LET'S first understand and agree what referral marketing is exactly. 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. The Word-of-Mouth Marketing Association reports that every day in the United States, there are approximately 2.4 billion brand-related conversations. People frequently talk about the products and services they enjoy, and the companies who offer them. According to the New York Times, 65% of all new business comes from referrals. That means on average, two-thirds of consumers make purchases because someone they know recommended a particular product or service. Recent findings from Nielsen support the remarkable potential of referral marketing, observing that people are four times more likely to buy when referred by a friend. Strategic use of referral marketing allows professionals to tap into the power of consumer recommendations to achieve exceptional results. What kinds of businesses tend to use referral marketing most? Referral marketing is employed by a wide variety of businesses. These strategies can be effective for companies ranging from small single-owner and entrepreneur companies, to large corporations in nearly any industry. Many businesses that offer products or services can implement referral-marketing campaigns. Some types of businesses that typically employ referral marketing include: retail stores, specialty stores, restaurants, automotive service companies, airports, hotels, and travel agencies, banks, health clubs and gyms, doctors, dentists, and health professionals. Online companies also use referral marketing. In fact, this form of marketing can be highly effective in an online environment because of the popularity of social media and sharing sites. Internet referral marketing can potentially spread faster and to a wider audience than most offline marketing strategies. Word-of-mouth spreads when consumers experience service and quality beyond their expectations. Businesses relying on word-of-mouth spreading purely on their clients or customers experience leave it to chance though. As much as we may be happy to recommend a product and service based on our own experience, we may not always do it naturally. Sometimes we need to be prompted or asked. A business which values the power of word-of-mouth is most likely to employ certain other strategies which can generate regular referrals and introductions. Some of these strategies are: • Referral Fees – many businesses use this strategy, which basically entails paying a small fee to customers who refer their friends and contacts to a service or product. • Dropbox, an online file storage company that offers both free and paid services, implemented a referral program in 2009 asking users to tell their friends about the service. The program offered rewards for both sides of the referral coin—those who signed up for a referral link would get additional free space, and the person who referred them would also get more space. By 2010, referrals accounted for around 35% of their daily signups, and Dropbox signups had permanently increased by 60% overall. The company estimated that within a 30-day period (April 2010), their users had sent more than 2.8 million direct referral invitations. • Joint venture referrals - Some companies partner with complementary businesses to cross-promote to each other's customer bases. This strategy involves each business offering discounts or other incentives to customers from the referring company, typically in exchange for a percentage of sales from referred business. A great example is when a real estate broker refers clients to a Solicitor for conveyance services. If the property buyer chooses to use the services of the recommended solicitor, a percentage of the solicitors' fees will go to the Real Estate Broker. • Referral networks – businesses have the opportunity to actively participate in so called ‘Business Referral Networks' which are very structured, requiring strong commitment and focused on its members referring business to each other. The success of these networks lies in the fact that they are membership based and normally limit only one person from each business category to be in the network to avoid competition or conflict. The premise of these kinds of networks is that the members build strong relationships, confidence and trust with each other and refer to each other without any monetary expectation in return. The law of reciprocity kicks in and members find themselves referring back in return. One such organization which has had huge success for itself and its members over the last 30 years is BNI which now spans in over sixty countries. Who needs it most? Businesses both large and small will agree that word-of-mouth referrals account for a large part of their business. Large corporates may have huge marketing and advertising budgets compared to micro-businesses, nevertheless their marketing and advertising mainly leads to brand building. Ultimately, it's through recommendations and customer testimonials that a large portion of buyers get influenced. Large corporates are most likely to engage in referral generating strategies that involve monetary or other rewards to motivate their referral sources. I use the term' Transactional Referral Sourcing' to define these kind of strategies as ultimately they're driven by incentives – often monetary. Micro-businesses on the other hand have smaller structures and most likely to have their owners involved in business development. They have limited budgets to spend on marketing but yet can have a big impact through ‘Relational Referral Sourcing'. This involves investing the time to build networks and working these networks to generate their referrals for them. The main investment is time in the relationship building process as opposed to money. It is a long-term process but the rewards are equally healthy as chances are the dollar value and retention value of such referred business is significantly higher.
*Bijay Shah is the Africa & Middle East Director for BNI – the world's largest referral organization of its kind. Bijay is also the Master Franchisee for BNI in the GCC countries. BNI is present in UAE, Saudi Arabia, Kuwait, Qatar and Oman.
