Is Your Small Business Relying Too Much on Referrals in Marketing?

Carmen Rane HudsonGeneral Online Marketing

referrals-in-marketing

“I don’t need to market. I get all of my business from referrals.”

I hear it a lot, and my response is often, “Hmm. Really?”

Don’t get me wrong. Using referrals in marketing is an awesome way to build your business. That’s why I devoted an entire post to using the internet to build a referral network.

But referrals alone won’t keep you busy forever. You have to keep engaging in consistent marketing efforts.

I’m not the only one who feels this way. BloggingPainters.com recently ran a post called The Danger with Referrals which talked about this very concept.

“There is nothing more invigorating than when one of your happy customers tells one of their friends about the fine work you do…and a referral is born.

But there is a real danger of being passive about getting referrals.

While word-of-mouth is the top way of getting new business, you cannot be lazy about it. You need to stimulate activity.

If you don’t actively pursue referrals, one day the phone will just stop ringing. Your referrals will dry up…and yes, your business will, too.

I couldn’t have said it better.

Darren Slaughter of DarrenSlaughter.com followed up on the post with this outstanding comment.

DarrenComment

My guess is, most small business owners know all this. Most small business owners just don’t enjoy marketing very much.

Putting yourself out there is uncomfortable. Marketing can be expensive, time consuming, difficult to predict or all of the above.

Only marketers really feel like they’re “good” at marketing, and we all have a tendency to avoid things that make us feel awkward or less competent.

But marketing still has to get done.

Getting customers is all about moving them through a sales funnel. But a sales funnel isn’t like a water funnel.

In a water funnel, all of the water at the top eventually makes it to the bottom. That doesn’t happen in a sales funnel.

Instead, customers leave at various points in the funnel until only a small percentage of them remain to become buyers.

Red, yellow and green sales funnel with arrow

“Suspects” are in research mode. They’re a little bit interested in what you have to offer, but they’re not necessarily interested in you, and they haven’t made any real decisions yet.

If you’re a siding contractor maybe it’s just occurring to these people that their siding looks like crap, so they’re doing a little bit of poking around online to figure out what their options might be and what prices might be like.

Prospects are a lot more serious. They are actually in a position to replace their siding. They’re qualified buyers because they’ve got the money to replace the siding as well as a need to do so.

As you can see, there are already fewer prospects than suspects.

Callers are now taking some kind of action. They’ve filled out your contact form or picked up the phone because they want a free estimate from you. You actually have a chance to earn their business, but, of course, you won’t get them all.

Buyers, of course, ultimately choose your company. You get to work, and then they pay you. This is the smallest funnel of all.

For simplicity’s sake let’s imagine that you lose 25% of the people who show up at each level of your funnel. That’s way too generous – 100 suspects will never produce 25 buyers. You’d be lucky to get 1 buyer off of just 100 suspects.

But, using these numbers will give me some neat, clean numbers that I can work with as I try to demonstrate why you MUST market your business.

Marketing fills up the top of the funnel. So in our example, you fill the top of the funnel with 100 people and then 25 buyers drop out of the bottom of the funnel.

Now let’s say that you decide not to market again because all 25 people stat sending you referrals. What happens?

Let’s say that each of these people generates about 2 referrals. That would be a pretty engaged customer.

2 referrals per buyer assumes, of course, that every single buyer is so happy with your business that they feel the need to tell people about it. You already know that this doesn’t happen but, again, we’ll go ahead and pretend that it does.

So, great, you think. I now have 50 new buyers, who should become 100 new buyers after they give me their referrals.

Only you don’t have 50 new buyers. You have 50 new people who are starting at the top of your sales funnel!

17 of those people will probably never be anything more than suspects. 11 of them will drop out of the funnel at the prospect phase, and 11 more will drop out of the call phase.

So what does this leave you with? It leaves you with just 11 new customers.

And if you sit there thinking that everything’s fine because the phone seems to be ringing with these awesome referrals then you won’t notice your business is drying up.

But your business will dry up, because now you have 9 people stopping at the suspect phase, 4 people stopping at the prospect phase, and 4 people who drop off at the “call” phase.

Now you have a grand total of four new customers.

Now you might ask why I’m not dividing them evenly. Well, it’s mostly because 50 doesn’t divide evenly by 4 and neither does 22. And more people are almost always going to drop off at the suspect phase than at any other phase.

The “I’ll kind of think about this but will never make a decision” crowd is always the largest.

So what’s the takeaway here?

A referral is not a guaranteed sale.

It’s not a guaranteed sale even if you call the referral. And think about the way that most customers give referrals in the first place.

“Hey, if you ever want to get your siding done, you should call Joe.” (Suspect. This person has maybe never given any thought to their siding before their friend mentioned this in passing).

“You said you wanted to redo your siding last month. Here’s Joe’s number.” (Prospect. This person at least wants their siding done and probably has the money to do it.)

“Hey, do you know a good siding pro?”

“Yeah, call Joe.”

This will create a caller. The referral actually started this conversation.

“Oh my God! Who did your amazing siding? I have to call that person right now.

“Here, call Joe.”

This is the only interaction that will generate an instant sale. As you can guess, this type of interaction doesn’t happen that often.

So not only do people not always buy when someone refers them to you, but they don’t even always call. Some of those referrals forget about the conversation. Sometimes the referral never cared that much in the first place. Some referrals run out of money before they can buy. And some change their mind.

Eventually, your happy customers are moving on to other things in the meantime. They simply forget about giving referrals.

So you have to fill the top of that funnel with everything else that you’re doing to create customers, and you have to make those efforts constantly. And of course, you need way more than 100 people at the top of that funnel. You need every last person you can pour in there.

Bottom line: marketing is NOT optional. Internet marketing is even less optional. And you can’t get all your business from referrals, period.