)How much value would DSC gain from each of the two referral types described above? Based on the expected proportion of each type, how much value should DSC expect any given referral to create for them on average?
Due to the strong personality of the Dollar Shave Club brand, it serves a fairly narrow set of target customers. Reaching these customers in targeted ways that don’t waste the brand’s promotion budget on non-target consumers is a challenging but important part of Unilever’s marketing plan for the brand. One option for the company to reach likely customers is to ask current DSC subscribers to refer their friends to the service.
Under the proposed referral program, any current Dollar Shave Club subscriber can earn a cash bonus by recommending the Club to a friend who ends up subscribing. Effectively, the company can share its advertising and sales budget with these referrers instead of spending it on its current promotional activities (TV ads, direct mail, etc.). Your job is to help the brand understand how a referral program might affect customer lifetime value and how cost-effective it will be compared to other promotional activities.
One advantage of referrals is that they can strengthen existing customer relationships. In prior research on consumer behavior, they have found that endorsing or recommending a product reinforces a customer’s positive feelings about the brand and makes them a more satisfied and loyal customer. In preparation for launching the referral program, they’ve conducted additional research for Dollar Shave Club specifically, to see whether this benefit would be likely. This research found that DSC subscribers who referred a friend would likely show an increase in retention, from the brand’s typical 83% yearly retention rate to an estimated 86% after referring a friend.
Dollar Shave Club’s marketing research also suggests that customers who joined through the referral program are likely to behave differently from standard DSC subscribers (see Table 2). The research team categorizes referrals in two groups: Join Anyway customers and True New customers. The “Join Anyway” referral customers are those who are already likely to subscribe to DSC but who will happily use a friend’s referral code if available. Approximately 40% of referral customers are expected to fall in this category. This type of referral doesn’t seem like a promising investment because it doesn’t entirely new customer relationship, compared to simply letting those customers join normally. However, the research team has found that Join Anyway customers are slightly more loyal to the company than standard subscribers because of their connection to the friend who referred them. The team estimates that the retention rate for this group will be 84% compared to DSC’s typical retention of 83%.
The second group of referral customers, the “True New” customer group, are those who would not have joined Dollar Shave Club without a referral. Approximately 60% of referral customers are expected to fall in this category. In general, the company sees this type of referral as more beneficial than the Join Anyway category because it creates brand-new customer relationships that the company would not get otherwise. However, the research team has found that True New subscribers tend to be a weaker fit with the brand and show lower retention than standard subscribers. The team estimates that the retention rate for this group will be 80% compared to DSC’s typical retention of 83%.
· The annual discount rate is 10% (i = .10)
· DSC receives 100% of profits (p – c) for its subscription sales and expects to receive 50% of the profits from indirect sales (unless noted otherwise)
· Account for acquisition costs in your calculations
· Acquisition costs are paid entirely by DSC in both channels
P=8 C=4.50 Q=12
·)How much value would DSC gain from each of the two referral types described above? Based on the expected proportion of each type, how much value should DSC expect any given referral to create for them on average?
· ) DSC’s current promotional activities require $60 of spending to acquire a new subscriber. Would spending $60 per referral be more or less profitable (in terms of total CLV created) than DSC’s current promotions? What would be the maximum amount of spending per referral to match the value of other promotional spending?
