Referral Marketing

Referral Marketing Tips Newsletter

Basic marketing theory offers that word of mouth marketing is one of the most effective and least expensive forms of business promotion. Word of mouth marketing occurs any time one of your current customers or clients recommends your business to someone else, who then, on the basis of that recommendation, decides to visit your business as well. Lead generation (getting the potential customer to walk through the door) is often the most time-intensive element of marketing. Once the potential customer has chosen to "walk through the door", it becomes much easier to convert them to a paying client.

In this form, word of mouth marketing costs almost nothing to implement, and if your business is continually recommended, it will continue to grow.

Referral Marketing Considerations

When considering the implementation of this kind of marketing strategy, there are several issues that must be considered.

The Lifetime Value of a Business Customer

This value is computed by multiplying the income received by the number of times in a year it is received by how many years the customer remains in your business.

For a business consultant, for example, the income received might be $400 per hour, the number of hours per year might be 100, and the average length of the client relationship might be 10 years. So, for the consultant in this scenario, the lifetime value of a customer would be $400/hour x 100 hours/year x 10 years = lifetime value of $400,000. This figure represents the amount that the business can spend to attract and retain a client and still remain profitable. It also implies that if the business can attract and retain clients for less than this amount (such as using a marketing by referral program), the business' profitability can increase significantly.

Asking Existing Customers for Referrals

Telling existing customers that their referrals would be valued and appreciated is a simple but often neglected referral strategy. An easy way to begin is to include a statement about this on all customer-facing materials, including business cards, brochures, invoices, and receipts. Many businesses create special "tell a friend" cards, which allow someone to gift a friend with a service or product.

For example, a beauty salon may create "tell a friend" business cards, and ask their current customers to pass these out to friends who might want to try the salon. In this model, the current customer is able to be generous by sharing a "gift" with a friend, who may, ultimately, sample the salon and decide to stay on as a customer.

For the price of a printed business card, and the cost of the service or product, businesses can generate hundreds of new leads very cost-effectively. The key to this strategy, though, is that the business must offer a product or service with high perceived value and low actual cost. An example might be a free haircut, or a mini-facial, or something similar.

Systematizing and Tracking Referrals

The third step of this process is to define an internal system or structure for rewarding clients for their referrals. The higher the price points in your business, the more generous the rewards should be. Consider creating a rewards schema which gives customers greater and greater rewards for every two or three new customers referred. Following through with the beauty salon example, the first referral might entitle the referrer a free haircut, but the tenth referral might entitle that referrer to a full spa treatment.

Keeping track of referrals may be best done in some kind of database or with customer tracking software. Build a referral tree to understand which customers are referring the most new business. Be sure to thank them promptly for their first referral, and don't forget to continue to reward them for sharing your business with others.

No matter what kind of business you run, a referral marketing program can increase profitability.

Qualities of an Ideal Marketing System or Tool

To be more specific, what you'll find on this site are strategies and marketing media that meet one or more of the following qualifications.

• Easy to Implement and Maintain
  Not complicated to start or to run; not necessary to hire experts to get it going.  Even better are marketing methods that you can start or stop at any time, or systems that you can implement and then let it run.
   
• Inexpensive
  We're talking maybe $100/month, at the MOST, unless you need to ramp up your marketing efforts for a particular reason or period of time.
   
• Personalized
  Generic broadcast advertising is much less effective than a referral from a trusted friend, right?  So any way to make personal or face-to-face connections with people is preferable.