Referrals — Putting Customer Relationships to Work

The best marketing is often word of mouth. When customers are happy, they generate new business. When they are unhappy, they can actively stymie efforts to create and qualify leads by telling others about their bad experiences. Even before the age of public satisfaction forums on social media, there was lots of evidence suggesting dissatisfied customers reach out more frequently and with more force than satisfied ones. A study by Eugene Anderson in the late 90s demonstrated the lack of consistency among results in measuring the customer satisfaction-word of mouth relationship.

Still, to win the battle for public opinion as a lead generator, companies often have go the extra mile. It simply is not enough to create good experiences and hope that word of mouth follows after them. Companies today have to make sure that the programs they create lead to satisfying results for everyone involved, and have to make it as easy as possible for customers to drum up new business. The smart use of technological tools can support these endeavors as well.

So why bother?

Referrals aren’t just important–they’re one of the strongest tactics for generating customers, too. A three-year study of a German bank saw that customers who came to the bank through referrals were not only more likely to stay, but were also more profitable in general. The bank’s referral program furnished customers with 25 euros, and the customers who came to the bank through the program typically generated about 40 euros in profits. With its 60% return on investment, the program generated thousands of dollars in revenue.

These results illustrate the simple truths of referrals: the customers you get are more loyal and more profitable. But there are some complications. In the long term, these customers eventually “normalize” and become similar to every other customer. This new business is most profitable at the start of its life, as the referred customer enthusiastically seeks out the products and services he or she finds most desirable. These loyal customers are more likely to be longer customers as well–the most profitable were the youngest.

Referrals have two benefits: stable, lengthy relationships, and an immediate burst of enthusiasm and profitability. The latter can generate more referrals and become the lifeblood of a business. So what does a good referral program look like?

Mutual Benefit

The key to a solid referral program is mutual benefit. Both the referred customer and the referring customer need to get something out of it. Consider Uber: each time a customer successfully drives new business through a referral, both the current customer and the new one get $20 off of a ride. Both parties receive the immediate benefit. The new customer gets a positive start with the company, while the existing is rewarded for new business.

These programs are more costly than programs with asymmetric rewards, but they also generate more business. In a case where only the new customer is rewarded, the existing customer has no reason (other than satisfaction) to make a referral. In a case where only the existing customer is rewarded, that customer has a reason to feel like a kind of predator, leading friends into a business relationship not because of a belief in the company or product, but for personal gain.

Ease of Use

The other major component of a good referral program is accessibility. How much effort does the new customer have to put out to get the benefits involved in a referral? How much work does the existing customer have to put in to start drumming up new business? If the answer to either is significant, the referral program could probably use a little work.

The key is to throw up as few barriers as possible. In the case of Uber’s successful program, customers were allowed to change the referral codes they were given into something memorable and personal, provided it wasn’t already in use. A customer who can tell her friends to simply put down her name, or a simple code like her first name and her pet’s name, is more likely to see success in getting her friends to try a new product.

As with any lead generation method, the pipeline needs to be short and direct. The fewer extra steps involved, the better–if a customer has to go to a separate page entirely from the standard registration to put in referral info, it’s probably too complicated.

Technological Tools

Once you have the basics of the referral program sketched out, the focus should shift to optimizing your technology to make it sing. As with many business tasks, tools like CRM software can both help you see how much your referral program is doing for you and improve its results.

Tracking Referrals

Your referral program should absolutely integrate with your CRM system. This data can serve as a sort of social network map of the individuals or businesses you sell to, highlighting which accounts have come with well-connected stakeholders who know how to get their friends and colleagues excited about a product. As you disburse rewards from referrals, make note of it in your CRM program.

Once you figure out which customers are the most valuable when it comes to generating new business, you can look for ways in which to strengthen those relationships. These customers have demonstrated a value to your business beyond their own personal purchases.

This information can also give you greater insight into the truth of some survey metrics. Many businesses ask their customers how likely they are to recommend others try out a service, building what some call a Net Promoter Score. With CRM referral tracking, you can put real numbers across from self-reported ideas. Are those who say they would recommend you to others actually promoting the business, or just making nice? This data can help you stay on top of who lives up to the self-reported hype.

Easy Workflows

While this goes without saying for some companies, not all have take this vital step in modernizing referral pipelines. Depending on the business, the particulars of this aspect can vary. Maybe it’s a web platform for sending referrals to friends. It could be a mobile app component that lets the customer send a message to a friend. Either way, simple technological pipelines keep the focus on the customers and ensure that they can make a valuable referral as easily as possible.

Keeping Referrers in the Loop

By tracking who referrals are coming from, you can also provide a sense of the new customer’s narrative for the referrer. By keeping the referrer involved in the sales process, you can leverage the strength of the relationship between the referrer and the new lead toward converting the lead. The existing customer will find the referral more satisfying if they know it turned into a sale, and you can’t depend on the two of them to communicate with each other on that front. Customers want to know that their referral efforts aren’t just disappearing into the aether.

This aspect is particularly important for referral programs that can generate referrals “passively,” such as through referral links. Letting customers know that someone has followed their link or used their referral code can remind them of the product itself if it’s not something they use every day. This can even drive new business.

The Relationship Matters

Referrals provide a way to turn the quality relationships a CRM system helps to cultivate into leads, and turn those leads into new business. By providing those existing customers with a straightforward way to help you generate new business, you can stretch the value of each existing contact even further. As always, the sales team has to remain focused in its pursuit of new business–even a strong recommendation as part of a referral won’t close a sale immediately.

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