Anyone who runs a business will tell you that referrals are a hugely important source of new customers. It certainly has been for us at Ember Television.
But does it mean that a growing business can rely entirely on referrals to provide a steady stream of prospects for years to come? Unless you offer something that’s extremely rare and valuable, the answer is a definite No.
There’s plenty of evidence to support the value of referrals. A study by Nielsen, for instance, showed that people are four times more likely to become customers of a particular business when referred by a friend. Researchers at Wharton and Goethe University demonstrated that referred customers are also more loyal and have a 16% higher lifetime value.
But there is a danger of overstating the amount of business that referrals generate.
Take the financial advice profession, for example. It’s generally accepted wisdom that referrals are the way to build a successful advice business. It may well have been the biggest source of new business in the past, but according to recent research, it isn’t anymore — at least not in the United States.
The Investment News 2016 Financial Performance Study showed, for the first time, that non-referral business development is now driving more growth in assets under management than all client and professional referrals combined. Instead, the study suggests, it’s more about external business development and marketing strategies.
For those interested, Michael Kitces has provided some excellent analysis on the Investment News study on his blog, Nerd’s Eye View, and Dan Solin, a business growth consultant working with advice firms, also touches on it in a recent interview I did with him for my podcast, Intelligent Adviser.
There are no pat answers when it comes to business growth. Winning new customers is never easy, especially in professional sectors where there’s so little obvious differentiation at the point of purchase. The Investment News study shows there’s little consensus on what the most effective marketing strategies are. Indeed, the only common thread is about what seems least likely to work, namely traditional advertising. But organisations that really are seeing growth at the moment are those that are properly devoting resources to marketing — particularly content and social media.
One more point needs making. Referrals and marketing are best seen as two sides of the same coin, the go together. Indeed there is a branch of marketing called referral marketing, one of the most important principles of which is that you need to make it as easy as possible for your customers to refer their friends and colleagues to you. That means having an effective digital presence and regularly providing content — videos, podcasts or blogs, for examples — that people can share.
So don’t choose between referrals and marketing. You need both.