Customer referral programs have been a staple of marketing plans in many organizations for years. The axiom about the marketing cost to acquire customers relative to retaining them is well known, even if it has some variation (10 times more, 8 times more, 5 times more- others?). The exact number is not as significant as the realization that targeting current customers is essential to marketing effectiveness. Thus, it is in marketers’ best interests to figure out how to nurture relationships that exist already.
Tapping Customer Connections
One strategy used in customer relationship management is to tap the social connections of customers by devising referral programs. The task of acquiring customers can be made easier by enlisting the help of current customers to recommend a business to their family, friends, or co-workers. Customers become a part of your sales team, sharing their experiences with their contacts. Although many customers voluntarily refer brands to their contacts, referral programs often sweeten the pot by offering incentives for referring someone who eventually becomes a customer (e.g., cash or free product). Finding new customers is challenging enough; why not enlist people already convinced of the value of your brand to advocate on your behalf?
The Surprising Payoff of Retention Programs
Customer acquisition is a significant motivation to implement referral programs, but they also can be an effective means of increasing customer retention. In a study published in the July 2013 issue of the Journal of Marketing, researchers Ina Garnefeld, Andreas Eggert, Sabrina Helm, and Stephen Tax examined the effects of customer referral programs on customer loyalty. Analyzing a data set from a global telecommunications company, they found that participation in a referral program has a pronounced effect on customer retention and loyalty. Defection rates among customers participating in a referral program dropped from 19% to 7% in one year. And, not only did referral program participants hang around as customers, but they spent more, too. Average monthly revenue from these customers grew by 11% compared to a control group.
Interestingly, customer tenure was negatively related to customer loyalty. Newer customers demonstrated a more positive relationship between referral program participation and attitudinal loyalty (i.e., liking and positive psychological attachment to the brand). An explanation for this finding is that \making referrals is a way for newer customers to align their attitudes (“I feel good about my cell phone provider”) and behaviors. Customers that have had a longer relationship with a firm may have already achieved internal consistency in their feelings and behaviors toward a brand.
Customer Referrals: A Dual Focus
Findings from the Garnefeld et al. study should prompt marketing managers to re-evaluate their use of customer referral programs. A tactic with a long history of being used for customer acquisition has a dual benefit of strengthening relationships with existing customers. An additional consideration in the research was reward size. Not surprisingly, a large reward (€50) had a positive effect on the interaction between program participation and attitudinal loyalty than a small reward (€5). In other words, offer sufficient value for customers to advocate on your behalf. The money invested will not only bring in new customers, but it could be instrumental in retaining current customers. Reducing customer defections is a key to improving profitability that must not be overlooked.
Have you ever realized that the way you are looking at something has been wrong all along? Your view changes in an instant, and you wonder why you did not see the flaws in your thinking long before now? It definitely happens to me; in fact it most recently occurred a couple of days ago when reading an article about customer loyalty. Larry Freed, president and CEO of marketing analytics firm ForeSee, took the stance in his headline that “all loyalty is not created equally.” He got my attention, but was this another hyped-up headline with little substance to follow? No, it was mindset changing for me.
Mr.Freed contends customer loyalty is not a single-dimension construct. Two types of loyalty are behavioral loyalty and emotional loyalty. Behavioral loyalty seems to be the aspiration that most marketers have for their customer relationships. After we acquire customers, the aim is to develop repeat purchase behavior. They buy our brand and not competitive offerings. Loyalty can be encouraged by rewards programs, incentives, and price breaks. If we achieve repeat buying behavior from enough customers we win, right? Unfortunately, Mr. Freed says “no.”
A significant limitation of building behavioral loyalty is that the willingness to buy over and over may have less to do with the brand and more to do with the system that promotes loyalty. An episode of Seinfeld makes light of the limitations of behavioral loyalty. Elaine is on a quest to get a loyalty card punched 24 times at a sandwich shop so she can be a “submarine captain” good for a free sandwich and a captain’s hat. She did not have loyalty to the shop (she said she had eaten “23 bad subs”) but she really wanted the rewards. Of course Elaine is a fictional character, but does her behavior mirror that of some customers who are hooked on the system, not the brand or customer experience?
What is the alternative, you might be asking. According to Larry Freed it is building emotional loyalty. Unlike behavioral loyalty that can be bought using incentives, emotional loyalty is a true feeling of connection with a brand resulting from satisfaction with the brand experience. It is true loyalty in that such a bond with your brand not only results in repeat purchases, but it leads to other behaviors like advocating for your brand via word-of-mouth and willingness to pay price premiums. To get to this point, Freed encourages a focus on customer satisfaction as the catalyst for building emotional loyalty. Simply put, what do customers want from their experience with your product or service?
Loyalty is the holy grail of marketing, but understand the difference between loyalty to your marketing system and loyalty to your brand. Reaching the pinnacle can be achieved by starting at the foundation, returning to basics having a better understanding of what customers want from you.
One of the most significant effects of the recession (which may be over according to economists but many households are not convinced) has been consumers’ propensity to trade down to lower priced brands. In good economic times, many marketers strived to deliver value through enhanced product features or symbolic benefits of their brands. The strategy was to deliver value that customers would be willing to pay price premiums to attain. When the economy worsened, consumers tended to become more conservative in their buying behavior, cutting back where they could and buying lower priced alternatives to meet their needs.
The behaviors described above are more than gut feelings about what consumers have been doing. A recent study by comScore found that consumers indeed traded down to lower priced brands during the recession. The study tracked consumer behavior in terms of buying the brand they wanted most for a variety of consumer packaged goods categories and housewares. All categories saw a decline in the percentage of consumers who had bought the brands they wanted most. For lower priced products that may have few perceived differences between brands, the effects of the recession on trading down were not as great. For example, 36% of consumers reported they bought the brand of paper towels they wanted most in 2010, only 1 point lower than 2008. But, for other products that have greater perceived differences between alternatives, more consumers decided to forgo the brand they wanted most for lower priced brands. For toothpaste, purchase of preferred brand dropped 10 points from 2008-2010 (67% to 57%), shampoo dropped 13 points (65% to 52%), and jeans dropped 15 points (54% to 39%). More information on the comScore study can be obtained by clicking here.
A great deal of uncertainty exists about whether the shift in consumer behavior during the recession is temporary or reflects a permanent shift toward value being defined more by low price than product benefits. Many experts believe the trading down behavior may be a realignment of consumers’ priorities. If that is the case, marketers must redefine their unique selling proposition. Is price the only point of difference that will matter to consumers? Probably not, but what brand traits will attract customers and more importantly, drive brand loyalty?
A return to branding basics seems to be in order. Trust is the foundation of relationships between buyers and sellers; it is no different than a personal relationship. Conducting business in a way that shows concern for customers, care for the community, and commitment to the well being of stakeholder groups are ways to develop and solidify trust. For example, social responsibility appears to be more than a fad; it is a shift in mindset among many people that businesses should be good stewards of the resources it uses and encourage consumers to do the same. Going forward, brand loyalty is more likely to be secured by demonstrating genuine concern for customers than dazzling them with product features or an aspirational image.