Referral marketing, just like any other type of marketing, works against you if your product or service is not up to snuff. Having a good product is necessary (but certainly not sufficient) for referral marketing to work.

On the other hand, there is a danger of falling into the “best product” trap. Far too many entrepreneurs spend all their energy on perfecting the product and not enough on marketing it. It’s not necessary for the product to be “the best”. Your product just has to be “good enough to do the job”.

Referral Marketing Tip #2: Make Every Customer Feel Special

Now, isn’t this a novel idea, to not simply ask for referrals but actually deserve them?

Many referral marketing seminars, books, and courses teach us to always ask for referrals. This idea can be taken too far. Like that birthday card from a realtor that comes full of nice wishes, two of his business cards included to give to your friends, and a P.S. in the end suggesting that he is “never too busy for your referrals”.

Well, how would you feel getting a card like this? Right, I’d want to wash my hands too. There is a time and place to ask for referrals as there is a time and place not to.

How about sending a card to them and making it entirely about them? A card that says “Happy Birthday”, “Happy Thanksgiving”, “Thank you”, “I appreciate you”, etc? The type of card that doesn’t scream, “Gimme, gimme gimme!” The kind they could only get from the person who really, truly cares about them — you!

When you stop worrying about referral gimmicks and start caring about your customers, is when you open referral floodgates. When you are no longer forcing referrals, you are allowing them to happen.

Referral Marketing Tip #3: Give Your Customers Something To Talk About

You start getting more referrals when you give your customers something to talk about. This can be a special event, a specific feature of the product, or simply something out of the ordinary you did for them.

For example, you can link your business to a charitable cause or a community campaign to save a local landmark. When the conversation at the office water cooler turns to the subject of the campaign, with your happy customer present, they will be only too eager to give you a plug.

When it comes to product features, the recent release of the new iPhone comes to mind featuring the messenger app. Given the blackout of the Blackberry network a few weeks ago, everyone wants to talk about the new iPhone. Several of my friends defeced from the Blackberry camp as a result.

And finally, here’s a story of how I made it easy for my accountant Chris to talk about my marketing services. One day, he received a greeting card in the mail from me that had a picture of our Prime Minister “saying” how he was concerned about the Federal Budget since Chris’ clients were paying so little tax. This card, taped to Chris’ desk for every visitor to see, invariably gets a chuckle. The next thing you know, my name is being kicked around.

• Should I or should I not pay referral commissions?
• If pay, how much?
• Should I use a specific formula like a percentage of sales or flat amount?
• Or should I be giving gifts?
• And what types of gifts would be the most appropriate and effective?

These are all great questions. And even though I don’t think a simple answer that would work well in every situation is possible, here are some principles that may help you find an answer for you and your business.

1. Be Aware Of Legal Implications

In some occupations (particularly those related to healthcare and finance) paying referral commissions could considered illegal. If your industry is regulated, you may want to check with the governing authority in your field about their position on referral fees. Make sure those legal implications don’t become legal complications.

2. Appreciation Is A More Powerful Motivational Force Than Money

Dan Ariely is his recent book, Predictably Irrational tells a story that illustrates this point. A group of lawyers was asked to donate their time and provide legal help to the people who couldn’t afford to pay their $350/hr fees, for free, as an opportunity to “give back to the community”. A certain (relatively high) percentage of lawyers agreed.

The second group of layers was approached with a similar request, only this time they were offered a small hourly rate of, say, $35/hr. Every single one of them said they weren’t interested.

Now, isn’t $35/hr better than $0/hr? As the song goes, ’tain’t necessarily so.

I distinctly remember being a bit ticked off when a friend of many years went out of his way to pay me for the referral I gave him. All I wanted was a sincere thank you for helping him and his fledgling business. I didn’t want it to look like I did it for the money.

(Now, for the record, I’m not the anti-referral-commission type. Referral commissions represent a significant chunk of my business’ revenue. In some cases there is a formal contract in place that clearly states how much money I earn by helping someone generate more sales.)

3. Thanking Is Good. Recognizing Is Better.

Thanking people for referrals is one-on-one. Recognizing is public, one-to-many.

Some ideas for recognizing those who give you referrals:

• Put their name, picture, and contact details in your company’s newsletter, printed or electronic. If you don’t have a newsletter, start one today. The easiest and the cheapest way is to use software such as http://www.iContactSoft.com (that’s what I use).
• Write about them on your website.
• Announce their names at a client appreciation event and have them come up to the podium so that others get to see them.
• Send out a greeting card or a letter recommending them to your network (which is bound to result in more referrals for them).
• Take them out to a lunch and send a stretch limo to pick them up at their place of work. They are guaranteed to be the gossip of the day.
• Send them a box of brownies to their office. They won’t be able to finish the whole box by themselves and will share it with the co-workers.

When you recognize people for giving your referrals, you reinforce their actions and send a message to the rest of your network that you want and appreciate referrals. By seeing that others give you referrals, some of the “non-givers” will receive the social proof they needed to join the ranks of “givers”, and those who have been giving you a few referrals may become true referral ambassadors for your business.

4. If You Decide To Pay Commissions, Be Generous

Don’t just focus on one transaction. Consider how much a new client is worth to your business over their lifetime and use that number in your calculations.

5. Do Unto Them As They Would Have It Done Unto Them

Remember, it’s not about you. It’s about them. There is no one-size-fits-all solution. Learn about them and about what they like and appreciate the most. Fulfill their dream. Give them something they’d like to get but wouldn’t necessarily spend their own money on.

Instead of giving them cash, pay for their romantic getaway. Buy them a ticket to a seminar, a concert or a game they’d like to go to.

