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Why Referral Marketing Works

Think cold-calling is the most effective way to snag customers? Try referral marketing and catch a new batch of clients.

When you have a fully functioning referral marketing strategy in operation, you can predict approximately how many referrals you can expect and what quality they'll likely be. True, you won't know exactly who you'll be selling to or how large the order will be, but that's true of almost all marketing techniques. One mistake to avoid, however, is looking solely at the sale itself. When you do this, you'll miss exactly how that sales opportunity came to you.

A few years ago, one member of a referral networking group (We'll call him Frank) who was a well-liked business owner and had received plenty of referrals, decided to leave the group. When asked why, Frank explained that the referrals he received seemed to be random coincidences and his clients couldn't be replicated. He felt the group wasn't working for him the way it should. Plus, he'd been gaining so many new clients that he said he didn't need the group anymore.

When asked about the new clients he'd acquired, Frank named some individuals who were familiar to members of the group. As it turned out, many of Frank's new clients actually were referrals from other members over the past year. Frank said that it was mainly by chance that he'd been introduced to these individuals and didn't believe the results were an indication of any system at work; it was simply coincidence that his fellow members had bumped into people who happened to need his services.

Frank's mistake was evaluating his success against the abstract standard of repeatability. His professional training taught him that he and his employees should call people from a list generated by the supposed demographics of his clientele. To generate more business--as the theory goes--he should call more people.

Each referral he got, on the other hand, had a unique story attached to the client--something that can't be repeated. This led him to believe the results were coincidental--a misconception because he focused on the referral itself, rather than on the relationship that produced the referral.

Referral marketing is like fishing with a net. You think about how to cast the net to optimize your chances of catching fish. You choose a likely spot, throw your net and when you pull it in, you find a number of fish. You have a pretty good idea of how many fish you're going to catch if you do this a few times, but you don't know which individual fish are going to end up in your net. The fisherman concentrates on casting the net, not on the individual path of one of the fish.

Frank focused on the referral and not the relationship because he didn't understand that building effective and profitable relationships is a system. In his early training, he learned about products, customer service and cold-calling. However, he'd never been trained to build mutually profitable relationships. When he did receive referrals, he was unaware of his actions that had caused it, so he was simply thankful for his good luck and went back to what he knew.

When it comes to networking, "luck" is where persistence meets opportunity. There's no coincidence about repeat referrals. They're the outcome of the day-to-day activities of building relationships. Although referrals can't be measured as easily as tracking cold-call ratios, the results are dramatic--and almost never coincidental. Repeat referrals happen because you've laid the groundwork through professional relationships.

What are the odds of that particular five-pound largemouth bass ending up in your net? If you don't know about that fish in advance--what kind of fish it is, how big it is, where it hangs out, what time of day it comes up into the shallows to feed--the odds are pretty low that you'll catch that exact fish. But once you've got it, it's yours.

Like the net fisherman, the referral marketer concentrates not on the individual fish but on the process. He knows the process will bring him many referrals, he just doesn't know who they will be or by what route they will take to get to him.

Referral marketing may seem a bit messy and random to those who've been trained to call a list of names in hopes of selling to one in 100. But it's a system that works well because it ferrets out all those unpredictable, hidden, complex connections that exist between people in everyday life and in business.

Most big companies are still in the dark ages when it comes to networking. The procedures and results of referral marketing are not as easy to measure as cold-calling. Therefore, big companies stick to the old ways when training their sales staff. Someday, savvy people in corporate settings will catch on to this system. In the meantime, small businesses are leading the way in this networking technique.

The author is an Entrepreneur contributor. The opinions expressed are those of the writer.

Ivan Misner is founder and chairman of BNI, a professional business networking organization headquartered in Upland, Calif. He is co-author, with Hazel Walker and Frank De Raffele, of Business Networking and Sex: Not What You Think (Entrepreneur Press, 2012).
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