Is Referral Marketing Effective?


It rarely fails to amaze me that, although marketers are willing to dump thousands of dollars per month on advertising to attract new clients and customers, they often overlook simple, low-cost strategies that are often more effective. One such fall-off-a-log simple strategy is referral marketing.

Doug, a friend I met at a networking meeting several months ago, owns and operates a local insurance agency. We started discussing marketing strategies one afternoon, and he revealed that he typically spends about $3,000 a month on PPC ads, direct mailers, and buying leads from third party quoting websites. Still, his business was stagnating.

“I’m hardly getting enough new business to justify my advertising costs,” Doug confided. “My book of business just isn’t growing fast enough to keep up with my expenses.”

I asked him how many new clients he was getting from referrals.

“I’ve never had much luck with referral marketing. I mean, it brought in new clients, but it wasn’t predictable. So it’s just one more thing to mess with.”

I sat quietly for a moment, trying to think of a nice way to put what I was about to say. Doug’s logic (or, rather, lack of it) was lost on me. He saw referral marketing as a pain in the rear end, rather than as a business-building strategy.

“It’s the process of referral marketing that isn’t predictable, not the results. You can’t predict how many people refer others to your agency, because you don’t have access to that information. But you can measure the number of referrals who call you and start policies with your agency.”

Doug nodded, but I was pretty sure it was an “if I pretend to understand, maybe you’ll drop it” nod. But as my wife can tell you, “drop it” just isn’t in my nature.

“Look, let’s say you send out ‘refer a friend’ cards to 100 clients. Maybe 10 of them will tell someone about your agency. Maybe 25 will… I don’t know. But let’s say that those 100 cards bring you five new clients. You can measure that… and if you use referral marketing consistently, you can even predict it with reasonable accuracy. So who cares how many clients participate, as long as you get the results you need?”

I don’t know if Doug ever acted on my advice – he’s a great guy, but a little on the stubborn side. But if he did, he would have a predictable system for securing new clients without the cost of advertising and buying leads. If a marketing strategy costs little and produces consistent results, why wouldn’t you use it?

Besides, a referred lead is far more likely to buy from you than a cold lead - four times more likely, according to Neilsen Research. After all, they’ve already received a recommendation from one of the most important people possible – a current customer.

Here are a few tips to help you get the most out of referral marketing:

1) Implement referral marketing consistently. If you decide to hit 100 clients up per month for referrals, do it every single month. This gives you the power to anticipate the effectiveness of your campaign, which is critical to planning for growth.

2) Don’t assume that a new customer will tell you how she found your business. Ask each new customer how she learned about your business. Obtaining this information helps you measure the effectiveness of your referral marketing efforts.

3) Offer an incentive for referral activity. Customers who refer new people to your business should be rewarded for their efforts. Depending on the nature of your business, an incentive might include a product discount, complementary tickets to a local event, or entry into a contest for a high-value product (tech products like iPads are particularly attractive to consumers).

Sure, referral marketing is one more task on your already full plate. But the low cost and high effectiveness of this strategy can be well worth the extra time and effort you spend attracting referral business.

Categories : Marketing Strategy

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