Help to Grow: Management Course | Kingston University

The Power of Customer Referrals

New customers acquisition through existing customers
By Maliha Haider
June 20, 2024

In business world, finding new customers can be tough and expensive. Yet, one of the most effective strategies is often right in front of us: customer referrals.

Recently a Harvard Business Review (HBR) article ‘Research: Customer Referrals Are Contagious by Rachel Gershon, Zhenling Jiang, Will Fraser and Jitendra Gupta enfolded some compelling reasons why customer referrals are so important, especially for small and medium-sized enterprises (SMEs) and those focusing on growth leadership within limited resources.

Referral Contagion

The magic of customer referrals lies in trust. According to the authors, when a potential customer hears about your product or service from someone they know and trust, it carries much more weight than any advertisement. For SMEs, which often rely on word-of-mouth to build their brand, this trust can be a game-changer. Referred customers are not just more likely to trust your brand—they’re also more likely to make a purchase.

But this goes beyond one purchase according to the authors. Backed by the data from over 4 million customers, they discovered that those who join through referral make more purchases than those customers who purchased using other methods. They also found out that a whopping 30% – 57% of new customers get in through those who joined through referrals. The authors coined the term “referral contagion — the tendency for referred customers to bring in more referrals.”

They investigated it from the lens of homophily, a concept that describes the tendency of individuals to build social networks with those who are similar to them. It leads to the phenomenon that if a customer likes a brand, they may have friends who would also like it.

Furthermore, the authors also discovered another key driving factor of referral contagion using controlled experiments. They found out that referred customers are more likely to refer to others as compared to non-referred customers.

If you would like to read more on this, go to the original article: