The clever method of customer
acquisition is a form of world of mouth (WOM) marketing known as a referral
program. While some programs have been used for decades by non profit
organizations like PBS, similar customer referral programs have also become
increasingly popular with companies in a wide range of industries, from
financial service and automobiles to newspaper and hotels. Christopher Van den
Bulte, a professor of marketing at Wharton, describes customer referral
programs as a effective way to attract higher quality customers. “They are an
old idea that’s getting more traction these days’” he notes,” and we now have
solid evidence of their financial benefits.”
According to a new study titled,
“Referral Programs and Customer Value,” customer referral programs are indeed a
financially attractive way of firms to acquire new customers. The study
authored by Van den Bulte, Bernd Skiera and Philip Schmitt, a professor and
doctoral student, respectively, at Goethe University in Frankfurt, Germany was
conducted over a period of three years and followed the customer referral
program of a leading German bank (which remained anonymous) that paid customers
25 euro bringing in a new customer.
Van den Bulte says it is no
coincidence that the study was conducted with colleagues based in Frankfurt, a
city considered the eurozones’ Financial capital and the home not only of the
European Central Bank, the Bundesbank and the Eurex, but also of the
headquarters of several large banks, including Deutsche Bank, Commers bank and
KFW.
The objective of Van de Bulte’s study
was two-fold, Van den Bulte state, “ There is a lot of talk about
word-of-mouth-marketing and making money out of social connections. Their first
objective, according to Van den Bulte, was to see if customer referral programms
can indeed turn social capital into economic capital. Their second objective
was to come up with a methodology to assess the effectiveness of customer
referral programs that was easy to implement with data and tools available to
many managers”. Using information from a database of about 10,000 customers
acquired by the bank in 2006 about half of them through the institution’s
referral program and the other half through traditional marketing efforts such
as direct mail and advertising the study tackled three question.
- Do referred customers have higher
margins than other customers?
- Do referred customers stay longer
with the firm than other customers?
- Do referred customers have a higher
customer lifetime value (CLV), the next present value of all the profits a
customer generates over his or her entire association with the firm?
The second key findings were about
customer retention. Referred customers were about 18% more likely to stay with
the bank than other customers, and that gap did not fade over time. This
pattern Van den Bulte suggests, is consistent with another mechanism documented
in previous studies on employee referral programs. People tend to have a
stronger attachment to an organization if their friends or acquaintances share
a bond to the same establishment.
The researchers also concluded that
the difference in margin combined with the difference in customer retention
amounted to a disparity in long-term customer value of 16% to 25%. “that is not
only a sizeable chack of money”, van den
Bulte says,” it also amounts to a 60% Roi (Return on investment) over six years
on the 25 enro that the bank paid for every referral”. Many practitioners, including
, mangers of the bank who made the data available, fear that referral programs
suffer from “moral hazard”, where opportunistic customers bring in “dead bats and
other unprofitable new customers just to earn referral fee”, van den Bulte state.
However, the study shows that the benefits of a customer referral program can
outweigh such negatives, making the programs pay off financially. According to
Van den Bulte, this is the first study ever published on the financial
evaluation of customer referral programs “we actually have hard financial
numbers, not vague feel – good stories or abstract statistical coefficients.
Our findings and methodology are something that financial managers can actually
understand and apply immediately”, he says.
It
helps that the techniques used to conduct the study were simple and straight forward,
he adds. “you can basically calculate the value using excel. You don’t need a
master’s degree in statistics, a smart intern or decent marketing consultant
can do it. We hope our study will actually motivate and help companies to
assess how effective their referral programs are”. The margin, customer
retention and customer value numbers, he notes, will vary across industries and
customer segments, but the procedures used in the study can be put into
practice at any company with customer profitability data.
Van den Bulte says that referral
programs featuring a financial pay-out are likely to remain a B2C (Business-to-customer)
practice, “because paying referral fees to B2B (Business-to-Business)
customers’ employees could be conceived as a bribe. Pharmaceuticals and medical
companies sometime get in hot water with the FSA for remunerating opinion
leaders to educate fellow physicians about the benefits of new products, so expect
that paying someone money just to bring in a new B2B customer or lead will be
frowned upon. Of course, the absence of financial pay-outs does not mean that customer
referrals are any less important in B2B markets. Companies just have to be more
creative in finding proper incentives enabling them to be more creative in
finding proper incentives enabling them to capitalize on their existing customers’
networks,”
SERVICE
A service is any act or performance that one party can
offer to another that is essentially and does not result in the ownership of
anything (Kotler & Keller, 2006). The insight of service marketing focuses
on selling the services in the best interest of users/ customer. It is fretful
with a scientific and planned management of services which makes possible a
fair management of the interests of providers a well as the users. Services are
vital segments of all economies and they become increasingly more everyday life
as economies develop. The size of service sector is increasing day by day
generally in all types of economies in the world and in particular developing economies.
