The Personal Touch, Quantified

Written

The Personal Touch, Quantified

Reminding customers of their loyalty to your business makes them much more likely to refer friends.
Cathedral of Light' at the Sydney Botanical Garden | Reuters/Jason Reed
The customer-referral game has changed dramatically with the rise of social media.| Reuters/Jason Reed

Melanie Brucks recently visited her family in Tucson and discovered a surprising way to bond with her father. They shared a dinner made with ingredients and a recipe he’d ordered online from a ready-to-make meal-delivery service.

“He started telling me about it and said I should try it,” says Brucks, a doctoral student at Stanford Graduate School of Business “I did, and now we talk on the phone each week about what we order. It’s been a new and interesting way to connect with him.”

That experience is a textbook example of how personal referrals play out among products and services, and a topic tackled in a recent study that Beth Benjamin, a senior director at the Palo Alto-based Medallia Institute, and her colleague Carly Kontra conducted with Brucks and Itamar Simonson, a Stanford GSB marketing professor. Medallia, founded by two Stanford GSB alumni, is a global provider of customer experience management software and asked Simonson to collaborate on a field experiment to evaluate the impact of different referral strategies.

The study builds on conclusions in Simonson’s 2014 book, Absolute Value: What Really Influences Customers in the Age of (Nearly) Perfect Information, in which he notes that the way consumers make buying decisions has vastly changed with easy access to online user reviews, price-comparison apps, and other ever-evolving technologies. Personal referrals “used to be all word-of-mouth,” says Simonson, “but social media opens new channels, and makes it easier and more efficient to share your views to a lot more people.”

Millennials are especially likely to share their experiences online, according to another Medallia study, with a startling 85% of them reporting that they write online reviews or post on social media after a particularly good or bad customer experience. Confirming Simonson’s earlier assertions, the study found that millennials also rely heavily on digital word of mouth to inform their buying decisions.

“The question then becomes, ‘How can companies increase the probability that their customers will share their positive experiences with others?’” Benjamin says. “How can they encourage recommendations and referrals?”

The researchers ran an experiment at a Gainesville, Florida, athletic club to gauge which types of customer referrals are most effective. They gave club members three different ways to refer potential new members:

  • Group 1 was asked to provide the names and email addresses of up to three friends.
  • Group 2 was offered three seven-day guest passes that they could share with friends by providing the friends’ names and email addresses.
  • Group 3 received a more personalized approach. Those members were told they had earned three sharable seven-day guest passes based on their individual workout frequency the previous month. The free guest passes were presented as a reward for visiting the gym, reminding members of how often they visited and applauding them for it.

Reminding customers of their own experiences at the club, and convincing them that their workouts were what earned them the right to refer others, turned out to be critical. “The personalized message was more than twice as effective at driving referrals as the more generic message that offered free guest passes as a standard perk of membership,” the report says.

It even worked for members who were more couch potatoes than ab crunchers. “While members who visited the gym more often were more likely to make a referral overall, the personalized message increased referrals across the board,” the researchers write.

The question then becomes, How can companies increase the probability that their customers will share their positive experiences with others?

“It didn’t matter how much you worked out,” Brucks says. “Three times a week or once a month, it has the same effect.”

The researchers say happy, engaged customers create a virtuous cycle by referring others to a product or service. They cited a different study that showed referred customers are 18% more likely to be loyal and are in turn more likely to refer their friends, which reduces the overall cost of acquiring new customers. Citing previous studies, the researchers write: “The lifetime value of referred customers was 25% higher than that of other customers, and the value rose to almost 35% after accounting for their lower acquisition costs.”

“I think the main point of this paper, the most interesting point, is this finding that if you tell a customer about their own experience — ‘You’ve been using the club once a week, so congratulations’ — that feedback, even among infrequent users, significantly increases the likelihood of these people referring others to this club,” Simonson says. “That personal touch makes a real difference.”

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