Customer referencing: Turning the customer into a credible source of value

Customer referencing can also be used as a sustainable source of competitive advantage, especially when customers are well known and respected. Image: Shutterstock

Have you wondered what the logic behind the famous toothpaste advertisement that claims nine out of ten dentists recommend the toothpaste is? As the market becomes increasingly homogenous, certification from a credible source acts as an effective way to grab the customers’ attention and convert it into sales. And who better to be a credible source than the current clients. 

Customers: The firm’s most important intangible asset

Customer referencing is the practice of strategically disclosing a firm’s customer connections – either privately or publicly – to demonstrate the credibility and attractiveness of its products or services. It is an important and pervasive practice with the central dogma: the customer base is one of the firm’s most important intangible assets.

Why do firms engage in this process, even though it isn’t mandated by regulations for some of their customers? Their primary reason is that the credibility offered by customer references lowers the uncertainty, perceived risk, and searching costs faced by potential customers – all of which contribute to increased sales of the firm.

Customer referencing can also be used as a sustainable source of competitive advantage, especially when customers are well known and respected. Furthermore, it can be a less expensive and more effective option to gain customers’ attention compared to traditional advertising and marketing campaigns.

Customer Referencing: The financial incentive

Profs Chung, Jia, Ng, Jing, and Zhang find that firms that engage in customer referencing have a better product market performance compared to one that does not, due to the credibility built by the phenomenon. Having a current customer vouch for their services is viewed as a sign of firm competence, credibility, and quality by potential clients.

In addition to better market performance, firms engaged in customer referencing also bear the economic fruits of their labour. The asset turnovers and gross margins of firms that engage in customer referencing are higher by 2.1% and 2.9% respectively, compared to firms that do not.

Also read: Sustainable growth and customer engagement in a circular economy

Reputation Spillover Effect

In today’s dog-eat-dog business environment, it would be naive to assume that all customers are equal in customer referencing. The researchers find that customer referencing reflects on the firm’s performance only when the referenced customer is reputable. While that may sound obvious, it is not always the case.

Among reputed clients, the higher their reputation, the more pronounced the effect on the firm’s performance. Interestingly, in the particular case where the referenced client is a minor client of the referenced firm but a major client of the competitor, the product market performance increases significantly.

Customers as a source of value beyond income

Customer referencing is a boon, particularly to companies that need it the most. Firms operating under highly competitive environments or operational and financial difficulties can use customer referencing as a life-saving tactic to turn around their activities. Prof. Tuck S. Chung’s research also shows that brands looking to endorse the quality of their products also benefit strongly from this customer certification effect – proving yet again that current customers hold value beyond providing income.

While the benefits of customer referencing increase the trust in a brand from a potential client perspective, customer referencing also increases the likelihood of successful marketing activities like co-branding, ingredient-branding, and sponsorships. Firms would be wise to realize that their value is not just in their financials – but also within their customers.

Tuck Siong Chung is an Associate Professor of Marketing at ESSEC Business School Asia-Pacific.
This article was adapted from CoBS Insights.