The ROI of Networking
Q: My question to you is the holy grail of business ROI (return on investment): Are there any benchmarks for quantifying word-of-mouth?
A: There has been very little quantitative research on the ROI of networking. However, having spent most of the last two decades participating in or managing business development networks around the world, I've amassed substantial evidence that suggests that there is a substantial ROI on one's networking and word-of-mouth efforts.
Let me begin with a study done by Robert Davis at the University of San Francisco. Davis found that people who participated in networking groups appeared to be "above-average networkers." The study concluded that participants in networking groups develop certain networking skills that the average business professional does not possess, and that these skills in fact result in more referrals to other business professionals, leading to substantially more new clients. This makes a very strong argument for participating in organized networking groups.
As part of my doctoral work at the University of Southern California, I conducted a thorough study of referral generation amongst members of a business development network or referral group. In the study, published in 1993, I found that the longer an individual participated in a business development network, the greater the number of referrals. In fact, the likelihood of receiving a hundred or more referrals virtually doubled with each passing year of participation. One participant told me that in his first year as a member (1993), he received roughly $6,000 in referrals for his paging business. During his second year, he got more than $11,000, and in his third year more than $22,000! The study clearly showed that the longer people participated in their networking group, the higher the return.
Some of the most exciting discoveries from my doctoral study and later discussed in my book The World's Best Known Marketing Secret involve the length of membership in a networking group. For example, the study found that the people who were members for one or two years identified their largest referral to be more than 50 times higher than people who had been members for less than one year!
This trend continued as long as the person remained a member. For example, 52.3 percent of the respondents who were members for less than a year stated that their largest referral was $250 or less, while only 7.5 percent said it exceeded $2,500. On the other hand, none of the respondents who were members for several years said that their largest referral was less than $250, while 52 percent said their largest referral was more than $2,500, with 32 percent actually exceeding $5,000! Thus, large referrals are directly related to length of membership. In other words, individuals who stay with a networking group longer are much more likely to get referrals that are substantially larger.
The chart below illustrates this point. You will notice that the longer someone was a member, the higher the likelihood he or she would receive a referral worth more than $1,000. It should be noted that many of these referrals were substantially more than $1,000 (or in some cases, over $100,000). In some years, many members got at least one referral worth more than $10,000 in business.
It is clear that the longer an individual is a member of a business development network, the greater the individual's opportunity to get larger referrals. In fact, members are almost twice as likely to get referrals worth more than $1,000 in net income if they are in the group for more than one year. In addition, the overall number of referrals increases substantially the longer someone participates, as shown in the figure below.
In addition, take a look at a book I co-wrote with Robert Davis entitled Business By Referral: A Sure-Fire Way to Generate New Business . On pages 23 - 26, we talk about some of the payoffs of networking based on a survey of more than 2,000 business professionals in several countries.
I believe that we will eventually see more quantitative research done on the ROI of networking and word-of-mouth marketing. It is clearly one of the most cost-effective ways to build one's business, and the more research that is done, the more evidence we will have to support that.