4 Reasons Why You Need to Have Referral Marketing in Your Marketing Plan

Referral marketing because birds of a feather flock together

I have a dear friend who has been in business for 22 years and relies solely on excellent customer service to grow his business.  He treats every prospect with the utmost respect.  He does absolutely no advertising for his business because he delivers an outstanding product.  And, he stands behind his product and his people.  He has quadrupled his sales in the last decade through referral marketing.  Referral marketing can improve both top and bottom line growth for a business.  Here are four reasons to include it in your marketing plan.

Common ground brings like minded people together.

At a time in the United States when everyone is talking about the benefits of diversity—diversity of race, gender, education, sexual orientation, even diversity of thoughts—it is still true that birds of a feather flock together.  Suburbanites meet with other suburbanites for happy hour cocktails.  Parents of young children share babysitting referrals.  Tweens share their favorite apps through iPhone texts.  Yes, in this very diverse world, it is the common ground that brings us together.

That common ground presents chances for sharing experiences.  This represents tremendous opportunity for businesses to get existing customers to tell their friends, family and colleagues about product choices, purchases and preferences.  Whether your target is business owners, stay-at-home moms or downtown condo owners, a solid referral marketing plan can help you reach the birds of a feather in your target market.  Reaching prospects similar to your current customers is a more costly undertaking outside of referral marketing, so create opportunities and reasons for your customers to share your product within their network.

Customers with product experiences are your best advocates.

On Facebook, it is easy to be an advocate for anything.  Just click the Like button and you are an advocate.  Or perhaps you can change your profile picture to support a cause.  Advocacy?  Not really.  The problem with this form of “advocacy” is that it requires no action and no experience.  However, when you endorse a product or cause with which you have had an experience, you change the platform for your advocacy.  You become a believable and trusted source.  That’s what makes referral marketing so powerful.  Customers are your best advocates because they have experience with your product.  They can give a first-hand account of what the product does and does not do.

A positive experienced endorsement is more powerful than a negative non-experience.  Consider, for example, if a neighbor tells you that they won’t use a new local car wash because they heard another neighbor had their car damaged there.  But, the next day, you hear from another neighbor that they took their car to the same local car wash and got the car detailed for a fraction of what they expected to pay and the car looked new again. Hmmm…the positive referral will give you cause to pause and consider the hearsay of the negative experience.  Maybe you will try that new car wash.  The fact is there is no better advocate for your business than a customer willing to share a positive testimony.

Referrals don’t require a large advertising budget.

As a business leader, you understand how difficult and expensive it can be to reach your target audience.  Where to find your target customer can be daunting given the myriad of choices—email, video streaming platforms, social media sites, television, SEO, search marketing, and on and on.  There are a multitude of channels and media outlets on which to spend your marketing budget.  By the time you identify the right customer through the right channel, your acquisition cost may leave little margin for profit.  You can balance your acquisition cost in these channels with a referral marketing plan, which effectively allows you to extend the acquisition cost of a single customer to, potentially, multiple customers.

Referral marketing demands good product and service.

A necessary prerequisite of a referral marketing plan is good product and good customer service.  This may seem obvious but it also is a catalyst to help a business focus on building and sustaining a good experience for the customer.  A strong referral program requires a culture of creating a better—not a good enough—experience for the customer.  Remember my friend with the 22 year old business.  While he has never spent much time studying the competition, he does hear about their work occasionally.  It usually happens when he is correcting the blunders of his competitor.  Referral marketing cannot happen in a vacuum.  It is done in real-time, in the context of whatever market competition exists for you, which demands an excellent customer experience.

​Referral marketing is an essential component of every marketing plan.  It will help you identify qualified prospects, because, indeed, birds of a feather flock together.  Referral marketing can help you identify your loyal customers willing to declare their allegiance.  It does not require a huge marketing investment but it will force the development of a superior customer experience.

A referral marketing program is a must for every business.

Improve Retention Rate through Better Service

Airport customer

Renewals, repurchases or reorders–whatever you call them in your business–are a key component of growth.  And, every single customer touch point can affect your retention rate.

Recently I flew across country on a no-frills airline. In the online sales process, if you want a carry-on, you pay a fee. If you want to check a bag, you pay a fee. If you want an assigned seat, you pay a fee. Expectations are set. But, my non-stop flight from Los Angeles to a remote Midwestern city was only $250 so I do not mind the nickel-and-dime sales process. When I was checking in for my flight to return to Los Angeles, I was asked to place my carry-on bag in the bag sizer to ensure it did not exceed the maximum dimensions. No problem. Where this airline went terribly wrong was when the gate attendant asked two young women to put their duffle bag into the bag sizer before boarding the airplane. The gate attendant who collected their tickets asked (very loudly, I might add) the airline employee who stood over the two women as they struggled to get their bag into the sizer if indeed the bag fit. It was a very public, unfriendly, embarrassing event for the passengers. Because they were right behind me, I saw everything and overheard them say they would never fly the airline again.

In my email inbox the day after I returned home, I received a thank you for flying the airline email. Can you imagine the two women’s reaction when they received the same email? Customer communications are key to retention but so is the sales process and every other customer touch point.

It is essential to have the appropriate evaluation tools in place to monitor when customers leave and why. Ask customers about their experience at every touch point from the buying process to the experience. If you improve the process, you might also just improve your retention rate and increase sales.

The Cost of Losing an Loyal Customer

loyal customer

Recently, I broke up with my cable company.  It was actually a very painful thing for me to do.  You see, I don’t like change; I’m a loyal customer.  I’ve thought about this breakup for years.  I moved into my current home seven years ago and I’ve had the same cable provider since the move.  Every year, my cable bill would creep higher and higher each year.  Each time it happened, I would contemplate a change.  My cable company provided both my television service and my internet service.  I still had a landline for home phone service.  There were so many reasons not to leave.  With another provider, I wasn’t sure if I would have to pay more for cable channels I’m used to getting.  I didn’t know if the service would be as stable as my cable service.  Would my internet service be fast enough?

To make a long story short, I left because of a terrible customer experience.  It was solely based on one bad interaction with one customer service rep.  Within a week of the cancelling my service, my cable company’s telemarketers were reaching out to me with new offers.  It was rather ridiculous because the new offers cost the cable company much more than keeping me in the first place.

As a result, I’ve been contemplating the cost of losing a loyal customer.  It usually results in higher expenses, lower revenue and damage to brand value.

Marketing expenses increase as customers leave

Generally, the marginal cost of keeping an existing customer is lower than the cost of acquiring a new customer.  It’s also lower than the cost of re-soliciting a former customer.  As a result, churn and marketing costs are positively correlated.  As existing customers leave, companies must put more marketing dollars into new customer acquisition to keep revenue flat and even more to grow.

Average revenue declines when customers exit

In nearly every business model, the average revenue from an existing customer is higher than the average revenue from a new customer.  Said differently, once a customer has made one purchase, that customer has given permission for a conversation for a second purchase…and a third and a fourth…  In subscription-based models, the longer a customer stays, the more likely that customer will stay longer.  This loyal customer requires an adequate investment in customer service.

Brand value is damaged when customers leave

Former customers cost companies an unknown, but likely large, amount of brand damage.  Most people are more willing to share a negative brand experience than a positive brand experience (which explains why we often find mighty fine restaurants with mediocre online ratings).  Again, this is why the customer experience—even for loyal customers—is so critical.

This is not to say that all customers are valuable.  It’s important to understand the value of each customer segment.  Ah, but that’s another discussion for another day.

As for me, I still don’t like change.  And, the breakup with my cable provider was hard.  Maybe I’ll go back one day…but it’ll cost them!