How to Calculate Fan Value: Fan Economics 101

We’ve all seen them, and many loathe them – Apple fan-boys.

Those white-earphoned iClones.

But did you know that each Apple fan is worth about 70% more to One Infinite Loop than a regular Apple customer? Each fan generates, on average, .82 of a new customer in a year via fan-advocacy; 17% of new Apple adopters cite personal recommendations as the principle reason for adoption. That means – very roughly speaking – an Apple fan is worth 1.7x more than a non-fan customer to Apple (approximately $4,400 as compared to $2,600).

Good thing, then, that Apple works so hard – and is so successful – at creating brand fans.

So comparisons with Apple, the company that sells more per square ft of retail space than any other brand on the planet, are perhaps unfair.

But the idea that your brand fans are valuable to you – more valuable than regular adopters – holds for all brands and retailers. In general, fans are responsible for about 80% of all brand advocacy, and so if 20% of your new customers come to you from personal recommendation, then fans bring in 16% of your new customer revenue – and that’s on top of what they spend with you. Moreover, research shows that new customers coming to you via fan recommendation are more valuable to you (16% more valuable) than those obtained via marketing.

More generally

Advocacy Value of a Fan = % of New Customers Coming From Referrals * New Customer Revenue * .8 * 1/Total Number of Fans

A simple – imperfect but useful – post-purchase survey can supplement analytics data to give you numbers to punch into this simple fan advocacy value formula

1. How likely would you be to recommend us on a scale of 0-10? (0=not likely at all, 10 extremely likely)? [to calculate % fans (fan = 9-10)]
2. What’s the one thing we could do to most improve the rating you’ve just given? [for extra insight into improvement priorities]
3. Is this the first time you’ve purchased from us? [use with analytics data – to calculate % customers new to you]
4. How much was this last purchase for? [use with analytics data – or use to calculate new customer revenue]
5. What’s the principal reason you first bought from us? [to calculate relative weight of personal recommendations, among others]

Of course, it’s imperfect – survey data is notoriously inaccurate and people are notorious in underestimating the influence of commercial communication (ads, salespersons) in purchase decisions – but simple surveys such as this will provide insight into the relative value of fans.  Whatever number you come out with – you’ll find fans are worth more to you that regular customers.  So treat them special.

Of course, the number of fans you have all depends on how you define a brand fan. in Old Skool social media, a fan was anyone who clicked on a fan button. Consultants Bain & Co use a more restrictive definition, defining fans (‘promoters’) as adopters with a high propensity (90%+) to recommend, and have shown that the brand with the most fans in any category grows at 2.5x the category average. Brand fans, according to Bain are responsible for 80-90% of all brand advocacy.

Deloitte define fans (‘advocates’) as adopters who not only recommend, but also disproportionally put their money where their recommending mouths are – spending more than average on their favourite brand, to the tune of more than 50% of their entire category spend. Looking at consumer categories (home cleaning, beer, savoury snacks), Deloitte found that whilst brand fans typically represent only about 5-10% of all adopters, they spend twice as much on the brand, and have over twice the advocacy value of non-fans. So, as a shorthand for the squiggle-babble of fan economics, think of your brand fans as worth about twice as much as regular users. And then ask yourself, what are you doing to cultivate your fan-base.

Whether you call them fans, promoters or advocates – and wherever you draw the line between fan-dom and non-fandom, brand fans are a brand’s most valuable asset for five reasons – according the Fred Reichheld originator of the Net Promoter System, the popular CRM approach used by Apple and built around building fans.

• Retention – fans are more loyal, staying with the brand for longer – thereby amortizing their acquisition cost
• Pricing – fans are less price sensitive than regular customers
• Annual Spend – fans give you a higher share of wallet and are more likely to trial new lines
• Cost-efficiences – fans cost less to service, complaining less frequently so consumer less customer-service resources
• Advocacy – fans bring in new business through recommendations and referrals

Moreover, fans accelerate sales – particularly at product launch. In addition to creating value by helping the firm to acquire new customers who would not otherwise have purchased (acquisition) (and by do so by creating a new “zero moment of truth” based on borrowed experience for new customers, fans accelerate the purchases of customers who would have purchased anyway (acceleration). In other words, fan advocacy is a ‘decision accelerator’ (this is key) – and it accelerates sales for a longer period than marketing communication.

Which is why smart brands and retailers give fan-first access to new products through tryvertising and seeding campaigns. (For more on this, the sales-accelerating effect of fans – see here and here).

So why all this talk of fan-economics? Well, we believe that the most compelling case for social commerce is fan-economics, using social media as a fan-commerce channel to deliver fan-experiences designed to help fans advocate.

What have you done for your fans lately?

For further reading, check out these fan-economics 101 resources:

• A New Breed of Brand Advocates (Pat Conroy et al – Deloitte)
• Monetary value of Word-of-Mouth Marketing in Online Communities (Michael Trusov  et al – Maryland University)
• The One Number You Need to Grow (Fred Reichheld – Bain (see also The Ultimate Question 2.0)
• The Social Value of Word-of-Mouth Programs: Acceleration versus Acquisition (Barak Libai et al – Tel Aviv University)
• Referral Programs and Customer Value (Christophe Van den Bulte et al – Wharton)
• Net Promoter Economics: The Impact of Word of Mouth Vince Nowinski – Satmetrix)
• How Valuable is Word of Mouth? Kumar et al – – Georgia State University)
• Driving Profitability by Encouraging Customer Referrals: Who, When, and How (V Kumar et al – Georgia State University)
• Is Talk Getting You Anywhere? Measuring WOM Marketing (Dr Walter Carl – NorthEastern University)
• What’s a Brand Advocate Worth (Rob Fuggetta – Zuberance)
• A New Way to Measure Word-­of-Mouth Marketing (Jacques Bughin et al – McKinsey)