Edited by V. Kumar and Denish Shah
A customer’s contribution to the firm is not limited only to the profits generated from his or her purchase behavior, it also encompasses the benefits that result from his or her referral behavior. Research has clearly shown that a customer’s referrals can be quite valuable to a firm since they can generate new customers in various situations, including during new-product diffusion (Mahajan, Muller, and Bass, 1995). Word-of-mouth (WOM) can also be quite important, since even when consumers are making general purchase decisions they often seek opinions from others who have specific product or market knowledge (Feick and Price, 1987). Furthermore, they tend to trust other consumers considerably more than they trust marketer-generated information. For example, Nielsen reports that 92 percent of consumers say who they trust recommendations from people they know, compared to just 47 percent who trust TV advertising. Moreover, 77 percent of consumers are more likely to buy a new product that was introduced to them through word-of-mouth originating from friends or family. Given the trust and importance that consumers place on product and service information provided by their social networks, many firms have now incorporated a referral program in their customer acquisition strategy.
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