Now, thanks to a tweet and post from Rick Pulito we have evidence that Promoters not only recruit customers for you, they recruit higher value customers.

Schmitt, Skiera and Van den Bulte looked at data from 3 years and 10,000 customers from a German bank. This institution (and most German banks apparently), offers cash incentives in a customer-get-customer program.

The findings?

1. Referred customers had a higher contribution margin for the bank
2. This higher contribution decreases over time, presumably as less profitable, less satisfied customers in the non-referred cohort, defect. 
3. Referred customers are more valuable in the short and long term however, with their LTV 16% higher in this data. They stay longer.  
4. Different customer segments vary in the amount of their extra value, confirming the wisdom (again) of 'treating different customers differently'. 

The great news? They also found that the extra value that comes from referred customers more than makes up for the expense involved in paying for the referral, giving an ROI of 60% over a 6 year period. This is even better when you consider that the cost of acquisition for a referred customer was 20 Euros lower as well...

Recommended reading for all of us looking to activate WOM as a tool to acquire high value customers.

The authors hypothesise some interesting reasons for these findings that should inform our relationship marketing;

• customers who understand your products may do a good job of matching what you have to their friends who have the needs you address, making for happy more loyal customers.
• both referrer and referee may feel better when sharing a company experience with others in their social circle.

 One interesting conjecture to finish - homophily (birds of a feather flock together) suggests that valuable customers are more likely to generate valuable referrals. Maybe we should consider varying the value of the referral rewards, based on the value of the referrer?