Referral marketing: using the power of word-of-mouth
Referral marketing: using the power of word-of-mouth
November 18, 2010 - 12:33PM
When it comes to getting new customers, one of the most powerful sources of leads is through referrals. Good old-fashioned word-of-mouth. After all, many consumers are going to be far more influenced by their friends - or people in whose opinion they trust - than a paid advertisement. I'm not suggesting that you shun advertising but, rather, consider including referral marketing to your mix. That is, actively asking and encouraging your existing customers or fans to spread the word about your products and services.
If you have quality products and services, chances are that your customers are spreading the word anyway. But, sometimes, they might just need a nudge. Or to be given an easy way for then to pass on information about your business to a friend. Some may be ready to recommend you but could just need an incentive to take the next step.
However, we've come a long way from leads exchange networking groups where participants were actively encouraged to refer new business to each other. Those groups still have their place. But with so much communication proliferating online, referral programs can be implemented relatively easily and cheaply. Importantly, they can be rigorously tracked so that you can determine where your leads are coming from, exactly how much it's costing you and whether your resulting customers are worth the investment.
So what are some initiatives you could use?
Chief strategy officer of Boost Marketing, Joel Norton, works with small business owners and provides the following examples.
1. Affiliate Marketing
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This is typically all implemented, measured and tracked online. It's a formal, structured arrangement where you receive an incentive for promoting someone's product. Norton says referrers typically receive between 5 to 20 per cent commission from every sale, although some businesses will pay per lead. Ecommerce/shopping cart applications catering to small- to medium-sized businesses - such as 1shoppingcart.com andBusiness Catalyst offer easy-to-use affiliate management programs which generally involves placing links or banner ads on your website. These links are embedded to track the lead through to sale, with commissions paid monthly to your referrers.
2. Co-branded activity
Norton explains that this is where two or three non-competing businesses work together to promote each others' services. "For example, a fashion retailer and a local cafe could run quarterly events to promote the new range clothes, and new menu," says Norton.
"Both businesses invite their customers along, so there's mutual benefit in cross-promotion. Alternatively, you could provide a value-add to your customers by providing an offer from another company, such as a simple 'thank you' and voucher or offer. These tactics work just as well in business-to-business.
A case in point: when my friend used a nanny recruitment agency to find a nanny, the agency sent her a goodie bag upon the successful placement. Often, people seek nannies when they decide to return to full-time work so chances are that they are ready to shop for work clothes and so on, to get ready to re-enter the workforce. In the goodie bag was a $100 voucher to have a makeover. I'm certain that after months of sleep deprivation, clothes full of baby spew and little opportunity to wear make-up, many women would love the idea of a make-over.
My friend was no exception. The beauty salon may have provided a $100 service for "free" but my friend spent over $1000 with them in a single visit. No joke. (Yes, even I can't quite fathom how one can spend this much on make-up in one hit - but it's certainly a great example of referral marketing in action.)
3. Perfect introduction in reverse
Norton says this is where you target businesses who offer a complementary service but are non-competing. "For example, a CPA and marketing consultant, or lawyer and accountant," he says. "Send them a letter asking them to provide information on who their ideal customer is, how best to communicate what they do, their referral process and any testimonials they might have. At the same time, you can provide your own outline as an example to follow, and it works as a great 'reverse introduction'."
4. Refer-a-friend incentive
These are simple incentives for existing customers to refer their friends. "A great example is CrossFit Athletic in Sydney's northern beaches, who launched in April with 14 members," says Norton. "They grew their membership by 292 per cent in four-and-a-half months, and this was during winter when personal trainers typically experience a decline in paying customers.
"There was no advertising involved, and the results were achieved purely through word-of-mouth marketing. They educated their customers on their ideal customers, introduced a strong offer - which was one month free for every two members they sign up - and implemented a selling system so they had a defined process for handling the leads. They also recognised the members who supported them by displaying their names on a leader board, which also created an element of competition."
Referral marketing doesn't just result in more leads and, ultimately, more customers. According to Norton, it can also reduce the length of the sales cycle, particularly for higher-priced items. "It's not uncommon for business-to-business organisations to experience a sales cycle of 12 to 18 months, and referral marketing can reduce that sometimes by as much as 50 per cent," he says.
"A person only buys a product or service when they trust the person or brand they're buying from. And when someone refers you to a person or brand, you're effectively borrowing trust from that person, so the sales process is shortened."
Ultimately, referral marketing is free - or low cost, depending on the size of the commissions you might have in any affiliate arrangements. But this is where I see some business owners baulk. I've spoken to business owners who say that they don't have enough margin in their products/services to offer commissions. But the reality is that it's actually a marketing cost - which they may have spent on advertising or brochures instead. Or perhaps they should reconsider their price model.
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The reality is that consumers are consistently bombarded with marketing messages. So a recommendation can be gold. And referral marketing can be mastered by small business owners. You don't need a massive budget to harness its power.
"Digital communications and social media has become a facilitator of word-of-mouth marketing, as it's now much easier to refer," says Norton. "Those conversations used to be exclusively around the water cooler in the office, or the barbecue on the weekend but they've now extended into social media tools like Facebook and Twitter.
"For example, there is implied referral when I use the Facebook 'Like' button, or if I retweet someone's tweets or content. Other times, it could be more explicit, when I openly say: 'You should buy X'."
However, referral marketing becomes a moot point if your customers don't have a great experience with your product/service. In the book Flip the Funnel: How to Use Existing Customers to Gain New Ones, Joseph Jaffe explains why businesses should focus on delivering an exceptional brand experience to not only keep existing customers but also win new customers.
Jaffe has commented: "When you consider customer acquisition for your business, think about this question for a moment: how much of your sales come from repeat business versus first-time customers? Now contrast that against how much money you spend against each segment. If you are embarrassed by the gaping disconnect, don’t worry; you are not alone."
What steps can you take to tap into your existing customers in an effort to gain new ones?