This is an exhilarating time for services developing, since new technologies
are transforming the services worldwide. These elementary and speedy changes
being practiced by services markets throughout the world are brought about
among other factors primarily by the technological improvements and by
competition oriented reform policies. This creates different anticipation on
customers’ awareness towards the products or service of the company.
In the era of globalization and
borderless markets, respond sieves, quality and productivity are essential for
the survival and growth of any organization (pot huri & magnate, 2011).
Despite this transformation and
improvement in the service sector and particularly banking sector in Nigeria,
it still remains a fact that less than 20%
Gronroos
(2000) defined service as, “a process consisting of a series of more or lee
intangible activities that normally, but not necessarily always, take place in
interactions between the customer and service employees and/or physical
resources or goods and/or systems of service provider, which are provided as solutions
to customer problems”. Frolic (2006) defined the term service quality as “a
global judgment or attitude relating to particular service; the customer’s overall
impression of the relative inferiority or superiority of the organization and
its services”.
SERVICE
INTERACTION
Interactions between customers and
employees are a decisive component of service quality. This is principally factual
for service exemplified by a high degree of person-to-person interaction and by
the absence of exchange of tangible goods. The client comes away from service
interaction with feelings of contentment or annoyance. Service encounter is an
interpersonal association between the firm’s staff and customers (Potluri and
Mangnale, 2011).
Research has indicated that service
quality has been increasingly recognized as a critical factor in the success of
any business (Parasuraman et al.,
1998), and the banking industry in this case is not exceptional (Hossain and
Leo, 2009).
Service
quality has been widely used to evaluate the performance of banking services
(Cowling and Newman, 1995). The banks understand that customers will be loyal
if they provide greater value (quality services) than their competitors (Dawes and
Swailes, 1999), and on other hand, banks can only earn high profits if they are
able to position themselves better than competitor within specific market
(Davies et al., 1995).
Consequently,banks need to focus on service quality as a core competitive strategy
(Chaoprasert and Elsey, 2004).
SERVICE
QUALITY
Service quality involves a
comparison of expectations with performance. According to Lewis and Booms
(1983), service quality is a measure of how well a delivered service matches
the customers’ expectations. Generally, the customer is requesting a service at
the service interface where the service encounter is being realized; then the
service is being provided by the provider and in the same time delivered to or
consumed by the customer.
The main reason to focus on quality
is to meet customer needs while remaining economically competitive in the same
time. This means satisfying customer needs is very important for the enterprises
to survive. The outcome of using quality practices is
- Understanding and improving of
operational processes.
- Identifying problems quickly and
systematically.
- Establishing valid and reliable
service performance measures.
- Measuring customer satisfaction and
other performance outcome.
Organizations are increasingly interested
in retaining existing customers while targeting non-customers and customers of
competitions; measuring customer satisfaction provides an indication of how
successful the organization is at providing products and/or services to the
market place. According to Rose and Hudgins (2008), a bank is a financial
intermediary that offers the widest range of financial services especially
credit, savings, and payment services and performs the widest range of
financial functions of any business form in the economy. The functions of a
bank according to Reed and Gill (1989), include creating money, payments
mechanism, pooling of savings, extension of credit, facilities for the
financing of foreign trade, trust services, safe keeping of valuables and
brokerage services. Universal banks offer the full range of banking services,
together with non banking financial services, under one legal entity. In
addition, the banks have direct links between banking and commerce through
cross shareholders and shared directorships. Their financial activities
normally include intermediation and liquidity via deposits and loans as well as
trading of financial instruments (e.g. bond, equity, currency) and associated
derivative, stock broking, corporate advisory services, including mergers and
acquisitions, investment management and insurance (Heffernan, 2005).
Zenith Bank Plc provides a wide
range of products and services for the benefit of its customers. From the
traditional products of the current/savings accounts, Zenith Bank Plc now offers
specialized products and services including corporate and investment banking,
commercial and consumer banking, personal and private banking, trade services
and foreign exchange, treasury and cash management services, other non bank
financial services mainly through subsidiaries. There are also investment
products like treasury bills as well as fixed and call deposits. These are cut
to suit the individual needs of customers. In addition, Zenith Bank has taken
advantage of an enhanced information technology system, to introduce internet
banking viz Local Money Transfer, Western Union Money Transfer, ATM Locator,
Zenith Direct, ZECA (Zenith Children’s Account), Global PAY, Zenith POS,
Eazymoney, Internet Banking, Online Bills Payment, Cards, Alerts.
