Referral Marketing: Making Recommendations Plannable

Why are referrals left to chance in most businesses?

Ask an owner where their best customers come from, and the answer is often: through referrals. Ask further how many referrals came in last quarter, from whom and what came of them, and there is silence. Referrals are seen as a gift that cannot be steered. So people wait for them.

There is an understandable reason for this. Asking for a referral feels like begging to many people. And an elaborate reward scheme does not suit a business whose customers are managing directors of other businesses. So nothing happens, and referrals come when they come.

Referral marketing does not mean pressuring customers or handing out rewards. It means recognizing the moments when a satisfied customer would gladly recommend you, and making that step easy for them. It is not an advertising campaign but a small, repeatable process. So the question is: how do chance referrals become a plannable channel without you pressuring customers? To answer it, we first clarify what referred customers are worth and why satisfied customers do not refer on their own, then introduce the referral loop, and look at referral partners, the most valuable referrers, and measurement.

Satisfied customers do not refer on their own. They refer when someone asks whom they know and takes the work of the introduction off their hands.

What are referred customers worth?

The best-known study on this comes from Schmitt, Skiera and Van den Bulte (2011). They tracked around 10,000 customers of a large German bank for almost three years. Customers who came through a referral program initially brought a higher contribution margin, though this lead shrank over time. But they stayed loyal to the bank more often, and lastingly so. Overall, a referred customer was worth on average at least 16 percent more than a comparable other customer.

Armelini, Barrot and Becker (2015) repeated this study at another financial services provider. The higher loyalty of referred customers was confirmed: they churned less often. But the authors did not find a higher value in every case. What mattered was the similarity between referrer and referred customer. When the two were similar, the new customers were more valuable.

For a small or midsize business, two things follow. First: referrals tend to bring customers who stay, and in a business with repeat orders that is often worth more than a large first order. How to calculate a customer’s value over the whole relationship is shown in the article Calculating customer value. Second: ask specifically those customers whose circles resemble your target customers. A satisfied customer from your target industry knows others from the same industry.

Why don’t satisfied customers refer on their own?

Anyone who recommends someone puts part of their reputation on the line. If the referral goes wrong, they look bad. Gershon, Jiang, Fraser and Gupta (2024) describe this reluctance in Harvard Business Review: many customers do not refer because they fear the referred person might have a bad experience. If there is a reward, a second worry is added: the referral could look like a deal at the friend’s expense.

Their own data also show how powerful referrals can be. In an app with more than 41 million users, customers who came through a referral bought more than others and themselves brought in 30 to 57 percent more new customers through referrals. The authors call this contagion. They found the same pattern on a platform for yoga lessons and in data from a referral program provider across various industries. One explanation: those who came through a referral themselves perceive referring as more normal and less awkward.

These data come from consumer business. The mechanics can be transferred, though. Someone who found your business through a referral is a particularly good candidate for the next referral. And every hurdle you take off the referrer’s hands makes the referral more likely: the uncertainty whether it fits, the effort of making the introduction, and the worry of seeming pushy.

The referral loop: occasion, request, path, thanks

These findings lead to a simple process that I call the referral loop. It has four steps, and the last one connects back to the first. A customer who has experienced their referral being well received will refer again.

1. Occasion

   The best moment is shortly after a visible success: at acceptance, when a metric has improved, when the customer thanks you of their own accord. At that moment satisfaction is highest and the risk of a referral lowest.

2. Request

   Ask concretely: “Do you know two or three businesses in your industry facing the same question you faced a year ago?” A concrete description makes answering easier than a general “If you know anyone …”.

3. Path

   Offer two paths: the customer introduces the two of you by email, or forwards a short text you have prepared. No form, no portal.

4. Thanks

   Say thank you immediately, and get in touch a second time when the referral has turned into a conversation or an order. The referrer wants to know they were right.

The last step is missing in most businesses. Yet it is the cheapest and most effective. A customer who never learns what became of their referral wonders whether they embarrassed themselves. A customer who hears that their acquaintance is satisfied feels confirmed and refers again.

Who refers besides customers? Referral partners

Customers are not the only ones who refer. For many businesses, other professionals serving the same customers are an equally important source: the tax advisor for the IT service provider, the architect for the building services company, the machine dealer for the maintenance firm. They face customer questions every day that they cannot answer themselves, and they need a reliable name.

Partner referrals live on reciprocity and reliability. Choose three to five partners whose work you know and whom you would recommend without hesitation yourself. Meet twice a year, explain your offer so the partner can pass it on in two sentences, and report back on what became of their referrals. You expect the same feedback from them.

Which customers bring the most valuable referrals?

The customer with the highest revenue is not automatically the best referrer. A study in business-to-business markets shows this. Kumar, Petersen and Leone (2013) analyzed data from a financial services provider and a telecommunications company that sold mainly to small and midsize businesses. For each customer they measured how strongly their reference had moved new customers to buy and how much these new customers were worth.

Most newly acquired businesses were strongly influenced by references but relied on only a few. The customers with the highest reference value were not the same as those with the highest own customer value. Four groups of factors determined reference value: the length of the customer relationship, the size of the referring business, the format of the reference and how well referrer and prospect matched.

This fits the findings from banking: similarity between referrer and referred pays off. Go through your customer list with these four questions and mark ten customers who meet several characteristics. These are your most important referrers. How to also win the same customers as references for prospects is described in the article Using testimonials and references.

How do you measure whether referrals are becoming more plannable?

Referrals can be measured like any other channel. Two fields in your inquiry list are enough: the source “referral” and the referrer’s name. In addition, count how often you asked. The following worked example shows one year with the referral loop.

If every inquiry keeps its source through to the close, you can compare referrals with other channels. How that works is described in the article Measuring marketing success. Referred inquiries still need checking: not every referred person fits your offer. The criteria for this are in the article on lead qualification. If you have to decline, do it particularly kindly, because the decline also reaches the referrer.

A final note on dependence: if more than half of your new customers come through referrals, that is a good sign for your work and a risk for your growth. Referrals can be prompted but not multiplied at will. A second, plannable channel protects you from a quiet quarter for referrals turning into a quiet quarter for revenue.

What you can put into practice right away

Do not start with a program; start with a list and a text. One hour is enough.

• Go through the new customers of the last twelve months and note who came through a referral and from whom.
• Write a short personal message to every referrer you have not yet thanked, with a sentence on what came of the referral.
• Mark ten customers who have been with you a long time, fit the target audience and are well connected.
• Write a three-sentence forwarding text.
• Add the request for a referral as a fixed step in project closure.
• Create the fields “source” and “referred by” in the inquiry list.
• Choose three potential referral partners and invite one of them to a conversation.

After a year you will know how many orders come from referrals, who triggers them and how often you asked. A gift becomes a channel. How to develop existing customers systematically beyond referrals is described in the article Growing existing customers.

The opening question was
chance referrals become a plannable channel. The answer is not a reward scheme but a small process: an occasion, a specific request, an easy path, and a thank-you that shows what came of the referral. Whether it works is shown by the source and the referrer's name in every inquiry. According to the available studies, referred customers are above all more loyal, and that alone is a reason to maintain this process.