Reports

Acquiring Customers via Word-of-Mouth Referrals: A Virtuous Strategy?

Constant Pieters and Aurélie Lemmens, 2015, 15-123

Evidence suggests that customers acquired through seeded word-of-mouth (WOM) campaigns or referral programs have higher margin and lower churn probability than customers acquired in other ways. However, the success of such strategies also depends on the extent to which these customers spread the word among their peers, producing long recommendation “cascades.”

In this report, Constant Pieters and Aurélie Lemmens examine this important aspect of customer referral value: To what extent do referred customers pass on the referral they received to others, and what drives this behavior? Based on an analysis of large-scale survey data among U.S. movie viewers, they find that, on average, customers acquired via referrals do not have significantly different referral value than other customers.

First, exposure to WOM referrals is non-random; customers who were exposed to WOM referrals are systematically different than customers who were not. Ignoring this self-selection mechanism leads to an overestimation of the effect of referral exposure on referral value. Second, a moderated mediation analysis shows that the mediation of satisfaction explains almost 80% of the total effect of WOM referral exposure on referral value. Referred customers who receive referrals that do not fit their tastes well (badly matched referrals) end up less satisfied than non-referred customers, leading them to refer less in turn.

The results suggest that managers should use WOM acquisition strategies cautiously as they may be not as successful in attracting customers with a high referral value as they are in recruiting profitable customers. Moreover, managers should not expect long chains or cascades of referrals as a result of WOM acquisition strategies.

Finally, companies should make sure their prospective customers have realistic expectations prior to consumption (for example, by means of information tools), and should encourage referrers to take the recipient’s tastes into account when referring (for example, by means of matching tools).

Constant Pieters is a Ph.D. Candidate in Marketing and Aurélie Lemmens is Associate Professor of Marketing, both at the Tilburg School of Economics and Management, Tilburg University.

Acknowledgments
The authors received financial support from a N.W.O. VIDI grant. The manuscript benefited from invaluable suggestions by Rik Pieters, Bart Bronnenberg, Marnik Dekimpe, Els Gijsbrechts, and the other members of the marketing department at Tilburg University. The authors acknowledge helpful comments from Ajay Kohli, Michael Haenlein, Marion Debruyne, and participants of the 28th EMAC Doctoral Colloquium in Leuven.

Related links

Effect of eWOM on Sales (2016) [Article]

The Impact of Referral Coupons on Customer Behavior and Firm Revenues: Evidence from Field Experiments (2016) [Report]

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