Referral Programs and Customer Value

TLDR

Referral programs are widely used to acquire customers, but it is unclear whether referred customers are more valuable than others. The study investigates whether customers acquired via referral programs are more profitable and loyal than non‑referred customers. The authors tracked about 10,000 customers of a leading German bank over nearly three years to assess contribution margin, retention, and overall value of referred versus non‑referred customers. Referred customers have at least a 16 % higher average value than comparable non‑referred customers, though the magnitude varies by segment, suggesting firms should target referral programs selectively.

Abstract

Referral programs have become a popular way to acquire customers. Yet there is no evidence to date that customers acquired through such programs are more valuable than other customers. The authors address this gap and investigate the extent to which referred customers are more profitable and more loyal. Tracking approximately 10,000 customers of a leading German bank for almost three years, the authors find that referred customers (1) have a higher contribution margin, though this difference erodes over time; (2) have a higher retention rate, and this difference persists over time; and (3) are more valuable in both the short and the long run. The average value of a referred customer is at least 16% higher than that of a nonreferred customer with similar demographics and time of acquisition. However, the size of the value differential varies across customer segments; therefore, firms should use a selective approach for their referral programs.