Customers who are referred to your business by their friends – word of mouth advertising – are more profitable over time than customers who found you through traditional marketing.

Intuitively, it makes sense: word-of-mouth is simple, virtually free, and it brings you great clients.

Now researchers have taken the time to study the monetary value of word of mouth (WOM) . They found that the average value of a referred customer is at least 16% higher than that of a non-referred customer.

Which raises the question, should you pay your customers (or your employees!) to refer you to their friends?

Senior photographers have been doing this for years with “ambassador programs” to varying degrees of success. If you take the cost of the packages you give away, add the cost for marketing materials, then divide the total by the number of new clients the program brings in, you’ll come up with an approximate price you paid for each new client. In marketing terms, this is called the customer acquisition cost. As long as it is less than your profit margin for each client, you’re making money.

This kind of “back-of-the-envelope” calculation can be applied to your entire studio. Add up the total you spend in a year for marketing and advertising, and divide it by the total number of clients that year. Don’t forget to include your time as an hourly wage.

For example, if you spent $10,000 in marketing in a year, and you had 100 new clients, your cost of customer acquisition would be $100 per customer. If your business is half weddings and half portrait sittings (high and low price packages) you will need to come up with a different customer acquisition cost for each.

Now, you could say to a senior or a bride, “for every referral that buys a package from my studio, I’ll give you a check for $XX dollars.” It cost you the same amount you’re paying anyway, and according to the study, the referred customer will be at least 16% more valuable than a customer who found you through traditional advertising.

What do you think? Could this work for your studio?

Tags: marketing, word of mouth

permalink |

This entry was posted on Thursday, August 12th, 2010 at 8:57 am and is filed under marketing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.