting neighbor is associated with an increase in the focal customer’s hazard of defecting as much as … 80%.

What’s more the more similar two neighbours are, the more pronounced is the effect.  However, over time the impact of the friend leaving reduces substantially.

…the influence of a neighbor’s defection decreases markedly with the passage of time, and a customer’s loyalty “immunizes” him or her against the effects of a defecting neighbor.

This should come as no surprise to marketers.  After all there is no such thing as a free lunch and if we want to leverage a social media to get customers we should expect that it can lose us customers as well.

So what to do?

Keep your existing customers

For many years I have espoused a focus on customer retention.  I have built many customer retention business cases to show the bottom line cost of not managing this company asset (customers) properly and the incremental value of investing properly in it.

It seems now that all of those business cases have actually underestimated the real cost of a lost customer.  It’s not just losing this customer that we have to consider but also the loss of their social network peers.

If we needed more evidence of the importance of customer retention, not that I did,  we have it here.

Proactively contact a lost customer’s social peers

If a customer does leave then we should be actively reaching out to that customer’s social network to “nurture” them through the initial period of loss and prevent them leaving as well.

Easier said than done you might say: how can we know the others in a customer’s social network?  With the data at the finger tips of most companies that task is not as hard as it at first seems.

If you are a telco then look to the telephone numbers that your lost customer calls most often.  It’s a pretty good chance that they are in the person’s social network.  If those other numbers are your customers, then execute some type of outbound communications. The type of contact should be relative to the customer’s value to your organisation.

If you happen to be in the banking or insurance industries look to the contact and transaction data that you have.  When person A closes their transaction account, contact the other account holders with the same address.

Retailers who have customer loyalty programs can use the same address and transaction data to contact the near social networks of customers who have slowed or stopped making purchases.

Where the customer was acquired via a “friend get friend” campaign then you should look to the lost customer’s original friend and target them with a communication.

It should come as no surprise that social networks are a double edged sword; so we should be just as robust about protecting ourselves from the negative effects as we are at leveraging the positive effects.

By Adam Ramshaw

Filed Under: Customer Retention, Social Media Tagged With: ,

An introduction to Customer Life Time Value (LTV) and Loyalty Marketing for SMEs

August 19, 2010 By Leave a Comment

We recently participated in a written interview for the SME magazine of one of our major Australian banks. The article was not all about us, so some of the input was edited to meet space restrictions; but we post the transcript here for those of you interested in Customer Lifetime Value and loyalty programs.

(Please excuse us for retaining the Q&A structure of the original).

Q: Please explain the theory behind customer lifetime value.

The concept of customer lifetime value is quite simple; customers give you value by buying from you now and if you do a good job, buying from you again in the future. Lifetime value is the sum of these two cash flows.

If your service makes it more likely that the customer will return in the future and spend again, you have increased the customer’s lifetime value.

If bad service decreases the likelihood that they will ever come back, you have just destroyed future cash flow, or decreased that customer’s lifetime value to you.

I first came across the concept in a book written by a Dallas Cadillac salesman in the 1980’s. He always personally delivered the car to a new customer, freshly detailed, with a full ‘tank of gas’ and a picnic basket in the ‘trunk’, paid for personally.

A good investment as it turns out.

The majority of his customers bought 3 cars from him in the next 6 – 8 years compared to the one sale enjoyed by his peers. They came back because they remembered the experience. He viewed each customer’s value as the commission he earned from 3 car sales, not 1, so he could afford to invest a little more up-front in the relationship.

These common sense concepts are no less relevant today;

  • Consider the future potential of customers when you serve them, look past the current sale and think about what you can do to make future business more likely today. In fact, add up the value of your best customers for as far back as you can to get some idea of the potential value a new customer could have if they become a ‘best’ customer.
  • Customers that remember you favourably are cheaper to attract – they do it of their own accord. Attracting new customers, strangers, is expensive. You have to advertise in some way and that is wasteful because you pay for the attention of a whole lot of people who do not become customers. At least you know customers needed your products once, which makes them qualified candidates, at the very least, better than mass marketing to strangers.

Just don’t spend more on making them really happy than they will likely contribute to your profitability in the future, allowing for the fact that cash today is more valuable than cash tomorrow.

