Recommendation vs referral: What’s the difference?

by | May 9, 2020 | Strategy

It’s always great to get business from recommendations, knowing that you’ve done such a good job somebody has told a friend to get in touch.

But leads generated by referrals are even better. You can measure and track them, for starters. You can also incentivise them using various marketing techniques to encourage happy clients to recommend you more freely.

What’s the difference between a recommendation and a referral?

Recommendations are informal suggestions from friends, family and, say, people you meet at the pub. In marketing, referrals mean something specific: when products or suppliers are endorsed through a formal scheme, to the mutual benefit of all parties involved.

So recommendations are actually a kind of referral. But for sales and marketing purposes we’re talking about a formal referrals scheme.

Usually there will be an offer or incentive for the referrer and the new client they introduce. As a business you will be actively asking for the referral.

Referrals schemes are more likely to use your firm’s marketing and communications channels, and the success of the scheme will be measured.

Why should you bother?

In a study titled Referral Programs and Customer Value researchers in marketing at Wharton University, Pennsylvania, and Goethe University in Frankfurt, Germany, took a forensic look at the value of customers acquired by a European bank.

The research, conducted over 33 months, unearthed some compelling numbers in favour of using referrals.

Here are some of the key takeaways:

  • Referred customers generated higher margins for the first 1,000 days.
  • Referred customers were about 18% more likely to stay with the bank than other customers.
  • The difference in margin combined with the difference in customer retention amounted to a disparity in long-term customer value of 16% to 25%.

Why were referred clients more valuable?

The research team put the differences down to what they called “superior match phenomenon”. It works like this…

  • Your customers know their friends better than you do.
  • They know you better than their friends do.
  • They have a better idea of which friends will be a good match for your firm, and vice versa.

So, now that we know that referred clients tend to be both more valuable and more loyal than those attracted by other means, why wouldn’t we put some of our marketing efforts into attracting more of them?


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Referrals aren’t a magic bullet

While referrals can generate solid leads, and can be a good source of revenue, it’s important to remember that they are rarely enough on their own.

In our experience working with accountancy firms, except in very rare cases, referrals alone don’t generate sufficient business to to compensate for client churn.

Even with a solid stream of reccomendations and referrals, prospective customers will often still need some form of validation before converting into sales. In practice, that means they’ll Google you.

They’ll look at your team on LinkedIn, your online reviews and, of course, they’ll look at your website.

That’s why, these days, you need an up-to-date conversion-ready website to use as a sales tool, as well as focused digital marketing activity to drive organic conversions.

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