Everyone has a different idea about how to measure the financial return from a marketing investment. Many experts claims it’s an inexact exercise at best and the numbers tend to get particularly hazy for word-of-mouth campaigns. But academic researchers at Goethe-University in Frankfurt, Germany who recently completed a study  say they’ve come up with a good way to measure how social capital becomes economic capital in a simple word of mouth (WOM) campaign.
This new study was based on the behavior of 10,000 banking customers in Germany but the findings can be applied to many types of businesses and locations. The researchers tracked the economic success of a banking initiative that paid existing customers to bring in new customers. Using simple statistics, the researchers measured how much more value each referred customer brought into the institution and for how long.
The researchers found that these newly referred customers were more profitable over a 3 year period than customers who came to the bank through other advertising initiatives. In addition, these customers were retained for a longer period of time. A referred customer is about 16% more valuable than other customers, when controlling for demographics and ‘time of acquisition’.
Head researcher Christophe Van den Bulte says referral programs are a positive way for marketers in the BtoC sector to profitably capture new clients but “paying referral fees to B2B customers’ employees could be conceived as a bribe,” and therefore aren’t as likely to be used. The study results also show how a referral campaign involves the use of the better-matching mechanism. In the better-matching scenario, the referring customer knows the bank and his/her friends well and can therefore make a superior match for a business relationship when compared to the type of relationship that might evolve as a result of advertising. Bulte also notes that as the influence of traditional advertising methods wanes, marketers should increase WOM and social media campaigns, especially when they have a tool to prove the campaign’s success to the company’s financial overseers.
[Source: Van den Bulte, Christophe. Referral Programs and Customer Value. Knowledge@Wharton.com>. 21 July 2010. Web. 8 Aug. 2010]