Q: From an SME’s perspective, what are the benefits in considering existing and potential customers from a lifetime value perspective?

Small companies cannot afford to view marketing as solely about conquest; common wisdom says that retaining a customer is 5-7 times cheaper than converting a stranger into a customer, for the same revenue. Understanding the differences in the profitability of business that comes from existing customers versus prospects really helps you balance the allocation of modest marketing budgets.

Q: What is the latest thinking / best practice in loyalty marketing?

Certainly for SMEs with repeating business, best practice is to understand the customer’s buying cycle so you can present a marketing offer at the correct time; when it is relevant because they are thinking of buying again.

Give them a reason to not Google. Otherwise your email/flier/letter is spam.

Q: What top five tips would you advise an SME to consider when embarking on a loyalty marketing program?

Six tips here, one extra to encourage repeat visits;

  1. Customer loyalty makes you more money than any other strategy. Think about what would make customers come back, at an acceptable cost, every day.
  2. Think about loyalty marketing as a way to keep good customers loyal and possible good customers interested, not as a way to give free stuff to everyone
  3. Think about how to only reward incremental business, not business you were going to get anyway
  4. The best loyalty program is to always have the best product at the cheapest price. Can you confidently do that and avoid bankruptcy? If you can, stop reading this article and start promoting!
  5. Loyalty marketing raises expectations of delivery quality for customers. Make sure you can deliver consistently to expectations; the customer backlash will be impressive but not pleasant.
  6. Do the numbers. As painful as it is, fire up Excel and work out how much extra you will make and how much it will cost you if you are successful increasing customer loyalty with your loyalty marketing. Personalized service becomes an entitlement in customer eyes instantly, so taking it away causes you angst. If you cannot see meaningful profits, be very careful.

We can help you with these 6 tips, happy to, if you need it.

Q Please comment on: Cost of acquisition vs. retention

It is 5 – 7 times more expensive to acquire new customer revenue than existing customer revenue if you get it right

Q: Please comment on: Opportunities to build share of wallet

If you remember what customers’ want/like/need you are more convenient than a competitor

Q:Please comment on: Engaging consumers suffering from loyalty program overload

Personalise! SMEs are supposed to be more personal, prove it. Large scale programs must treat you like a number.

Q: Please comment on: Making loyalty program retention attractive and easy

Relevant rewards are the key.

Q: Please comment on: Developing strategies to encourage and reward referrals

Always reward the customer that takes up the referral as much as you reward the customer doing the referral. We all want to feel like we have done a favour, not profited from our friends.

Q: Please give a good example of loyalty marketing?

I have personally bought 3 cars from a single salesman. He calls to tell me when the residual lease value matches market value of the car. He does it for all of his SME clients because it saves them the trouble of renegotiating end-of-lease ‘stuff’. An electronic calendar and 2 phone calls have tripled my lifetime value to him, so far.

Filed Under: Customer Analytics, Customer Retention Tagged With: , ,

Customer relationships: When to communicate for maximum impact

August 3, 2010 By Leave a Comment

Deciding when and how to contact your customers is an ongoing task for every organisation.  Getting the delicate balance between too much contact and not enough contact is difficult and you need to focus on it every day to get it right.

Right up front you should invest some time and effort in developing and mapping an effective customer lifecycle journey for each type of customer.  This gives you a starting point for contacting your customers in an effective manner.

This can start simple and be built out as you go but you need to start with a base line work from.

A good customer lifecycle journey also needs a good customer contact framework to be successful.  A customer contact framework (CCF) is a set of rules and approaches that govern how and when you will contact customers.  It takes into account the customer lifecycle journey map but also adds rules for event based marketing activity and wider business contact rules.

Your wider business rules should include (among other things) areas such as not contacting a customer too often and not contacting customers during high profile holiday or public events because the response rates will drop substantially.

You customer contact map should take into account the following broad areas as a minimum:

Customer Onboarding

Customer onboarding is contacting customer during the initial phase after their first purchase of a product or service.  We know from experience that this is a critical time in building the customer relationship.

