When small businesses and high-touch service businesses mimic the referral rewards programs of big businesses, I would argue that they cheapen themselves and fail to maximize the potential yield of their referral sources.

What the heck am I talking about?

I’m referring to the difference between sincere yet deliberate (orchestrated) gratitude and what I call a “transparent referral economy.”

If you’re managing thousands of referrals and referral sources, at some point you may find that you have no choice but to build a simple referral economy. Refer a friend and get $10 off of your next purchase. Refer two friends and you pay nothing for …. A referral economy is a publicly stated formula for compensating referral sources.

Don’t get me wrong. There are circumstances in which a simple pay-off works best. Let’s face it. We all like to make an extra buck. But let me ask you this…

When you received your last coupon, gift certificate, free T-shirt, etc. in exchange for introducing a friend to some company’s product or service, did it make you feel any differently about the company to whom you referred your friend?

Did you feel any closer/more connected to its brand?

Did you feel APPRECIATED? Or did you simply feel entitled to the compensation?

If you run a referral economy, my advice is to call it as it is, and be sure that the compensation motivates the behavior you’re trying to produce. Track it. Test incentives. And remember your customer acquisition costs through other channels.

I worked with one of the big wireless carriers last year on a program that we hoped would have a referral component and was astounded by two things:

1. They were willing to pay a marketing acquisition cost of more than $200 to acquire the particular type of customer we were targeting. Yet they would only pay $25 to a person for referring one of these customers.

2. Even worse – they capped the pay-out at 10 referrals ($250). God forbid anyone should refer a whole office of 100 people and make off with $2,500.

Advice – be sure your program makes economic (and rational) sense.

On the other hand, if you operate a small business and/or a high-touch service business and you are compensating referral sources using a referral economy, you may be cheating yourself out of an opportunity to build better relationships with referral sources (and to generate even more referrals).

I was speaking about this with a chiropractor recently. As a patient of his, if you refer a new patient, you get a T-shirt. (Yawn….) To make matters worse, as he bragged about the fact that he tracked referral activity in their patient database, he noted that this allowed him to be sure he reminded each referrer, “Hey – don’t forget to pick up your T-shirt on your way out.”

Doesn’t that make you feel all warm and fuzzy all over?

This approach is flawed almost to the core. First of all, the average lifetime value of a patient in his practice is fairly large (more than $2,500). If you are simply compensating patients for referrals, is a T-shirt really the right incentive? I doubt it.

Second, how about that delivery? “Pick up your T-shirt on your way out…” Just look a person in the eye and offer a sincere “thanks,” and you would probably make a more lasting impression.

My advice to him – first, congrats for tracking referrals in the first place. Most people in healthcare don’t. But at the very least, re-work the delivery of the T-shirt. Infuse sincerity… and possibly a touch of theater to make people feel truly appreciated for the fact that they are helping you to build your practice.

At the close of an appointment with a recent referrer, take a moment, look them in the eye, and say something like, “I wanted to thank you for referring John to me recently. My practice grows by referrals, and through the willingness of people like you to share what I do with friends. It is a tremendous help, and it is not un-noticed. If he’s anything like you, I’m going to enjoy having him as a patient. Here’s a small gesture just to say thanks.” Hand over the T-shirt.

I’m no script writer, but this is a step in the right direction.

Now, what if someone refers not one – but two… four… ten patients over time? Then what? A stack of T-shirts?

At this point, you have identified a RARE breed of customer, and you need to dispense the LOVE. As these people reveal themselves, be prepared to recognize them – and CONNECT with them. Be creative and authentic.

My financial planner (to whom I refer heavily) planned a hot air balloon outing for the two of us and our wives. I had mentioned it a long time ago as something I would one day like to do. He remembered.

His firm uses Goldmine for CRM, and in their database, they have identified their top referring clients and united them in a customer segment that they refer to as “first class.” This small population enjoys a truly differentiated, five-star experience. Quarterly gifts, periodic personal check-in phone calls from the firm’s founder, dinner outings, golf, …. Several of us act as client advisors to the firm. What’s interesting is that admission into this group has nothing to do with the amount you invest and everything to do with the amount you refer. The result – 72% of their business comes from referrals, and they’re growing like crazy.

Don’t think for a second that this is in any way random. It is every bit as deliberate and structured as a referral economy. At our last dinner, my advisor had a print out of every referral I had ever made and the outcome/status of each one.

Let me wrap this up with a few key points:

1. If you business is intimate with its customers in the delivery of your product/service, don’t be mechanical and cold about rewarding referrals.

2. Tracking is critical. If you don’t have a well maintained customer relationship database (nothing fancy – ACT!, Goldmine, Salesforce.com, etc.) you will fail.

3. A salesman once told me, “Tom, sincerity is everything. And if you can fake that, you’ve got it made!” The problem is – you can’t. Not consistently at least. People who refer want to feel truly appreciated. Why not give that to them? They are worth it to your business.

4. If you are operating a referral economy, be sure the referral compensation is actually motivating – and rational. Test it.

Tags: referral programs | sales

| customer rewards

| CRM

This entry was posted on Saturday, November 18th, 2006 at 3:09 pm and is filed under Infinite Return Marketing, Sales & Business Development. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.