Referral marketing, sometimes also called as word-of-mouth marketing, is people purchasing products based on someone else’s opinion or influence. Study after study has proven that referral marketing is one of the best forms of marketing when it comes to sales.

It’s a powerful marketing channel because people trust the opinions of other people in their lives and people they respect, whether that is family, friends, social media or celebrities. It makes sense, as we regularly get advice from our friends about which TV shows or movies to watch, or restaurants to go to. Also, as end consumers ourselves, we want to share our stories about the products we buy and the brands we choose. This becomes magnified when the buying experience and products are exceptional.

Why is it so influential?

A customer referral program can in fact be strikingly profitable. When you have a fully functioning referral marketing strategy in function, you can predict approximately how many referrals you can expect and what quality they’ll likely be. At the same time, you won’t know exactly who you will be selling to or how large the order will be, but that’s true of almost all marketing techniques.

By pursuing referrals in an organized and structured way, the existing networks can be turned into active referral networks. Referrals offer significant advantages over cold-calling and direct marketing leads. For example, referrals are:

  1. Always more cost-effective and
  2. Referrals generally help in taking decisions quicker about purchasing
  3. Returning customers are likely to purchase more often
  4. Less negotiation or convincing is required
  5. They will be more willing to make further referrals

Talking about the Referral Effect

  • A study by HBR (Harvard Business Review) shows the extent to which referred customers are more profitable. The study was done on 10,000 accounts in a large German bank over a period of three years, and found that customers obtained through referrals are both more loyal and more valuable than other customers. After controlling factors such as age and gender, it was found that referred customers are, on average, about 18% more likely than others to stay with the bank. The study also projected that they generate 16% more in profits.
  • According to Nielsen92% of customers trusted referrals from people they knew;
  • According to a study carried by the Wharton School of Business, a referred customer has a 16% higher customer lifetime value. This means that referrals help you save more on acquisition costs and help you make more as they’ll be more loyal to your brand; and,
  • Referred clients tend to spend 13.2% more than a non-referred customer.

Boosting your business

Referral marketing is a powerful and important component for every business. Implementing some basic tactics can help encourage and facilitate the referral process, which can be a major source of new sales. It is rated continually as one of the most powerful modes of marketing. But why?

  • Targeting Referral and word-of-mouth marketing tend to be much more targeted because people tend to know their friends and social audiences pretty well. This allows your brand message to spread more effectively than with most other marketing channels.
  • Trust – Consider the last time a salesperson you know is on commission and tried to sell you something. You likely had doubts about his authenticity due to a lack of trust. With referral marketing though, the sales pitch is usually coming from someone who you either know well, like friends and family, or it’s coming from someone you have trust in, like your favourite new publication, blogger or writer.
  • Customers’ Reach – Earlier, average reach of a typical consumer was limited. As most part of it was restricted to the number of people they met or talked to on the phone. Today, though, it is much larger and with strong social followings, it can be enormous. Some consumers now have the power to make or break a business by what they say about it online. With a simple Facebook post and Twitter tweet, the average consumer can now reach hundreds in a matter of seconds. That kind of social reach is definitely a critical reason to why referral marketing has only gotten bigger over the years.

Referral marketing may seem a bit messy and random to those who’ve been trained to call a list of names in hopes of selling to one in 100. But it’s a system that works well because it flushes out all those unpredictable, hidden, complex connections that exist between people in everyday life and in business.

The procedures and results of referral marketing are not as easy to measure as cold-calling. Therefore, big companies stick to the old ways when training their sales staff. Hopefully, someday, people in corporate settings adopt this system. In the meantime, it is surely working wonders for start-ups and upcoming businesses that are leading the way with this networking technique.


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