Loyalty and Growth: Why Every Company Needs to Harness the Power of Referrals

“The only path to profitable growth may lie in a company’s ability to get its loyal customers to become, in effect, its marketing department” – Frederick Reichheld

No matter what kind of business you’re in, no matter what size your company, it turns out that customer referrals are the key to growth. We hear a lot of buzz about customer loyalty, which encompasses all sorts of metrics from retention to satisfaction, but the best indicator of loyalty that drives bottom line results comes from one simple behavior: the willingness for a customer to put their own reputation on the line and recommend your product or service.

It’s common knowledge that small businesses owners and independent professionals, such as freelancers or financial advisors, must place great importance on building a steady pipeline of referrals. (For example, national statistics show that 82% of real estate sales come through an agent’s previous clients and referrals, and referrals usually account for about 50-70% of a local fitness club’s business.)

But what inherently makes a referral so valuable? And are they valuable to large companies on a grand scale?

In the famous study, The One Number You Need to Grow, Frederick Reichheld, Bain and Company, and Satmetrix teamed up to look for a correlation between customer survey responses and real customer behavior such as repeat purchases, or recommendations to friend and peers. Based on 4,000 customers, they ranked a variety of survey questions according to their ability to predict this real life behavior. Across multiple industries, the top ranking question was, “How likely is it that you would recommend Company X to a friend or colleague?” This “likelihood to recommend” question proved to be the first or second correlate to actual customer behavior 80% of the time: if customers reported that they were likely to recommend a particular company to a friend or colleague, then these same customers were also likely to actually repurchase from the company, as well as generate new business by referring the company via word-of mouth.

The Power Behind a Single Number, 2009. http://www.satmetrix.com/pdfs/NetPromoterWPfinal.pdf

The ability of loyal customers to bring in new ones, at no charge to a company, is particularly beneficial as a company grows. Within big corporations, a great deal of resources go to marketing costs and new customer acquisition, all which affects profitability. So again, even for large, mature businesses, there is a strong relationship between customers’ propensity to recommend a company and its financial growth. As the following chart shows in context of the airline industry, companies that maintain a higher Net Promoter score demonstrate higher revenue growth rates. 

The Power Behind a Single Number, 2009. http://www.satmetrix.com/pdfs/NetPromoterWPfinal.pdf

Finally, even when a business invests in a a referral program and offers financial incentives, the program can still pay off because of the unique value of referred customers. In the 2010 study, Referral Programs and Customer Value, market researchers followed the customer referral program of a German bank that paid customers 25 euro for bringing in a new customer. The study found that referred customers were both more profitable and loyal than normal customers, with referred customers having both a higher contribution margin and retention rate.

In short, referrals are like gold and should be an everyday priority. How many of your customers are actively promoting your business? Take the time to get to know and understand your clients, and provide them with easy and enticing ways to become brand ambassadors.

Dana Byerlee is a corporate strategist and relational marketing expert to both Fortune 500s and startups. She has worked with Ferrazzi Greenlight, and is passionate about leveraging new technology to break down barriers and build deeper connections. @LADLynn

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