Capital Ideas Blog

How companies can cash in on social media

By Pradeep K. Chintagunta

From: Blog

This post originally appeared on the Kilts Center Faculty Blog.

With Twitter’s recent announcement of their intentions of going public, the focus is back on how social networking sites can make money.

As Rod Tidwell (Cuba Gooding’s Oscar-winning performance in Jerry Maguire) puts it so eloquently, the mantra is one of: “Show me the money!”

At the same time, other companies—packaged goods manufacturers, service companies, and business-to-business marketers among others are looking for ways to leverage the various social media platforms in order to provide greater value to their customers or clients.

In this post, I will describe the model used by Punchh—a Bay Area startup—to illustrate how firms can leverage customers’ social networks. By using mobile technology in local contexts, they obtain measurable returns on rewards programs. The company was founded and is being run by a number of former Chicago Booth graduates (see for more details) and provides a mobile CRM platform for restaurants and restaurant chains.

In an earlier post about Netflix, I discussed the importance of the customer lifetime value (CLV) metric for service businesses. Repeat business from loyal customers enhances their lifetime value. Firms need to engender loyalty and generate repeat business. At the same time, visiting restaurants is also a social activity and first time visits are often triggered by referrals from one’s friends. New customer acquisition can be driven by referrals from current customers to their friends in their social network in the local market area of the restaurant.

This is where Punchh comes in – it sets up a loyalty rewards program for existing customers which piggybacks on these customers’ social networks to reach potential customers. In the process it helps to not only acquire new customers but also strengthens existing customer relationships by providing additional rewards for every new customer acquired via referral using the network.

Specifically, the system works as follows. Say a new customer walks into a restaurant on the Punchh system. Point-of-sale materials direct the customer to join the restaurant’s rewards program by downloading an app. The app allows the customer to participate in the rewards program, and earn and redeem rewards for making a purchase, based on either visits or spend.

The program brings conventional paper based punch cards to the era of mobile and social media savvy customers. This builds customer retention and loyalty (for further details see the CLV formula in my Netflix post—retention is reflected in term “R” in that formula). A scanned receipt triggers a punch every time the customer visits the chain, and allows the customer to share opinions about the restaurant with his or her social network.

The app also asks permission to access the customer’s friend network, which provides the application with the names of the people in the existing customers’ networks. If one of the friends in the network also downloads the chain’s app and completes a transaction and punch at the chain, the app (using the network information previously obtained) queries this new customer whether he or she was visiting the restaurant based on a referral from the original customer. An affirmative answer then triggers an additional punch for the original customer to reward him or her for the referral.

Accounting for this “referral value” of existing customers helps to further enhance the customer’s lifetime value to the restaurant chain.

A key capability of the Punchh program is to go beyond traditional loyalty programs— which primarily reward the customer for his or her individual visits and spend—to reward “social” behaviors such as referrals. Plus, Punchh ensures that all outcomes are clearly measurable and in most cases attributable to the rewards program that the chain is investing in. This enhances its value to both marketers and CFOs who are interested in quantifying the return on investment of such marketing initiatives.

There are many different ways in which companies are leveraging social networks to provide more value to their customers. As networks grow, firms can benefit from enhancing both the customer base and the lifetime values of their existing customers.

As Jerry Maguire (played by Tom Cruise in the movie of the same name) notes “So this is the world, and there are almost six billion people on it. When I was a kid, there were three. It’s hard to keep up.” For marketers, being able to better understand and leverage the social networks of their customers implies that they can benefit if the world has 3 or if it has 6 billion.


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