The evolution of referral marketing

The evolution of referral marketing

Although people have understood the significance of positive referrals since before the Stone Age, strategies directed specifically at increasing them are relatively new. It wasn’t long, however, that referral marketing became synonymous with spamming. The good news is that referral marketing is beginning to evolve as businesses become smarter and understand the psychology behind referrals.

As people have become increasingly connected through the internet and social media many businesses have embarked on strategies to reach them on a mass scale. With this process the first wave of ‘referral marketing’ was born. The problem lies in the common mistake some companies make by treating their customers as impersonal business opportunities rather than real people.

Why impersonal referral marketing will not work

At the onset of referral marketing the grand design was simple — a company does business with John, and John surely has friends and family, so let’s ask him to spread the word for us. In fact, entire business models were created around this concept. Companies promising referrals (for a fee) would send this automated message to a business’s entire address book:

“If you’re taking on new clients, I’d like to include you in my private referral network to send you business leads.”

The idea is to connect as many people as possible and hope that business leads will be sent their way. The simple reason this will not work is because it does not target the reasons why people refer. This message screams spam. The hope is that if a company sends one thousand of these messages they may receive a handful of leads. What they are not considering is the damage they are doing along the way. A business’s reputation is on the line with every message they send — impersonal “spammy” communication like this does not set the tone for a reputable business.

The alternative

First consider who the communication is sent to. There are two types of referrals, positive and negative. Companies looking to increase referrals should identify their satisfied customers before promoting word of mouth. The Net Promoter Score is a great tool to recognize both customers that are satisfied and those that have an issue. But only until a business knows where a customer stands in regard to satisfaction can they send effective and targeted communication.

The next step is for companies to pay close attention to the message they send. This is where traditional referral marketing and incentive based programs fall flat on their face. People refer friends and family for many reasons (reciprocity, social status, obligation, homophily, exclusivity, etc.) but not simply to bring their company more business. The individual’s reputation is on the line with each referral they make and most are not willing to sell that for a quick buck. Referrals are personal and as such should be the communication. Companies that are able to reach their clients on this level will realize many more quality referrals while not damaging their reputation along the way.

Finally, companies need to consider how they are sending the message to their clients. With the onslaught of email marketing in recent years people are increasingly ignoring digital communication. Physical mail will have a much more positive impact if done correctly. Handwritten notes stand out today more than ever — they portray a feeling of genuineness that just cannot be replicated with email. The “wow” factor resonates with customers and this feeling is often shared with others.

Bottom line, referral strategies are effective if done correctly. The transition from mass communication to a personal and targeted level marks an important shift in leveraging an existing customer base. As businesses begin to understand the psychology of why people recommend referral marketing will continue to evolve. The good news is that tools have already been developed to help businesses automate this need breed of referral strategies.

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