Reference Point
a newsletter for customer reference professionals
JUNE 2005
in this issue
-- A Conversation with Frederick Reichheld, Part 2
-- Update: the Fall Customer Reference Forum


A Conversation with Frederick Reichheld, Part 2

In the May issue of Reference Point, we saw how loyalty guru Frederick Reichheld frames the strategic importance of customer referrals - and the importance he places on them could hardly be higher. The reason: in a forthcoming study, he'll show that referrals drive 30 to 70% of sales. Click here to read about it. In this issue of Reference Point, we'll look at some ideas on HOW you can assess the value of your reference program based on Reichheld's framework.

During my conversation with him earlier this year in Cambridge, he suggested three ways to do this:

* New business 1: This is the most obvious impact, based on Reichheld's forthcoming study. For example, suppose that references drive 50% of business at your firm, that 30% of your customers are enthusiastic references or "net promoters," and that your CR program helped increase the number of net promoters to 40%. Then it's reasonable to anticipate that such efforts will increase revenues by 16%, calculated as .5 x (.4/.3 - 1).

* New business 2: In addition, CR programs help expose existing references to additional prospects, by bringing reference activity "to the surface." Calculating this impact is harder, but it may be reasonable to assume that references will have an impact in this expanded group similar to the one they already exert informally or "below the surface" (i.e., without your direct knowledge or assistance). This time, let's assume that your references drive a third (33%) of new sales in markets where they have influence, but that 60% of your prospects are never exposed to your references (formally or informally) during the sales process. If your proposal win rates are 20% with this group, it seems reasonable to assume that adding relevant references to the mix (which the buyers actually check out) will increase close rates by about 10% (to 30%) with this group, calculated as (.2) / (1-.33). For every $100 million worth of proposals you have out to this group, you could close an additional $10 million in sales.

* Share of wallet: There is good research showing that companies win a greater share of wallet from referrals. If your program is not merely identifying customer references, but actively intervening in the relationship to help convert apathetic customers into enthusiastic references - as Kathryn Perkins is helping to do at SumTotal Systems - that will impact your company's top line. Just calculate the share of wallet you get from referrals vs. non-referrals. The impact of converting customers into referrals then becomes a pretty straightforward calculation.

* Time and information: Referrals are much more willing than less enthusiastic customers to provide constructive feedback that can improve a firm's offerings and lead to better innovation. Calculating the impact here will depend on the value your firm receives from customers who provide such input, but if you can determine that number, then the impact of increasing the number of such customers becomes a straightforward calculation.

By the way, Reichheld also had an interesting idea regarding motivating sales: Pay them a bonus not just for providing a willing customer reference - make the bonus contingent on whether the resulting case study is "worthy" (i.e., is useful in strategically important sales efforts and contains real business results and ROI). Plus, pay even more when the case study actually gets used in sales efforts.

Update: the Fall Customer Reference Forum

Early registration for the Fall Customer Reference Forum In Boston begins next week - with the chance to get up to 15% off the registration price. If you'd like for me to remind you, please reply to this email with "please remind" in the subject line.

"The February Customer Reference Forum in Phoenix was extremely helpful to me. I came away with information that I was able to put to immediate use in my job. The Customer Panel, for example, generated ideas I used to rework the value proposition we use to persuade customers to participate in our reference program. In the last three months since the forum, we have tripled the number of customers in the program. I'm looking forward to the next event." Kathryn Perkins, Senior Manager, Customer Loyalty Programs, SumTotal Systems, Inc.

The Fall event in Boston will be longer than the one in Phoenix, with more content and new topic areas such as professional development, managing smaller programs and vendor solutions. And as we did in Phoenix, we're gong to have some terrific presenters, great opportunities to meet and get to know your peers in the profession, and above all -- tools that can help you excel in your job.

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