Referral marketing is a method of promoting products or services to new customers through referrals, usually word of mouth. Such referrals often happen spontaneously but businesses can influence this through appropriate strategies that encourage customers and contacts to talk as much as possible about a brand or product.
A study conducted by the Goethe University Frankfurt on the customer referral program of a German bank found that referred customers were both more profitable and loyal than normal customers. Referred customers had a higher contribution margin, a higher retention rate and were more valuable in both the short and long run.
Word-of-mouth referrals are the number one way professional services firms get leads and new business. This is supported by the American Marketing Association’s 2009 study which found that peer recommendations are 2.5 times more responsive than any other marketing channel.
For a business to grow through referrals it must be referable (i.e. adds value and exceeds client expectations) and must implement an effective referral program.
To develop a referral marketing system you need to:
- Define your ideal customer.
- Identify your best referrers. This could be existing clients, vendors, banks, friends, etc.
- Clarify your differentiation. Define what you do and provide that is different from your competitors.
- Educate your referrers so they understand how you add value for clients.
- Ask for referrals from your clients.
- Reward the referral sources. This can be a phone call, email thank you, bottle of wine, gift voucher, or lunch.
- Track your referrals and analyse key results.