Word of mouth (WOM) has re-emerged as an important marketing phenomenon, and its use as a customer acquisition method has started to attract renewed interest (e.g., Godes and Mayzlin 2009; Iyengar, Van den Bulte, and Valente 2010). Traditionally, WOM’s appeal has lied in the belief that it is cheaper than other acquisition methods. A few recent studies document that customers acquired through WOM also tend to churn less than customers acquired through traditional channels, and that they tend to bring in additional customers for the firm through their own WOM (Choi 2009; Trusov, Bucklin, and Pauwels 2009; Villanueva, Yoo, and Hanssens 2008). One study further suggests that customers acquired through WOM may generate more revenue for the firm than customers acquired through traditional marketing efforts (Villanueva, Yoo, and Hanssens 2008).
From a managerial point of view, these findings are encouraging and suggest purposely timulating WOM to acquire more customers. However, there are concerns that WOM timulated by the firm may be substantially less effective than organic WOM in generating aluable customers (Trusov, Bucklin, and Pauwels 2009; Van den Bulte 2010):
(i) targeted rospects may be suspicious of stimulated WOM efforts; (ii) such efforts often involve a monetary reward for the referrer who as a result may seem less trustworthy; (iii) programs providing economic benefits tend not to be very sustainable (Lewis 2006); (iv) unlike organic WOM, stimulated WOM is not free, raising questions about cost-effectiveness; and (v) stimulated WOM is prone to abuse by opportunistic referrers. The uncertainty about the benefits of stimulated WOM in customer acquisition is frustrating for managers facing demands to increase their marketing ROI and wondering whether or not to use this method. Our study addresses this managerial issue by investigating the value of customers acquired through stimulated WOM and comparing it with the value of customers acquired through other methods. We do so in the context of a specific WOM marketing practice that is gaining prominence: referral programs in which the firm rewards existing customers for bringing in new customers.
Whereas such programs are generally seen as an attractive way to acquire customers, their benefits are typically considered to be their targetability and cost effectiveness (Mummert 2000). We broaden this view by assessing the value of customers acquired through such a program.Specifically, we answer four questions. (i) Are customers acquired through a referral program more valuable than other customers? (ii) Is the difference in customer value large enough to cover the costs of such stimulated WOM customer acquisition efforts? (iii) Are customers acquired through a referral program more valuable because they generate higher margins, exhibit higher retention, or both? (iv) Do differences in margins and retention remain stable or do they erode? The answers to the last two questions provide a deeper insight into what might be driving the value differential.