Does (Customer) Loyalty Drive Referrals -- OR Do Referrals Drive Loyalty?

The smart aleck answer is, of course, “yes.” But let’s dig further.

That loyalty drives referrals is easy enough to recognize. We can see how (some) loyal customers become advocates for a product or brand, and choose to refer others. A lot of loyalty research and practice focuses on this causal link. One – the Net Promoter Score – proposes a single question as its simple loyalty measure: How likely is it that you would recommend our company to a friend or colleague? This approach to loyalty is blessed with supporters, as well as critics.

The second part of the question is more provocative and interesting, especially in a socially connected world. Can referrals drive loyalty? Can we make them social?

We will use this well-constructed definition of loyalty (per Bob Hayes of Business Over Broadway) below to build our case.

1.     Retention Loyalty: Will a customer stay with you? (impacts overall customer growth)

2.     Advocacy Loyalty: Will a customer refer others? (impacts new customer growth)

3.     Purchasing Loyalty: Will a customer buy more? (impacts average revenue per customer)

Now let’s see how referrals might drive each form of loyalty. 

#2 is the most obvious. A referral is a form of advocacy to others, so referrals are synonymous with advocacy loyalty (and drive new customer growth).

Let’s look at #1. Can referrals drive retention? The very act of a referral binds a consumer more tightly with the product or brand. For this reason alone, the consumer is more likely to stay with the brand than make a switch on a future purchase, ceteris paribus. But there’s a bigger reason: A shift in allegiance would make the consumer appear hypocritical or two-faced, even if just to one self. Since human behavior tends to abhor duplicity, one might make the case that a referring consumer is more likely to stay with a brand, post referral.

Consider #3. Do acts of referrals make consumers buy more (quantity) of what they refer? I think you will agree that it would be hard to argue otherwise. At the minimum, you might agree that referrers continue to buy at the same level; perhaps some buy more. So, the outcome that referrers (in aggregate) buy more goods (post referrals) is more likely than either of the other two outcomes.

Now let’s change a few things.

1.     What if the brand provided a proper motivation for a referral – perhaps tying referrals to promotions they would otherwise give away (for example, you get a coupon and the ability to pass it on for referring others to a brand video); or tying them to corporate social responsibility efforts (for example, you refer our program supporting cancer research)?

2.     What if brands entered their frequent referrers into a “loyalty” program that conferred special privileges?

Both these strategies would serve as catalysts to develop each form of loyalty.

We make the case that businesses should proactively generate referrals to drive loyalty, rather than passively accept them as outcomes.In a socially connected world where each consumer is connected to hundreds others, the reach of referrals is unprecedented and its timing immediate. Neither was true even a few years ago. And here’s the icing on the cake. Consumers today overwhelmingly make purchase decisions based on the advice of people they know. So referrals are solicited, rather than tolerated.

Programs driving social referrals will transform the practice of consumer loyalty. They allow consumers to build “social credit” with their friends. As argued here, they will also enable businesses drive all forms of customer growth.

Tags: social media
Recommend (8) Print RSS
1 comment about "Does (Customer) Loyalty Drive Referrals -- OR Do Referrals Drive Loyalty?".
  1. Scott Segel from Crowdly , September 17, 2012 at 6:12 p.m.
    Wanted to comment on one point here. I agree with most of what you're saying, except "What if the brand provided a proper motivation for a referral - perhaps tying referrals to promotions they would otherwise give away (for example, you get a coupon and the ability to pass it on for referring other to a brand video)..." I feel like this approach completely negates the potential value of a referral from an advocate into their networks. The real power of any referral comes from the authenticity and motivation behind it. As a brand, if I am incentivizing these types of actions... I surely can expect the 'coupon hunters' of the internet to come out of the woodwork and paint a spammy picture of me to their friends. eg. "Tweet this for a chance to win x" or "Share this with your friends to get y". My take on this is...stick to what's personal. If you want your advocates to talk about your brand, let them talk about themselves on behalf of your brand. Ask them to share their stories, ideas, thoughts with you... after all, you can't deny the fact that in the end everybody enjoys talking about themselves. Thoughts?