This month's Harvard Business Review (October 2007) has a fascinating article by three academics on placing a financial value on referral customers - (or as we like to call them, customer references:) Here's a link to How Valuable is Word of Mouth? (requires $6.50 purchase price).

Most financial analyses of a customer's lifetime value (CLV) calculate the present value of his or her projected purchase behavior. CLV has become a respected metric among financial types and increasingly sophisticated statistical models have made these projections quite accurate, even when you have surprisingly little data.

But for those customers who refer additional business to your firm, CLV doesn't come close to measuring their full value. If your customer Mary refers two new customers to you per year for 3 or 4 years, her lifetime referral value to your firm (CRV) increases geometrically - and can far eclipse her traditionally measured CLV

What is great about the article is that it moves beyond this somewhat obvious, theoretical fact and puts the concept to the test with a marketing campaign designed to understand and leverage your referral customers. The test campaign worked, providing a very healthy return on investment. Also, the study revealed some fairly surprising facts about your best referral customers - they aren't necessarily who you think they are.

I provide some key results for you below my signature line and announcements.

All the best,
Bill

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CUSTOMER REFERENCE FORUM 2008
Will be held again at the fabulous Claremont Resort in Berkeley, CA on February 18-20. One topic we plan to cover thoroughly is the impact of social media and online customer communities on reference programs. One of our Advisory Board members put it best in a recent meeting: social media will completely change the world of customer references in the next two years. Will you be ready? We'll help you prepare. To be kept informed as our plans for the 2008 Forum progress, just reply to this email with "keep me informed" in the subject line.

60 CAB PROFESSIONALS MEET IN SAN JOSE
We had a terrific turnout last week for our first CAB EXCHANGE SUMMIT in San Jose. Keynoted by customer guru Patty Seybold, filled with presentations and information-exchange by experienced Customer Advisory Board (CAB) professionals and attended by a great lineup of firms like Oracle, GE, Intel, Apple, Hewlett-Packard, AT&T, Microsoft, Wells Fargo and dozens of others - the event was a solid start in forming a new community.

"This was truly the most valuable 2 days I've spent since coming into this role for Oracle. Each presentation was valuable in itself and I really enjoyed meeting and learning about best practices from so many other Customer Programs professionals."
Dian Thompson, Senior Director, Global Customer Programs

ADVICE
Check out our BEST PRACTICES REPORTS for tips on critical issues like: getting marquee customers to participate in a reference program; getting customers to reveal measurable benefits; developing customer communities; integrating your program with sales; gaining executive support, and more. For more information, please click here.

RESEARCH
Check out our SURVEYS of Reference Programs and the Managers who run them, here:

JOBS
We can let our community of more than 500+ reference pros know about your position opening. To post a job (for now, this service is free), please click here.

On the other hand, if you're looking for a job, bookmark our new job board postings and check it from time to time, at www.customerreferenceforum.com/jobs/ job_openings.php.

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HOW VALUABLE IS WORD OF MOUTH?
by V. Kumar, J. Andrew Peterson, and Robert P. Leone
Harvard Business Review, October 2007

SOME KEY FINDINGS

- Understanding the full value of a customer must include their lifetime referral value (CRV). In their study, the authors found many customers with very low CLV (traditionally measured lifetime value) whose previously unrecognized CRV made them among the most valuable customers.

- In their study and test marketing program at two firms (a telecommunications firm and financial services firm), the authors found that, remarkably, the most loyal customers were NOT the most prolific referral customers. This has important implications for allocating marketing budgets - in particular, to your reference program. In focusing on engaging your most loyal, or even most strategic customers, as references, are you overlooking the most prolific referral customers?

- In particular, don't blindly allocate marketing dollars to loyal customers designed to encourage them to make referrals. Determine first which customers are your most enthusiastic referral customers - many of which won't necessarily by your biggest buyers - and focus your referral efforts on them.

- In their test marketing campaigns at both firms, by segmenting customers according to both lifetime purchase value and lifetime referral value - encouraging the big purchasers to purchase more while encouraging the prolific referrers to refer more business - the authors achieved a 12-fold return on marketing investments. That's double the usual industry rates.

- Note that the study assumed a simplified B2C market, which may make it more relevant to SMB marketing efforts by larger firms. But the ideas would seem to translate even to complex B2B markets where decisions are often made by groups of people - provided you can determine the most important influencers in the sales process. If so, the tools suggested by Prof. Kumar et. al. may allow you to calculate their (considerable) lifetime value as references.