Tuesday, July 1, 2008

Customer Referral Value (CRV)

How Valuable Is Word of Mouth?
By: Kumar, V., Petersen, J. Andrew, Leone, Robert P.,
Harvard Business Review,
October 2007, Vol. 85, Issue 10

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.

Clearly, a corporation that accurately targets those of its customers who are likely to make profitable referrals will earn a better return on its marketing investment than its competitors that do not.

But when we looked into the specific referral behavior of customers with different CLV levels, we found that a high CLV is not a good predictor of CRV and so is a very questionable proxy for a customer's total value.

V. Kumar (vk@business.uconn.edu) is the ING Chair Professor in Marketing at the University of Connecticut's School of Business in Storrs and the executive director of the school's ING Center for Financial Services. J. Andrew Petersen (apetersen@business.uconn.edu) is a doctoral student in marketing at the University of Connecticut's School of Business. Robert P. Leone (leone_7@cob.osu.edu) is the Berry Chair Professor of New Technologies in Marketing at Ohio State University's Fisher College of Business in Columbus.

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