However, a bank like Zenith Bank Plc
recognizes that customer satisfaction (CS) plays a key role in a successful
business strategy. What is unclear is the exact nature of that role, how
precisely satisfaction should be managed, and whether managerial efforts aimed
at increasing satisfaction lead to higher scores in sales. Today managers in
the banking sector especially at Zenith Bank Plc, undertake substantial efforts
to conduct it surveys. Yet it appear that in most cases the data are used to
simply monitor specific attributes, and especially overall satisfaction over
time. Unless the impact of customer satisfaction on revenues is assessed,
managers have little basis for allocation of resources.
The concept of customer care is
concerned with customer satisfaction, putting the customer first, anticipating
needs and problems, tailoring the products and services to meet needs and being
nice to customer. It also includes service to the customer, delivery operation,
employee relationship with customer and internal relationship between employees
and management. In improving customer care strategies and programs, financial
services organizations are managing products and services, delivery systems,
environment and people so as to provide an efficient and caring service,
getting things right the first time and maintaining standards (Naveed, 2009).
In services industries, the subject of service quality globally remains a
critical one as service providers strive to maintain a comparative advantage in
market place. Financial services in general, particularly banks, compete in the
market place with generally undifferentiated services and products. Thereby
service quality becomes a key competitive weapon (Staffor, 1996). A banking
organization like Zenith Bank Plc can only differentiate itself from
competitors by providing high quality services. It is true that structural
changes have resulted in banks to perform a greater range of activities, and
enabling them to become more competitive with non-bank financial institutions
(Angur et al., 1999). Presently,
technological advancements are causing banks to revise their strategies for
services offered to both individual and commercial customers.
QUALITY
MEASUREMENT
Quality measurement is separated in
subjective and objective processes, at which mostly the customers’ satisfaction
is being measured. Measuring the customers’ satisfaction is an indirect way to
measure quality.
Objective
processes are subdivided into primary and secondary processes:
- During
primary processes, test buyings from silent shoppers are being made or normal
customers are being watched.
- During
secondary processes, quantifiable enterprise numbers like amount of complaints
or the amount of given back goods are being analyzed, and with this information
conclusions to quality can be drawn.
Subjective
process are being subdivided into characteristic orientated, incident
orientated and problem orientated processes.
- To
the characteristic focused processes counts the SERVQUAL method.
- To
the incident focused processes counts the Critical Incident Theory.
- To
the problem focused processes counts the Frequenz Relevanz Analyze (German).
The
most important and most used process to measure quality is the SERVQUAL method.
However, the Nigerian Banking
Industry has witnessed any developments in terms of innovative products and
services. This current state of affairs has brought tremendous transformation
in the way business is done in the banking industry. The deregulation of the
sector and subsequent introduction of a universal banking license for banks to
engage in all banking transactions ranging from merchant banking, commercial
and investment banking to development activities has been a catalyst in the
direction. The 21st century is considered as the service industry
century. Service industry is growing at a rapid pace across developed and
developing countries. Services are deeds, processes and performances (Zeithaml
and Bitner, 2003). Broadly speaking, services include all economic activities
whose output is not a physical product or construction is generally consumed at
a time it is produced, and provides added value in forms (convenience,
amusement, timeliness, comfort or health) that are essentially intangible
concerns of its first purchaser (Quinn and Paquette, 1987). Service has been
entering every part of life from the most essential demands (such as eating,
sleeping) to other entertainment needs such as banking, sport, traveling,
cooking and telecommunication. Customer service improvement has led to the introduction
of innovative products of banks as acknowledged by Kock and MacDonald (2006)
can be financial or technical. For example such emerging financial products as
personal housing mortgage loans, personal consumption loans, sales and
trusteeship of funds have not only satisfied people’s diversified financial
demand to some extent but also expanded banks’ operational space and their
profit-making channels.
WORD-OF-MOUTH
MARKETING
Word-of-mouth (WOM) marketing has
recently attracted a great deal of attention among practitioners. For example,
several books tout WOM as a viable alternative to traditional marketing
communication tools. One calls it the world’s most effective, yet least
understood marketing strategy (Misner 1999).
