How To Design Referral Strategies For Your Business

How To Design Referral Strategies For Your Business
April 3, 2012 Dmitri Stern

Referral Strategies and Marketing


What exactly is a referral system? Do you need one for your business? More importantly, do you already have one? A good definition for referral marketing follows:


To design a great referral marketing strategy and system for your business, start by answering a few basic questions.

  1. How can you provide incentives for your customers to give you a referral?
  2. What offers and rewards will excite them?
  3. How will you keep track of referrals?
  4. How will you approach a referred prospect?
  5. How will you make certain that your employees and staff consistently ask for referrals? What incentives will keep your staff excited?

Sometimes marketers and business people talk about word-of-mouth as a source of business. You need to be careful to understand that referral marketing and word-of-mouth are not the same thing. Word-of-mouth referrals are typically left up to the customer. The business owner has very little if any control over when or even if any of his customers make a recommendation for his or her business. Typically, word-of-mouth referrals come up as part of everyday or ordinary conversations between two customers rather than as a system or process built by the business owner. If someone asks, “Where did you get your hair cut?” that can be an opening for a word-of-mouth referral. You tell your friend or colleague that you got your hair cut at a certain location and then talk about the experience. Whether or not your friend goes to the same place for a hair cut is more or less random. If they happen to need a haircut and they trust your opinion, they might go to the same place. But, there is no incentive for them to do so.

With referral marketing, you the business owner have more control over the outcomes. You are asking your customers specifically for one or more referrals from people they know and you are providing incentives for them to make those referrals. This is much more proactive than waiting on a chance word-of-mouth conversation. You can also provide incentives for new customers that are referred to you by your current customers. One way to bring the referrals in to your business is to tell your current customers that you have a special deal or offer for anyone they refer to your business.

You do need to make certain that you and your business have the reputation and service that your customers want to refer to their friends and colleagues. If you are an auto shop and fix a customer’s car, if that car keeps running and the repairs are done properly, then the customer will feel much more confident about making referrals. Remember that you are asking your customers to refer you to their friends and colleagues. Their reputation is on the line too as well as yours.

Your referral system has to be systematic as well. By systematic, we mean consistent execution over an extended period of time. For example, do you know how you will collect referral information? Will you ask your customers to refer their friends and colleagues by themselves? Or, will you ask your customers to give you their friend’s contact information so that you can follow up? These are important parts of the system that you need to put in place and you need to make these decisions so that you and your staff or employees are doing the same things in getting referrals from customers.

If you let customers make referrals on their own, then you need to provide them with a way to let you know that they have made a referral. This can be as simple as a pre-addressed postcard that the customer can use to provide you with information about their referrals. It’s also important to keep track of referrals so that you can reward your customers for their efforts. If you and your staff are keeping track of referrals and new customer contact information this can also be as simple as recording referral information on a card or ledger of some form. Then you will need to keep your customers informed of any follow up with their referrals and progress toward receiving the incentives you provide. Either way, these are important pieces of building a great referral marketing system.

You and your business can also get referrals from complementary businesses. Let’s look at a couple of examples on how this might work. For example, let’s say you have a plumbing repair service company. As you make plumbing repairs in people’s houses you have an opportunity to take notice of conditions there. Maybe it looks like the carpet needs to be cleaned. Or perhaps the garden and flower beds are not in good condition. If you have a referral program with a carpet cleaning service and a gardening or landscape service, you can make referrals to these other two businesses. It’s always best of course to ask the customer or homeowner before making a direct referral. If you have been in business for a while, it will be easier to talk to customers that you know well or your best customers and ask if they would like a referral to one of the other businesses you represent. Some of the same principles we’ve discussed about being referable apply here too. If you are referring your customers to another business, you want to make sure that you know that business well enough to understand how they will treat your customers. And, remember too that some people will agree to a referral and some will not. And, that is okay. The outcome will be similar for your customers. Some will give you referrals and some will not. That is okay too. The point is that you need to have a systematic approach to referral marketing.

Why is referral marketing so important?

There are several reasons and we’ll work through a couple of examples on how much impact referrals can have on your business, but first consider the following.

