Word-of-mouth is the most effective form of advertising--but it's not the safest. Some people approach referral marketing with an attitude that all they have to do is get to know people and referral business will simply bubble up like spring water. What they don't realize is that once trust evaporates, so does the water.
In word-of-mouth (or referral) marketing, your integrity and your reputation are on the line all the time. You can't hide behind an ad. In the referral process, you're continually transparent; you've got to do what you say you're going to do. You've got to be professional. Any flaw in your integrity becomes instantly visible to everyone you're dealing with.
When you give a referral, you give away a little bit of your reputation. While giving a good referral will enhance your relationship, a bad referral will hurt it. If the person you referred does a poor job or is dishonest, your reputation is what takes the biggest hit. Your relationship with the prospect will probably suffer, at least temporarily, and you may even lose that person as a customer.
For example, even top-flight master networkers can inadvertently pass a bad referral once in a while. I started a new company with two partners--Mike A and Mike B. Knowing that we'd be doing a lot of business printing, Mike A referred one of his clients, who owned a business-printing company, to Mike B. A deal was made, but before long it became apparent that the vendor was charging for services that hadn't been included in the quote. Mike B called Mike A and complained. Mike A called the business printer and complained. The vendor called Mike B and apologized for neglecting to reveal hidden charges in the contract. Mike B told him, "I'll accept your apology, but I think the bigger apology needs to go to my partner, because he's the one who referred you. You've done him a lot more damage than you've done me."
Since that time, we've done no business with that business printer and would never consider referring him to anyone we know. It was later learned that the vendor had cheated other people Mike A had referred him to and that, like termites, the damage to Mike A's reputation stayed hidden until it came to light in his own business referral. In the end, Mike A greatly mitigated the damage by contacting and apologizing to each of the people whose business had been harmed by the unscrupulous vendor he'd referred them to. In this way, he was able to minimize the damage to his own networking relationships.
As you can see, the biggest risk in this referral was to the referral giver's reputation and business relationships. Many people hired this printer without a bid process because of Mike A's reputation and clout. That's why referral marketing is dangerous, and why the referral giver owes it to himself and others to know as much as possible about the vendors he's referring to others. Take the time to get to know the people you're referring. Make sure they have integrity; if they don't, your reputation is at risk. Here's another important point: Never give good referrals to people who don't want them or can't handle them with integrity and professionalism.
Similarly, if the person being referred assumes he's got carte blanche because he's a referral--a friend of a friend--he can do himself permanent damage by performing poorly or dishonestly. When your business depends on word-of-mouth, you can't hide behind a mass advertising campaign and bank on plenty of new customers replacing used-up, disgruntled ones. Word-of-mouth is always working--if not for you, then against you.
The same thing goes for the prospect. If you're expecting to get a break--say a special price or a freebie--or if you try to take advantage of a situation in which a friend referred you to a vendor she knows, there's a strong chance you're damaging the vendor's relationship with your friend by making her look bad. Rather than refer other vendors to you and risk damaging those relationships, chances are the referral giver is going to avoid you in the future.
As you can see, everybody in this three-way referral relationship is in a fishbowl. Everything you're doing or communicating, everything you're displaying, is part of your word-of-mouth message. Dishonesty, incompetence and carelessness quickly become apparent to all. In traditional advertising, a graphic designer can create your image--your brand. In word-of-mouth marketing, your image is not only what's been created for you, it's also the way you come to the table--even the way you behave in roles outside of business. For example, if your child's Little League coach is timely, well-behaved, professional and a good leader, you'll be favorably disposed toward giving him your business when you learn he's also a respected attorney. His professional demeanor outside of business is likely to win him clients. Taking a similar approach in life is likely to win you business, too.
Even for someone who's honest, skilled and dedicated, word-of-mouth marketing may not be the best choice. If your business can ring up plenty of sales based on your customer service reputation alone, if you're uncomfortable spending the face time needed to maintain good networking relationships and if you don't want to do marketing yourself--traditional advertising probably should be your choice of marketing strategy.
Remember, word-of-mouth is always working; it's just not always working for you--especially if you're a jerk.
The author is an Entrepreneur contributor. The opinions expressed are those of the writer.