How to Start a "Refer a Friend" Business Program
By Charles Hopkins
Published 04/20/2006 | Marketing
As a small business owner, you may be considering the implementation of a "refer a friend" marketing program. There are several reasons why this is a wise move.
Basic marketing theory offers that word of mouth marketing is one of the most effective, and least expensive, forms of business promotion. Word of mouth marketing occurs any time one of your current customers or clients recommends your business to someone else, who then, on the basis of that recommendation, decides to visit your business as well. Lead generation (getting the potential customer to walk through the door) is often the most time-intensive element of marketing. Once the potential customer has chosen to "walk through the door", it becomes much easier to convert them to a paying client.
In this form, word of mouth marketing costs almost nothing to implement, and if your business is continually recommended, it, obviously will continue to grow.
There are several forms that this marketing by referral program could take. One is that of "refer a friend", which, as it sounds, is based on the idea that your current customers can be rewarded for referring their friends to your business.
When considering the implementation of this kind of marketing strategy, there are several issues that must be considered. First, consider the lifetime value of a business customer. This value is computed by multiplying the income received by the number of times in a year it is received by how many years the customer remains in your business. For a business consultant, for example, the income received might be 400 per hour, the number of hours per year might be 100, and the average length of the client relationship might be 10 years. So, for the consultant in this scenario, the lifetime value of a customer would be 400/hour x 100 hours/year x 10 years = lifetime value of 400,000. This figure represents the amount that the business can spend to attract and retain a client and still remain profitable. It also implies that if the business can attract and retain clients for less than this amount (such as using a marketing by referral program), the business' profitability can increase significantly.
The first step in setting up a marketing referral program is to understand the lifetime value of your customer. This will indicate how much should be spent to attract new customers.
The second step is to tell your existing customers that their referrals would be valued and appreciated. A simple way to begin is to include a statement about this on all customer-facing materials, including brochures, invoices, and receipts. Many businesses create special "tell a friend" cards, which allow someone to gift a friend with a service or product.
For example, a beauty salon may create "tell a friend" cards, and ask their current customers to pass these out to friends who might want to try the salon. In this model, the current customer is able to be generous by sharing a "gift" with a friend, who may, ultimately, sample the salon and decide to stay on as a customer. For the price of a printed business card, and the cost of the service or product, businesses can generate hundreds of new leads, very cost-effectively. The key to this strategy, though, is that the business must offer a product or service with high perceived value and low actual cost. An example might be a free haircut, or a mini-facial, or something similar.
The third step of this process is to define an internal system or structure for rewarding clients for their referrals. The higher the price points in your business, the more generous the rewards should be. Consider creating a rewards schema which gives customers greater and greater rewards for every two or three new customers referred. Following through with the beauty salon example, the first referral might entitle the referrer a free haircut, but the tenth referral might entitle that referrer to a full spa treatment.
Keeping track of referrals may be best done in some kind of database or with customer tracking software. Build a referral tree to understand which customers are referring the most new business. Be sure to thank them promptly for their first referral, and don't forget to continue to reward them for sharing your business with others.
No matter what kind of business you run, a referral marketing program can increase profitability.