What is Customer Network Value

“If you do build a great experience, customers tell each other about that. Word of mouth is very powerful.” – Jeff Bezos.

Customer Network Value is the Value generated from the network (Both social and professional) by the acquisition of new customers through word of mouth advertising.

Jeff Bezos, the founder, president, chief executive officer and chairman of the board of Amazon.com never said anything truer when it came to realize Customer Network Value. Typically it has been seen that for both B2B products and especially for B2C products, word of mouth proves to be a better media for advertising than most other media, and actually the returns on investments are that much higher.

Typically every customer has their own Customer Life-time Value (CLTV) to the firm. But very few managers realize that this is only a small fraction of the value that can be generated from a customer. The social and professional network provides another great source of value to the firm, potentially called the Customer Network Value.
Customers, on an average, through their network can potentially rope in, 2-5 times their own life time value (revenue), from their network, if they are satisfied. A satisfied customer, on an average, brings in 2.8 new customers to your firm, in the B2C segment, through word of mouth.

Not only by creating customer satisfaction, you are increasing his life tme value to the firm, by increasing customer loyalty, but also you will increase the customers network value and rope in new customers.

And all this extra network value for almost zero cost of acquisition. This is of prime importance in today’s business scenario since typically, cost of new customer acquisition is 5 times than to retain an old one. Although it is difficult to determine the exact origins of this value claim, the earliest sources that we can find attribute it to research conducted by the Technical Assistance Research Project (TARP) in Washington, D.C. in the late 1980s. Around the same time, other loyalty pundits claimed exactly the same findings as their own (for example, the Customer Service Institute, Consumer Connections Corp., and ITEM Group).

How ever big may be the multiplicity value, it boils down to one thing, Customer’s network value cannot be rejected in current times.

 

By the way, did you read our article on customer lifetime value estimation and management?

Author: Kar

Dr. Kar works in the interface of digital transformation and data science. An alumni of XLRI, he has extensive experience in teaching, training, consultancy and research in reputed institutes. He is an Editor and Regular Contributor of Business Fundas. Note: The articles authored in this blog are his personal views and does not reflect that of his affiliations.