Perhaps, this shouldn't be a surprise but a recent Wharton Business School study found that referred customers spend more. The study found that on average, referred customers spend:
Referred customers spend 16% more than those who come in without a recommendation.1
If that's the average, there are outliers who do far better than that. There's one successful London start-up that reports seeing Lifetime value more than 40% higher from referred customers.
Why is this? The principle reason is trust. When we arrive at a site cold, we invest a lot of time determining whether we can trust the site and we try to manage our risk by not spending too much. On an online clothing store, we're not too sure about the quality of the products, so we buy one to start off. However if we've been referred by a friend who has already told us that the quality is good then there is nothing holding us back from buying more. We are also predisposed to like the brand and so that feeds into our perception of the company and makes us more likely to come back.
John Jantsch, author of the Referral Engine2, explains this well:
"Referred prospects ... have the ability to factor value into the equation. When your business comes highly recommended by a friend, the role of risk is minimized, and that fact alone moves the significance of price comparison down the list.In fact, when introduced by a friend as the best possible choice, prospects often anticipate paying a premium for the products or services, and do so willingly once some measure of social proof has been factored in."2
What are the implications for business? It obviously means that we should strive for referrals. It also means that we should be willing to pay for referrals. If you typically have a marketing cost of 30% of revenue then you might consider using to incentivise a referral by offering both the referrer and referrer offers and rewards to that value. This research suggests that you should be considering using some of the upside in basket value that you're earning as well.
1. Schmitt, P., Skiera, B., Van den Bulte, C., “Why Customer Referrals Can Drive Stunning Profits,” Harvard Business Review
2. p26, Chapter 2 of the Referral Engine by John Jantsch