Why referral programmes cannot take off

Let’s say you started the year with a lakh customers, and plan to add another 12,000, at a modest but constant rate of 1000 every month.

We further assume that customers who have referred once have no more referrals to give, at least not at present. Therefore, they are not approached again.

Furthermore, each referrer gives 5 referrals, and 5% of the referrals are converted. All conversions are, of course, immediate. (At the end of each month, the customer base [for the next month’s referral activity] diminishes by number who refer, and increases by 1,000 new customers [converted referrals].)

A short calculation (http://spreadsheets.google.com/pub?key=pjtNNMP33DgsMGFCNi91xTA) shows that the response rate must climb substantially, from 4% at the beginning of the year to almost 6% by its end.

The calculation is admittedly simplistic, yet it’s not illogical or improbable. Can the response grow in real life? One would expect the opposite to happen if one goes referral hunting every month.