Why Knowledgeable Customers Create More Value

About five years ago three professors did an interesting study on the amount of value created by different customers from their own spending, as compared to their referrals of other customers. They looked at one financial services firm and one telco, modeling each firm’s customers to try to assess the amount of lifetime value produced by direct spending, as well as by referring other customers who spent. They wrote their study up in a Harvard Business Review article, “How Valuable is Word of Mouth?” which is highly readable and has a number of very interesting points.

Somewhat counter-intuitively, one thing they discovered was that the highest spending customers are not the same as those who generate the most value by referring others (at least not according to their model). To help you visualize this, I took the numbers from the telco company they analyzed, and I arranged them on a bar chart:

This chart clearly shows that the top three spending (CSV) deciles don’t overlap at all with the top three referral (CRV) deciles. Or in plain English, the 30% of customers who spend the most are completely different from the 30% who refer the most other customers. Not even close. Big spenders generate little value at all with their referrals of other customers, while those who generate the most value from referring others tend to be middling spenders themselves.

The authors of this study didn’t speculate as to why this seemed to be true of both the telco and the financial services firm, but if you think about it, it easily makes sense. You spend more yourself because you have a greater need for the product or service, and you're generally satisfied with it. But no matter how satisfied you are, the value you generate for a company by referring others to it will be based not on your spending volume, but on your own reputation and "authority" among your friends.

This is even truer today, in the connected age of online social networks and transparency. Personal expertise has never been more easily shared with others. And you don’t have to spend a lot with a company before you’re capable of evaluating the kind of service you’re getting.

For businesses, this means it's more important than ever to cultivate relationships not just with high-spending customers, but with intelligent, thoughtful ones as well. Too many businesses still regard less knowledgeable customers as high-value targets. But the less knowledgeable the customer is, the less likely it is that the customer -- even if he or she is very highly satisfied -- will ever generate much "word of mouth" value for your brand.

One more important point: In order to appeal to knowledgeable customers you have to do more than provide a discount or even a unique product benefit. You have to earn their trust, as well. And a customer will only trust you if he or she believes (1) you have the competence to deliver a quality product or service, and (2) that you are trying to act in the customer's interest, rather than just your own.