Referral program effective for new businesses

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For an entrepreneur who has only recently taken steps to create a corporation, finding ways to attract new customers is critical to continued success. A new report from the Wharton business school at the University of Pennsylvania says that referral programs are a cost-effective marketing technique.

Looking at a German bank, researchers found that new customers brought in through a customer referral program were actually up to 25 percent more valuable and showed 18 percent more loyalty to the business than customers who were not referred to the company. One of the study’s authors said that this was the result of better customer matching.

“As a customer, I know my bank better than non-customers do. I also know my friends better than my bank does,” Christophe Van den Bulte, a professor of marketing at Wharton, told “Knowledge@Wharton” the Wharton School’s business journal, “I have a better idea than my bank about which of my friends would be a good match for the bank, and vice versa.”

A referral program also uses a company’s own customers to spread the word about the business – which can have a much stronger effect than other marketing efforts. Research has shown that customers are five times more likely to trust peer recommendations than a paid advertisement.