Just How Valuable are Customer Referrals Anyway?

If you ask any small business owner where they derive the majority of their new business they will inevitably tell you that it’s through word of mouth referrals from their existing customers.

We all seem to know that our existing customers are a gold mine of future business opportunities via their contacts, but why do so many of us fail to convert these leads into tangible results?  It seems like too many times we end up getting the shaft while someone else takes the gold.

Last month, I published a post called Is Your Small Business Kissable? where we looked at how small business owners can send the wrong message to their customers when it comes to referrals.  So how well are you doing a month later?

Asking for Referrals is SO PAINFUL!

Chances are that you agreed with what I wrote in that post, but quickly got distracted and took no action.  Maybe you thought about how you would, or even attempted to, get referrals from your customers.

What did you think?  Was it painful?  Perhaps, it was even excruciating to some of you?  Many gurus will tell you that it’s really not, it’s all in your head.

It’s almost like they are saying, “Quit being a baby when it comes to asking for referrals!”  Honestly, it’s pretty hard for many of us to start this conversation with our clients, but I think they’re right.

You started your business to provide a product or service to your customers that was higher quality, more efficient, and greater value than what you saw being offered in the marketplace.  Why would you send their friends elsewhere?

“A System! A System!  My Business for a System!”

So you don’t want to send them elsewhere, but you need a proven system to convert them?  Okay, I’ll buy that.  This whole process would be much simpler and less painful with a proven system.

I could give you my system right now, but many of you would probably still fail to use it.  Is the system that bad?  Is it just a bunch of smoke and mirrors?

No, but here’s the problem.  Until you truly see the value in a referral from your customer you will most likely quit the program at the first sign of failure.

An Example Using Just Referrals

Let’s take a small business owner who is just starting out.  We’ll call her Jane.  Jane has managed to build her business up to 10 clients who on average generate about $5,000 a year in revenue.  Looking at her clients, she decides that she is going to ask half of them to refer 2 prospects.

Jane really believes in the customer referral system, so she decides to focus only on referrals.  She will not use any other source to generate client leads.  Pretty extreme, but if you knew Jane you would understand.

The Assumptions

To make our example realistic, we will assume the following:

• 10 existing clients
• $5,000 avg. revenue/client
• 50% of clients refer
• 2 referrals per client
• Jane converts 1/3 of the leads
• 90% retention rate

Show Me The Money!

Here’s what the first year would look like.  Multiply all the factors above together – 10 clients * $5,000 per client * 50% referrals * 2 referrals per client * 33.33% conversion * 90% retention = $14,998.50 from referrals bringing total revenue to $65,000.

Year 2 all the same assumptions, except now we have 13 customers.  Year 2 revenue from new referrals is $19,305 bringing total revenues to $84,305.

Year 3 all the same assumptions, except now we have 17 customers.  Year 3 revenue from new referrals is $25,245 bringing total revenues to $109,550.

Did I Get Your Attention?

Pretty amazing, huh?  Plug in your own numbers and see what it would look like for your business.  Honestly, these numbers assume a pretty low level of effort in trying to generate referrals.  Don’t forget this doesn’t include any other advertising.

Now that you see the true value of customer referrals, how scary does it sound?  Is the fear worth letting your competitors take this gold mine away from you?

What’s that?  Oh yeah, what is my proven system?  I will be sharing that with you over the next few weeks, so make sure you come back.  Better yet, why not Subscribe to My RSS Feed so you are sure not to miss it?  It’s free, what do you have to lose?

Related posts:

1. My Proven Client Referral System – Part 1
2. Is Your Small Business Kissable?
3. Home Based Business Nightmares
4. What Entrepreneurs can Learn from Martha Coakley’s Campaign
5. Customers that Make Small Business Owners Scream