How did you answer these questions in your business? How do you thank people for giving you referrals? Post a comment below.

Alas, nothing can be further from the truth.

Every successful business that I have studied and that generates a lot of referrals, has a systematic, well-thought-out referral process in place. Referrals don’t “just happen”! No matter how great a job you do as a business or a professional, it is never enough to attract a sufficient number of quality referrals.

The sad truth is, people take good service and good experience for granted. They are much more likely to tell their friends about their bad experience than good experience.

There is a psychological reason for that: Most of us humans are preoccupied with negative thoughts. We all like to vent. And given a chance, we do.

Which is confirmed by a customer behavior research company called TARP, based in Arlington, Virginia. Here’s what TARP research has to say on this:

• A happy customer may share their experience with just a few friends;
• These friends will not remember much and will not share that information with anyone at all.

And that’s it. The message stops there (unless you use deliberately designed referral tools to carry it down the channel) and you get no new business.

Now let’s imagine you messed up. Here’s what’s going to happen to you, according to TARP:

• A disgruntled customer will share their bad experience with the average of 12 other people;
• Each of those 12 people will in turn mention it to 6 others

Let’s do the math: We are talking about (1 person who has had bad experience) + (12 people that person has talked to) + (12 groups * 6 people they have contacted) = 85 people will no longer think very highly of your business or service just because of a little mess-up!

Bad news certainly travels fast.

Here’s what this all means to you and your business:

• Doing a good job is still important (as they say, “you can’t brand crap”). However, it’s not enough to attract a reliable stream of referrals.
• To get more referrals, you need to build and implement a referral system that you can control and rely on (the type of the system we teach at the Small Business Referral Seminar).
• When you make a mistake, you need to go out of your way to admit your mistake, apologize, and make it right again for customer. For example, you can send a nice “apology” greeting card to them, possibly with a small gift. Chances are, this person will become one of the most loyal of your customers (sometimes they will become a bigger supporter of your business than those customers who have never seen you make a mistake).

So doing a good job is important to avoid the negative word of mouth. However, doing a good job is never enough to get all the referrals that you need and that you can handle. That task is only accomplished by creating a systematic referral process.

Getting a referral is like receiving a stamp of approval for all the hard work you’ve done. It sure does feel good!

However, aside from the warm and fuzzy of this experience, let’s take a look at the 7 most important reasons why you should be build your business using referral marketing:

1. Referrals Are Cost-Effective

In most cases, referral are much more cost-effective than any other form of marketing. They cost very little if anything at all! In the world of skyrocketing advertising costs and slugging economy, this is a very nice thing to have.

2. Referrals Are Better Clients

New clients that you have acquired by the way of referrals tend to be much better clients. They are less demanding, more appreciative of your work, and they are tend to be nicer people to be around. By focusing on referral marketing, you can “engineer” the type of people you want to attract to your business.

3. Referrals Are Predisposed To Buy

If someone was referred to you, chances are they have already been looking for your product or service. They are in the market. They need and want your product or service, right now.

4. Referrals Are Less Skeptical

When someone refers business to you, they provide an endorsement (either explicit or implicit) of you as a professional. This is the critical element of social proof that makes the selling process so much easier. When you focus on building your business via referrals, you don’t have to overcome as many objections and your closing ratio goes up.

5. Referrals Pay More

The people that have been referred to you by someone are not as price-sensitive as the other types of prospects. The price someone is willing to pay is in direct proportion to the amount of risk they see in the deal.

6. Referrals Are More Loyal

Clients that have been referred to you will tend to keep buying your product, or doing business with you as a professional, for a longer time than the clients you acquire through advertising.

7. Referrals Are More Likely To Give Referrals

This is something that most business owners never think about yet is possibly the most important item on this list. When someone gets referred to you and becomes a client, he or she will think that giving you referral is “normal”. As a result, they will be a lot more likely to give you referrals than the rest of your clients would.

I met a lot of people who think that these 3 words mean essentially the same thing. And they don’t.

If you have ever been confused by all this, I’m about to make it all clear for you.

The only thing common about these three is the fact that they all give you a way of getting more business without advertising. That’s it. That’s where the similarities end.

Networking is a way of establishing new contacts by meeting people where people congregate. There are business functions (networking meetings, conventions, trade shows, exhibitions, seminars, workshops, association annual general meetings, etc.) and social functions (parties, outings, church events, hobbyist & enthusiast events, etc.) that you can attend. To me, this is hard labour. Sweaty, unpleasant grunt work which you still do because that’s the quickest way to expand your network. (You may have figured out by now that I’m not a naturally-born networker. You may like networking a lot more than I do, which is a good thing for you.)

Word-Of-Mouth is an “organic” process of turning your customers or clients into raving fans and ambassadors for your business. It’s a great thing when this happens. The issue with the word-of-mouth is that it’s hard to control or to influence.

Referrals, on the other hand, are typically the result of having the right referral system in place that automatically attracts qualified referrals to your business every day of the week. A good referral system doesn’t happen by chance. It needs to be engineered, tested, and put to a good use. And once it’s in place, it’s like having a referral tap in your office: Open the tap and the referrals pour in, credit card in hand, wanting to do business with you.

Both the Networking and the Word-Of-Mouth can be made a part of your Referral Process:

By implementing a Networking Referral System in your business, you can become a much more effective networker.

By creating special incentives for your customers or clients to refer your business, you can stimulate and control the word-of-mouth.

Referral systems go far beyong just networking or just word-of-mouth. This entire site is devoted to helping you engineer a system that will attract an endless stream of referrals to your business.