Keep clients coming back · Every business
What a Referred Customer Is Worth Compared With One From an Ad
A referred customer and an ad-driven customer can spend the same on the first visit, but one of the most cited long-run studies of referral programs found the referred one worth at least 16% more, and the gap widens once the cost of winning each customer is counted.
At a glance
- In a study of about 10,000 customers at a German bank, published in the Journal of Marketing, referred customers were worth at least 16% more than comparable customers who arrived another way, with about 25% higher contribution margins early on and about 18% lower risk of leaving.
- In an illustrative business where an average customer is worth $1,000, a referred customer worth 16% more and costing a $25 reward nets $1,135, against $850 for an ad customer who cost $150 to win.
- Find your own two numbers, the average value of a customer and what each source costs you, before deciding where the next marketing dollar goes.
The number and where it comes from
The most careful long-run measure of a referred customer's value comes from a bank that ran a referral program paying existing customers a 25-euro voucher for each new customer they brought in. Researchers followed 5,181 referred and 4,633 non-referred customers acquired in 2006 for 33 months, comparing the two groups while controlling for differences in who the customers were.
| Measure | Referred vs. comparable non-referred customers |
|---|---|
| Customer value | At least 16% higher |
| Contribution margin | About 25% higher, a gap that narrowed over time |
| Risk of leaving | About 18% lower, an advantage that persisted |
| Observed value difference | About 49 euros per customer |
| Estimated return on the 25-euro reward | Roughly 60% over six years |
A follow-up study of the same bank, published in the Journal of Marketing Research, found that the retention advantage held while the referrer stayed a customer, with a risk of leaving about 40% lower, and reversed once the referrer left. That finding points to the friend as part of the reason referred customers stay, and it suggests that keeping the referrer happy protects the referred customer too.
The owner's usual comparison runs only on the first sale: A customer is a customer; the ad brings them in faster. Research on a social networking site, published in the Journal of Marketing, adds a second difference: the effect of word-of-mouth referrals on new sign-ups lasted about three weeks, against three to seven days for traditional marketing, and its long-run effect was about 20 times that of marketing events.
The worked calculation
The cleanest way to compare channels is to subtract what each customer cost to win from what each customer is worth over time.
| Input | Ad customer | Referred customer | Source |
|---|---|---|---|
| Value of an average customer over time | $1,000 | $1,000 | Assumption |
| Referral premium | None | 16% | Schmitt et al., 2011 |
| Customer value | $1,000 | $1,160 | Calculated ($1,000 × 1.16) |
| Cost to win the customer | $150 | $25 | Assumption (ad spend per new customer; referral reward) |
| Value after acquisition cost | $850 | $1,135 | Calculated |
| Difference per customer | $285 | Calculated ($1,135 − $850) |
The calculation leaves out a further benefit. In a ten-year data set from a cashback company with 41.2 million registered customers, published in the Journal of Marketing Research, referred customers made 31% to 57% more referrals than other customers with similar purchase activity, so each referred customer is also more likely to bring in the next one.
Note for the site: this section sits beside a lean widget with three sliders (average customer value, ad cost per new customer and referral reward) and one result, the difference per customer.
How you compare
- The research benchmark: referred customers worth at least 16% more and about 18% less likely to leave, in the bank study.
- Your ad cost: divide last quarter's ad spend by the new customers who named an ad when asked how they found you.
- Your referred customers: compare their average spend and rebooking rate with everyone else's over the past year; if they lag, look at who is referring.
The next step is to tag every new customer's source for one month, then fill in Exhibit 2 with your own average value and acquisition costs.
About this research: The central figures come from a Journal of Marketing study of about 10,000 bank customers and a Journal of Marketing Research follow-up of the same bank, with supporting evidence on word of mouth from a Journal of Marketing study of a social networking site and on referral contagion from a cashback company. None of these studies measured service businesses directly. The worked example is illustrative.
Sources
- Schmitt, P., Skiera, B. and Van den Bulte, C. Referral Programs and Customer Value. Journal of Marketing 75(1), 2011. 5,181 referred and 4,633 non-referred customers.
- Van den Bulte, C., Bayer, E., Skiera, B. and Schmitt, P. How Customer Referral Programs Turn Social Capital into Economic Capital. Journal of Marketing Research 55(1), 2018.
- Trusov, M., Bucklin, R. E. and Pauwels, K. Effects of Word-of-Mouth Versus Traditional Marketing: Findings from an Internet Social Networking Site. Journal of Marketing 73(5), 2009.
- Gershon, R. and Jiang, Z. Referral Contagion: Downstream Benefits of Customer Referrals. Journal of Marketing Research 62(1), 2025. 41.2 million registered customers.
Related reading: How to Build a Referral System That Doesn't Feel Like Begging · Referral Programs for Dental Practices, Salons and Home Services · The Referral Ask to Use at the End of a Visit
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