If this phase is done correctly you will enjoy longer customer tenure and higher cross-sell and up-sell rates.  We routinely build and prove business cases on this key customer contact showing time and again that it has a very high relative marketing return on investment.

Event based activity

The next step in communicating for maximum impact is to ensure that you track customer activity and intervene when something changes.  If you track the customers sales activity in terms of recency, frequency and size of order (monetary),  called RFM analysis, it will let you know which customers to contact and when.

For instance a customer that buys every month but has gone two months without a purchase: it may be time to contact them with an offer.  Or the customer who suddenly starts purchasing twice the product that they have purchased in the past: it would be a good time to contact them and find out why.

Save teams

Another good, although reactive, time to contact customers is this a Save team. Save teams swing into action when a customer either tells you outright that they want to leave or when you can infer they might be about to leave.

How do you infer a person may be leaving?  You need to think about your business but for example banks use the “loan payout request” as an indicator.  A person calling a bank and requesting this value is probably looking to make a change to their accounts and you need to be there to make sure that you are included in that discussion.

Save teams are a very specific type of customer service team that has special training and access to special customer offers.  We spoken about them before in past posts.

By Adam Ramshaw

Filed Under: Customer Loyalty Management, Customer Retention, Customer Strategy Tagged With: , ,

Using next logical product to maximise cross-sell

May 24, 2010 By Leave a Comment

Most of our clients see the ability to increase their cross sell rates as a good way to increase their overall share of the customer’s wallet and customer retention.  One of the better cross selling techniques is the next logical product approach.

(Wondering “what is cross sell”)

The next logical product approach to cross selling where you try to identify the product that the customer is most likely to buy next and then present them with a well timed offer to make the purchase.

It sounds very straight forward, and it is, but determining the next logical product (NLP) can take some time and effort.  There are several ways to determine the next logical product for your customer:

Based on current holdings

If you have a relatively defined set of products or services then you can often determine the NLP based on what that customer has not already purchased.  For instance consider an insurance company that sells building and car insurance.  A simple NLP approach would be to look for all customers that have car insurance but do not have building insurance and create a building insurance offer for them.

As you can see this is a very simple approach to implement but doesn’t take into account a customer’s needs.  You could very well be offering them a car policy when they have no car or a building policy when they are only renting.

Based on customer lifecycle

If you have a product set that lends itself, you can also generate your next logical product recommendations based on the stage of the customer lifecycle with your organisation.  For instance if you are a business to business software supplier your customer probably goes through several stages of need.

Firstly they will buy the software and some training.  After a few weeks or months they may need some implementation support to help them get the system in and operating correctly.  After a year or two them may need help to take the implementation to the next level of complexity and so need some advanced systems consulting support.  Lastly after 3 or 4 years you should be looking to have them upgrade to the next version of the software so that the process can start all over again.

At each of these stages you can clearly identify the customer’s next logical product and act accordingly.

Based on customer life stage

Another popular way to implement NLP is to try to guess where each person is in their overall lifestage (from birth to death) and select products that meet their needs.  Typical life-stages you might consider include: single, newly married, married with young children, empty nesters, etc.

The simplest example of this is pension and superannuation companies who use the age of their customers as a cue to the products that they might need.  For instance, the next logical product for a 30 year old customer is not an annuity based pension but it may be a college / university savings product for their current or future children.

On the other hand, a 63 year old customer may be thinking of retiring in the next few years, starting a conversation with them about an annuity pension product is probably just the right timing.

One of the major disadvantages of this approach is the increasingly complex nature of modern customer life stages.  Increasing divorce rates, the availability of late in life fertility treatments, people working long after the official retirement age, etc, have made this approach very difficult to implement reliability.

Based on customer activity

Lastly, you can look at customer transactions or other activity and statistically determine the next logical product.  Typically this requires advanced data analytics and a good volume of customer data and transactions.  Often through the process of data mining you uncover unusual or unexpected linkages that you would not have uncovered using the above approaches.

For one client, where extensive work on product purchase propensity had been done, we simply used the product with the highest sales propensity as the next logical product.  A very straight forward approach that worked very effectively for our client.

By Adam Ramshaw

Filed Under: Customer Analytics, Customer Strategy Tagged With: , ,
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