In his well-regarded 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. The full value of your customer needs to include a measure of his or her ability to serve as a customer referral that brings in profitable new customers.

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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. What’s more important is the impact of referrals on your business. A study by my colleague Matt Heinz found that 60% of companies with a referral process experience faster close rates, 59% report higher customer lifetime value, and 71% report higher conversion from contact to customer.

Per Reichheld found that referral rate is positively related to a company’s profit growth. 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.”

Customer Referral initiative

How to Create a Powerful Customer Referral Initiative

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 Value of a Referral

The financial value 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.

5 Best Practices for Acquiring the Right Customer Referrals

If you haven’t established a referral program, now is the time. 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. Employ these  five best practices for laying the groundwork for your best-in-class customer referral program.

Make Sure You can Secure Referrals.

To earn referrals, existing customers need to believe in your value and have had their own positive experience. It’s nearly impossible to establish a referral program if your customers are dissatisfied.

Invest in understanding what it takes to create an exceptional customer experience along each interaction point your customer has with your organization. That means from the moment of purchase or reservation, to the moment of service, to the moment of payment, and so on.

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.

Clarify How Success Will Be Measured

A referral program sounds like a great idea.  It may be if you have the resources to pull it off.  Before you push the button be clear about how success of the program will be measured and what business outcome it is expected to impact.

Set Clear Targets

The old adage “birds of a feather flock together” applies. Some customers are better than others. Review your profile of your ideal customer. Identify existing customers who meet the profile and measure their customer value.  

Then review your customer list and determine how many of your current customers came through referrals. From this list identify the customers who meet BOTH the profile and customer value target. 

Now select three of these 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.

Give to Receive

You are ready to develop your referral program.  It will be need to be designed to encourage customers who fit the ideal profile to refer people who are like them. You will want to consider two sides of the equation.  What you want your customers to do and what you will give in return.

On the ask side of the equation be sure your program addresses various types of referrals behavior, such as someone willing to make an email introduction versus someone willing to set up and participate in a lunch meeting.

On the give side plan to acknowledge each type of referral differently. Have something in place for each type. Be aware that different personas value different “rewards.” Different customers value different offers. For example, perhaps one persona would prefer unlimited technical support, whereas another might want special pricing on upgrades, and another might want an opportunity to be seen as a thought-leader in their industry. 

Document your program, the plan to market and measure it, map the process, fund the resources needed, and select someone to own it.

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.

We’re here to help you define and launch your referral program. Let’s talk NOW!

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