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Recommendation and referral: The difference and why you should care

We all get business from referrals, don’t we? Somebody tells a friend what a great job we did for them, the friend calls us and we have a new client.

That’s a referral, right?

We’ll let’s just say that these types of referral are informal recommendations, and think  what could happen if we incentivised referrals with and used some established marketing techniques to encourage happy clients to recommend us more freely.

What’s the difference?

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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