How Valuable Is Word Of Mouth?

Submitted By fnusrat
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How Valuable Is Word of Mouth?
Identify the customers who bring in the most referrals. Then capitalize on that knowledge.

by V. Kumar, J. Andrew Petersen, and Robert P. Leone

Justine Beckett



has gotten fairly sophisticated. Companies can draw on databases that tell them how much each customer has purchased and how often, which they may supplement with detailed demographic profiles. By applying statistical models, they can predict not only when each customer is likely to make a future purchase but also what he or she will buy and through which channel. Managers can use these data to estimate a potential lifetime value for every customer and to determine whether, when, and how to contact each one to maximize the chances of realizing (and even increasing) his or her value.
But as Bain consultant Fred Reichheld reminds us in his December 2003 HBR article, “The One Number You Need to Grow,” the value of any one customer does not reside only in what

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Harvard Business Review 139

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How Valuable Is Word of Mouth?

that person buys. In these interconnected days, how your customers feel about you and what they are prepared to tell others about you can influence your revenues and profits just as much.
Companies go to considerable lengths to motivate their customers to double up as salespeople: Mobile phone operator Sprint PCS offers a service credit of
$20 to any customer who refers another person and a service credit of $10 to anyone referred in this way who actually becomes a new customer. Similarly, online brokerage Scottrade offers three free trades valued at $7 each to both referring and referred customers.
Ideally, therefore, a company that wanted to know a customer’s full value would include a measure of that person’s ability to bring in profitable new
Article at a Glance
What your customers feel about you and what they are prepared to tell others about you can influence your revenues and profits just as much as, or even more than, what your customers do themselves.
To estimate the value of a customer’s referrals, take the value of the business brought in by the customers she refers and subtract the marketing costs that prompted her to make the referral. You base your estimates of future referral behavior on past behavior.
Once you segment customers according to their referral value and the value of their purchases, you can see how those values relate. Often, it turns out that the customers who buy the most from you are not your best marketers.
What’s more, your best marketers may be worth far more to your company than your most avid consumers.
Understanding how much value a customer brings in from purchases and how much from referrals can help companies target their marketing campaigns appropriately, enabling them to achieve superior marketing ROIs and reap the full value of all their customers.

customers. But the nearest that most firms get to estimating the value of a customer’s referral power is some gauge of the individual’s willingness to make referrals. At a macro level, this is not a bad metric; as Reichheld points out, it is positively correlated with a company’s profit growth.
The trouble is that most good intentions remain just that – good intentions.
Working with managers from a telecommunications firm and a financial services firm, we polled a set of their customers (9,900 at the telecom firm and 6,700 at the financial services firm) on their referral intentions and then tracked their behavior and the behavior of the prospective customers that the referring customers brought in over time. The number of both companies’ customers who said they intended to recommend the firms to other people was high, but the percentage who actually did so was far, far lower. While 68% of the financial services firm’s customers expressed their intention to refer the company to other people, only 33%