Q: I've been promoting my business more and more by word-of-mouth through some networking groups I belong to, but I'm having trouble figuring out how to accurately calculate my revenue from referrals. Do you have any advice on this?
A: It's critical to track your income sources, whether from referrals, advertising, walk-in or drive-by traffic, or elsewhere. But before attempting to track the results of something, you must first set goals to shoot for. How many referrals do you expect to get? How much income do you expect to realize from these referrals? How many referral sources will you need to achieve these projections? You could guess at the answers to these questions, but there's a better way-a systematic method of setting your goals using your experience as a base. First, look back at a recent period of sales revenues from referrals and all other sources. Then project what you expect revenue to be as a result of your referral marketing campaign.
Your forecast should be based on four factors: the number of referrals you expect to receive, the dollar value of the referrals you expect to get, the percentage of your business you expect to result from referrals, and the number of sources you'll need to achieve the expected number and dollar value of referrals.
Many networking organizations ask members to track the amount of money earned from the referrals exchanged with one another. When tracking revenue from referrals, I often see business owners look at the value of each referral for the dollar amount-in other words, they report the value of each referral based on the cost of the item sold. Obviously, this isn't the net income to their company. They're actually reporting their gross sales as the amount of money referrals bring in to the business. So when you're looking at the dollar value of each referral, remember to calculate the actual net income to your business.
The bottom line is you should measure the income that comes directly to you. With some professions that means gross income, and with others it means gross commission; however, in both cases, it is gross money to the business owner.
Let me say that there's no perfect way to measure. Every variation has a problem with it. But based on years of experience, I've found this approach has the most level playing field, and it's the measure we use in all official referral numbers in BNI, the referral organization I founded almost 20 years ago.
Measuring the value of your referrals is important because it helps you determine your return on investment in a group. One thing that you should consider is the critical-mass point for your networking group. In BNI, we have found that to be roughly 20 people.
There's an interesting dynamic relating to net income that happens in networking groups. In one region of our networking organization we studied, for example, chapters over 20 members produced an average net income of 289 percent more than chapters of 20 members or less. If you're in a networking organization, it's clear that the size of the group is going to impact the bottom line of your business! During the time your networking group is between 10 and 20 members, you're in the growth stage. Between 20 and 30 members, you're in the profitability stage. Mike Garrison of the Referral Institute calls this the "Power of 20." The more sources for referrals you have at your ready, the more referrals you are going to get and the higher your income from referrals will be.
With the results of that survey in mind, you can see that building your business through referrals is systematic. Too many people approach this concept socially. While developing your business by referral is about relationship-building, it's not social! It's based on numbers. You have to measure what word-of-mouth is doing for you. It's the only way to tangibly see what impact referrals are having on your income. An essential part of any marketing plan is measuring the results, and referral marketing is no different. To use your sources wisely and efficiently, you've got to know how well your plan is working, how you can change it to improve current and future results, and how much your investment of time and money is earning you. When we go back to the beginning of my answer, you can now see how your projections are inextricably linked to tracking your results. In my book Business by Referral, co-author Robert Davis and I have outlined some projection and tracking methods which are very helpful for those wishing to have some really hard numbers on the effectiveness of their networking efforts.
With a thorough tracking and evaluation system, you'll know whether your plan is working and whether it's cost-effective. You'll be able to demonstrate to managers, investors, bankers and employees that you're a focused and capable marketing professional. Be patient, persistent, flexible and imaginative, and you'll eventually find yourself running a successful referral-based business, one that will be the envy of other business owners.
The author is an Entrepreneur contributor. The opinions expressed are those of the writer.