Flip the Funnel: How to Use Existing Customers to Gain New Ones

THE ECONOMICS OF REFERRALS

If you’re wondering why any customer would participate in a referral program for a third-party company, the answer is that they’re already doing it. They’re just not necessarily getting credit for it.

The other day my wife and I were watching the reality program America’s Got Talent (don’t judge me). She was questioning why the judges were so liberal when it came to sending—questionable at best, and bizarre or even obscene at worst—performers or entrants to the next round of auditions in Las Vegas. I explained to her the very simple economics of advertising-subsidized or supported television programming. To begin, we were looking at between two and four hours of this show every week during a summer hiatus when there was pretty much nothing else to watch (which is not to say that AGT’s any better). Multiplying this across 10 weeks of masochistic pain, extrapolating the total revenue the show received from advertising, and offsetting this against the $1 million prize and the judges’ (The Hoff, Sharon Osborne, and Piers Morgan), host (Nick Cannon), and crew fees would net out a pretty healthy bottom line P&L. Calculating the incremental cost (round-trip coach and a couple of nights of—shared—hotel fees) of sending 50 made-for-TV” heartstring or freak-show no-hope acts to Vegas barely makes a dent in the show’s profit. And there you have it.

Ultimately, it all comes down to economics, and as the next chapter will reveal, the economics of customer experience ...