I contributed to a discussion on a business networking forum the other day. A fellow member was considering setting up a referral programme to win new clients but had heard there were pitfalls and wanted some opinions.

Having written a long reply (as usual 🙂 ) I thought I’d write a post for my blog on the subject (thereby following one of my pet philosophies of ‘create once, use many times’!)

I think referrals are becoming an increasingly important aspect of marketing and new customer acquisition.

The rise of social media, coupled with a growing mistrust of both officialdom and advertising, mean that people are increasingly making their buying decisions based on the opinions and recommendations of their friends and trusted contacts.

For any referral programme to succeed it has to be easy – both for the referrer to make the recommendation and for the company to manage the reward that follows.

There are many different types of referral system and depending on the nature of your business and your revenue model, some may be more suitable than others.

Delivering a great product or service at a great price to your customers naturally means that many of them will recommend you without needing any reward or incentive to do so – you just need to encourage them to do that. “If you enjoyed your meal tell your friends, if you didn’t – tell us” is often seen in restaurants. Adding social media share and like buttons to your website is another great way of getting your existing customers and prospects to tell their friends about you.

Another kind of referral programme involves rewarding your existing customers by giving them discounted or free products and services. This could be a one off reward or you could have the amount increasing the more people they refer or the more business those referrals generate. Of course, you have to make sure the business gained generates enough revenue to cover the cost of delivery of the discounted/free rewards as well as improving your overall profitability – otherwise at best, there’s no point in running the scheme, or at worst it could be your quickest way to go out of business!

A third kind of referral programme involves rewarding existing customers by giving them rewards outside the scope of what you sell. These should have a high perceived value but a low cost of delivery. Examples may be vouchers for special offers at other businesses or retail outlets, bottles of wine and other luxury items.

That leads on to a fourth kind – cross referral between two complementary businesses. Rather than your customers referring clients to you, you refer your customers to a strategic partner and vice versa – e.g. the hairdressers gives a voucher for money off a manicure at the local beauty salon while the beauty salon gives a voucher for free cut with any colour treatment at the hairdressers.

Then there are affiliate programmes where the people referring business to you aren’t even customers necessarily. You pay them a percentage of the sale generated or a flat fee for each new client.

I’ve become an affiliate/referrer for quite a lot of the services I use on a day to day basis. I’m the kind of person who mentions great things I’ve found anyway, but receiving commission, discounts or freebies just adds a nice touch. Of course, my reputation is vital to me so I’m only ever going to recommend companies I respect and products/services I genuinely believe in.

So to summarise, a referral programme needs to create a win for everyone – you, the referrer and the new customer. It has to be easy for referrals to happen and easy for you to track them and reward the referrers.

So have you tried a referral scheme for your business? Has it worked well? What problems did you encounter? I’m planning more detailed articles in this area so it would be great to know what information might help you.

Oh and if you’ve enjoyed this article, why not share it with your friends!!

Published by Michelle McDines

Michelle McDines is an entrepreneur and property investor. She is passionate about real estate, investment, business startups and wealth creation.

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