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In his December 2003 HBR article, “The One Number You Need to Grow,” Fred Reichheld once suggested that the value of any one customer resides both in what that person buys and what they are prepared to tell others. What your customers tell others about you can influence your revenues and profits. Your referral rate reflects an output metric that gauges the value of your customers: referral power or referral value. Per Reichheld, referral rate is positively related to a company’s profit growth, a valuable outcome metric. This concept serves as one of the basic components of the Net Promoter Score (NPS), which measures the willingness of customers to recommend your business, and places them on a continuum from a low range of “detractors” to a high range of “promoters.”

The most important point is that you need a process for seeking out referrals and introductions as part of your Marketing mix. When you can accurately target customers who are likely to make profitable referrals you will earn a better return on your marketing investment. When done correctly, referrals are one of the most powerful avenues to organic growth and a cost-effective form of marketing.

The ROI of a referral is significant for three reasons. First, the cost of sale is low compared to trying to acquire a net new customer. Second, typically the sales cycle is shorter. Third, referred customers are less likely to defect. The Wharton School of Business found that a referred customer is 18% more likely to stay with a company over time than the average, off-the-street customer.

Now is the time to establish a referral program, if you haven’t before. Making referrals pay off requires having a systematic process for securing AND acting on referrals. A customer referral program entails more than sending out a message to all of your customers asking them for a referral. There are three essential questions to ask to best lay the groundwork for an effective customer referral program:

  1. Can you secure referrals? To earn referrals, existing customers need to believe in your value and have had their own positive experience.
  2. How can you make it worth your customer’s time and offer something of value to your customers in return for referrals?
  3. How can you best spend time working referrals and invest in a creating a referral process?

How to Acquire the Right Customer Referrals

Employ these seven suggested tips to help start you on your way to developing an effective referral program:

  1. Take time to review. Review your customer list and determine how many of your current customers came through referrals.
  2. Create an ideal. Establish a profile or persona of your ideal customer and then identify existing customers who meet the profile.
  3. Start small. Select three of your customers who meet the profile attained through referrals and ask each of these customers how the referral came about, who gave the referral and what you did to get the referral.
  4. Utilize strategic questions. Include a question in your customer satisfaction research and post-sale processes to find out how likely they are to refer and what they would want in return, e.g., additional services, a discount on their next purchase, etc.
  5. Be intentional. Develop a program that is designed to encourage customers who fit the ideal profile to refer people who are like them. The program should address various types of referrals and acknowledge these types differently. For example, what you do for someone willing to take a call will most likely be different from what you do for someone willing to send a note to make an introduction versus how you acknowledge someone willing to make a call for you, compared to someone who gives you three names and phone numbers to contact. Have something in place for each type of referral.
  6. Record your progress. Track which new customers comes from which referral type and from which customers.
  7. Stay communicative. Keep in frequent contact with people who provide referrals and keep these people informed of any new business as a result of their efforts.

Learn more about which customer-centric metrics to measure and how to calculate them. Share your thoughts with us on Twitter or in the comments.

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