  1. Referrals are credible from the first time you have contact with them. When a trusted friend or colleague tells you about a business, product or service you immediately transfer that trust to the business. Even if you have never heard of that specific business or location, if the information about them comes from someone you know and trust you have an implicit trust of that business. As the business owner, you can rely on this trust factor rather than have to build trust with a brand new customer.
  2. People who are referred to a business tend to spend more money. People and your customers tend to refer other people that they know are in your target market or are in need of your service. So, you won’t have to convince them of the need for your product or service, but you will have to make sure they know the value of what you provide. Generally, you won’t refer a friend or colleague to a business if you think they aren’t serious about wanting the product or service. You wouldn’t refer a friend to the same place where you got a haircut if you didn’t think they were serious about going there. And, this is especially true when you will receive some incentives for providing referrals. Most of your customers won’t refer other people to your business that aren’t serious about making a purchase.
  3. Referrals are very cost-effective. Think about this one for a minute. How much does it cost you to ask one of your current customers for a referral? Yes, it takes a little time and you have to have a way track and report results of the referral, but these types of costs are typically very small. Also, keep in mind that the incentives you provide customers for their referrals will cost you something as well. But, these costs will be minimal as well – especially if you use your own products or services as a reward for referrals. You can provide these incentives at little or minimal cost. In total, the return to you and your business from referral marketing is very high. It doesn’t cost you much to get referrals and the referrals spend more than other new customers so the ratio of revenue to cost (return on investment) is usually a BIG number.

Let’s work through some of the specific numbers and examples related to referral marketing systems. By the time we are done, you will begin to see the power of referrals and how you can grow your business in a BIG way FAST. And, all of this of course will get you that much closer to achieving your dividend objective and profit goals for your business.

To properly assess the impact of referral marketing on your business, fill in the blanks for the following questions:

How many years have you been in business?           ___________ (Let’s assume 5 years)
How much do you spend on advertising each year? ___________ (Assume $5,000)
How much are your other expenses and costs?       ___________ (Let’s say $195,000)
How many customers do you have?                        ___________ (Let’s use a 1,200 number)

Here is what you can do with this information:

Your total business costs each year total $200,000 – the total of advertising plus other expenses.

If you have been in business for 5 years, then your total investment so far is $1,000,000 ($200,000 x 5).

For your 1,200 customers, each one is worth $833 ($1,000,000 divided by 1,200) or stated another way, you have invested $833 in each customer to this point.

Can you sell your business for 1M? No? Can you sell it for 500K? Maybe…No. What about 250K? Yet, this money (1M) been through you till and out to pay for your business expenses!

Does it make sense to Maximize that investment in your business?

Now consider the value of referrals. What if only half or 50% of your customers are willing to make referrals to your business. To start with that is 600 customers that sign up for your referral program. You provide free gifts, special rewards, and VIP recognition as incentives for these customers to provide you with referrals and implement a systematic effort to recruit customers to your referral program. In actuality not everyone that signs up for your referral program and incentives will wind up making referrals for you and your business. Let’s assume that only half of the original number actually make a referral to your business within a reasonable period of time. This final number will be 25% of your beginning base of 1,200 customer, or 300 customers in total that are actively making referrals to your business. What happens to your business if each of these 300 customers refers 4 friends or colleagues to your business over the next year? If that happens, you will now have 1,200 (300 x 4) NEW customers to go with your 1,200 prior or existing customers.

By using a referral marketing program you could have DOUBLED the size of your business.

And, all it took to accomplish that was a systematic, consistent approach to asking your current customers for referrals. Of course, you had to follow up with each new customer and close the sale. But, that is part of your business operations and requires no special effort beyond what you would do for a new customer anyway.

And, what happens if each customer makes more referrals? Or, what happens if more of your customers actually follow through and make referrals than the 25% we have assumed here? Are there ways to help customers make more referrals? Consider the following table of results when you build your own referral program.

Think about providing different levels of incentives – I’ve used silver, gold, platinum, and diamond below.

Outstanding Results Company - Results of Customer Referral Program

Now you can see the power in referral marketing. As more customers make more referrals, there are BIG increases in the size of your business that can result. If half of the customer base we used in our example calculations made 15 referrals each over the next year, your business would increase 750%. Would you like to have a business next year that is 8 times the size of the business you have this year?

It becomes that much more important to also recognize the value of your current customers. You have invested a lot to get them as customers. Providing incentives to them – and you know your business and customers well enough to know what kinds of incentives are appealing to them – in relation to the value they can bring to you and your business through referrals makes good business sense. Most of us would like to have more new customers that we can obtain inexpensively and have them spend more than other new customers. At some point, your new customers today will also be the customers that make referrals for you in the future too. Referral marketing can be the engine that drives substantial growth in your business not only in the short-term but also in the long-term. If you don’t have a referral program today, it should be one of your top priorities.

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