Marketers are particularly
interested in better understanding WOM because traditional forms of
communication appear to be losing effectiveness (Nail 2005). For example, one
survey shows that consumer attitudes toward advertising plummeted between
September 2002 and June 2004. Nail (2005) reports that 40% fewer people agree
that advertisements are a good way to learn about new product, 59% fewer people
report that they buy products because of their advertisements, and 49% fewer
people find that advertisement are entertaining.
Word-of-mouth communication
strategies are appealing because they combine the prospect of overcoming
consumer resistance with significantly lower costs and fast delivery especially
through technology, such as the internet. Unfortunately, empirical evidence is
currently scant regarding the relative effectiveness of WOM marketing in
increasing firm performance overtime. This raises the need to study how firms
can measure the effects of WOM communications and how WOM compares with other
forms of marketing communication.
Word -of - mouth marketing is a
particularly prominent feature in the internet. The internet provides numerous
venues for consumer to share their views, preferences, or experiences with
others, as well as opportunities for firms to take advantage of WOM marketing.
As one commentator stated, “instead of tossing away millions of dollars on
super bowl advertisements, fledging dotcom companies are trying to catch
attention through much cheaper marketing strategies such as such as blogging
and WOM campaign” (Whitman 2006, p. B3A). Thus, it is important to understand
whether WOM is truly effective and if so, how it’s impact compares with traditional
marketing activities.
Word – of – mouth has been
frequently addressed in the business literature especially in service
literature. Classically, it has been viewed as an element in the framework that
constructed from satisfaction – profit relationship. Satisfactions has been
assumed to effect word-of-mouth, which consequently affects the profitability
of the firms, the ultimate goals that companies are looking to increase (s Derlund
& Rosengren, 2007). The behaviour that forms the word-of-mouth is
considered as the informal sharing of any purchase or consumption related
information among customers. Word-of-mouth is considered to consist of two
general types: negative and positive word-of-mouth.
There has not been agreement over
the content of the information in word –of-mouth that people transfer to each
other; conceptualizations and operationalizations of the word-of-mouth
construct, some authors emphasize explicit recommendations (Fullerton &
Taylor, 2002; Gremler & Brown, 1999; Hartline & J, 1996; maru, et al; 1994). The latter phase is
principally prevailing in researches on satisfaction – related. Moreover, in
these kinds of research, it seems as common behavior to bulge together
measurement elements that might reflect the word-of-mouth senders along with
the element indicating other different purposes.
This approach, which is called cocktail, does not persuade
such full appraisal of predecessor of word-of-mouth and outcomes of
word-of-mouth; and it might be fairly accountable for the lack of theoroes in
detail about the role that word-of-mouth plays in its homological net.
There is no general accordance between scholars on the
nature and contents of the information that is being shared among customers.
When authors want to operationalize the concept of word-of-mouth, some believed
on unambiguous recommendation (Gremler & Brown, 1999). While other authors
believed that word-of-mouth is an activity that comprises thoughts, ideas, and
information being shared among customers from their personal incidents (Mikkehsen,
et al; 2003).
East, Hammond, and Lomax (2008) defined word-of-mouth
as an informal adviser that are being transferred among customers. Authors saw
word-of-mouth as interactive, rapid, and deficient in business – related
predisposition. word-of-mouth is considered as a very powerful effect on the
behavior that customers show regarding the decisions they are willing to take.
Positive word-of-mouth is considered to be encouraging
a choice like brand choice, while negative word-of-mouth is considered to be
discouraging a brand choice. word-of-mouth is believed to be influential in
adopting new groupings and the brand selection in adult classifications with
regards to antecedents to transmitting word-of-mouth many scholars focus on
global evaluations such as satisfaction (Ranaweera & Prabhu, 2003;
westbrook, 1987), perceived service quality (Danaher & Rust, 1996;
fullerton & Taylor, 2002; Hartline & J., 1996) and perceived value
(Sweeney, soutar, & Johns, 1999).
EFFECTS WORDS-OF-MOUTH ON
CUSTOMER ACQWSITION
The earliest study on the
effectiveness of word-of-mouth is survey-based (Katz and Lazarsfeld 1955) and
was followed by more than 70 marketing studies, most of them also inferring
word-of-mouth from self-reports in surveys (Godes and mayzlin 2004; money,
gilly, and graham 1998).
Researches have examined the
conditions under which consumers are likely to rely on other’s opinions to make
a purchase decision, the motivations for different people to spread the word about
a product, and the variation in strength of people’s influence on their peers
in word-of-mouth communications moreover, customers who self-report being
acquired through word-of-mouth add more long-term value to the firm than
customers acquired through traditional marketing channels (Villanuteva, yoo,
and Hanssens 2008).