March 16, 2018 6 min read

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I’ve been an entrepreneur since 1999. I worked in three startups earlier in my career. I cherish the extensive network of diverse entrepreneurs I’ve established. Together, my friends and associates own three local hair salons, an accounting firm with global customers, a trademark and patent law practice, a dentistry office, a city-acclaimed restaurant and a yoga studio. Our website developer, software developer and copyeditor are all entrepreneurs with companies of various sizes. While these are all very different businesses, they have one thing in common: customers. As an entrepreneur, you know that customers are your most precious business asset.

Related: 25 Ways to Ask for a Referral Without Looking Desperate

In a Harvard Business Review article on “The One Number You Need to Grow,” Fred Reichheld wrote that “the value of any one customer does not reside only in what that person buys … what they are prepared to tell others about you can influence your revenues and profits just as much.” As a result, full customer value needs to include a measure of his or her ability to bring in profitable new customers. Your referral rate reflects an output metric that gauges the value of your customers’ referral power or referral value. Per Reichheld, referral rate is positively related to a company’s profit growth, a valuable outcome metric. What’s more important is the impact of referrals on your business. A study by my colleague Matt Heinz found that 60 percent of companies with a referral process experience faster close rates, 59 percent report higher customer lifetime value, and 71 percent report higher conversion from contact to customer.

While we commend anyone using these metrics, the most salient point is that you need a process for seeking out referrals and introductions. I suspect you’re thinking, “We do this already. We ask our customers for referrals all of the time.” That’s great, but not all customers are equal when it comes to referrals.

When you can accurately target customers who are likely to make profitable referrals, you will earn a better return on your marketing investment. When done correctly, referrals are one of the most powerful forms of marketing and among the least expensive. The ROI of a referral is significant because the cost of sales is low and the sales cycle is generally shorter. Researchers at the University of Pennsylvania’s Wharton School of Business found that the time it takes a referred customer to leave a company is 18 percent slower than the average, off-the-street customer.

Related: 4 Mindsets That Earn You More Customer Referrals

How to develop a successful customer referral program

If you haven’t established a referral program, now is the time. Making referrals pay off requires having a systematic process for securing and acting on referrals. A customer referral program entails more than sending out a message to all of your customers asking them for a referral. Here are three essential steps for laying the groundwork for a best-in-class customer referral program.

Step 1: Make sure you can secure referrals.

To earn referrals, existing customers need to believe in your value and have had their own positive experience. Invest in understanding what it takes to create an exceptional customer experience along each interaction point your customer has with your organization. That means from the moment of purchase or reservation, to the moment of service, to the moment of payment, and so on.

For example, one firm we know of has a tendency to send duplicate invoices even after the initial invoice was paid. There is clearly a process issue in this firm. Another firm requires payment by the 10th of the month, yet often its invoices do not arrive until the 10th of the month. These create breakpoints that will negatively affect referral rate.

Related: Getting Referrals When You Can’t (or Don’t Want to) Offer Incentives for Them

Step 2: Be selective.

The old adage “birds of a feather flock together” applies. Some customers are better than others. Know what kind of customer you want, and seek referrals from customers who reflect this criteria. Regular customers who only purchase when you offer a coupon may not be part of your referral program.

Step 3: Make it worth your customers’ time.

Different customers value different offers. Know what each customer segment values. For example, perhaps one segment would like a service dedicated to relaxation, such as a complimentary facial. Another person might prefer the gift of a product from your company.

How to create your best referral process

I know it takes tremendous energy and time to run a business. As the owner of a small firm, I have my hands in everything from new business, marketing and sales, customer work, to the back office. Adding one more task to the never-ending to-do list may seem a bit daunting. However, the task of customer referrals needs to be at the top of list. Use these eight guidelines to help start you on your way to developing your own effective referral program.

Related: Generate 189 Referred Customers in 90 Days or Less

1. Review your list of customers and organize them into segments. Identify those customers who are most valuable to your company.

2. Using your newly established list, formulate a profile of your ideal customer and then identify existing customers who meet the profile.

3. Determine how many of your current customers came through referrals.

4. Select three of your customers who meet the profile that you attained through referrals and ask each of these customers how the referral came about, who gave the referral and what you did to get the referral.

5. Include a question in your customer satisfaction research and post-sale processes to find out how likely people are to refer a customer and what they would want in return, e.g. additional services, a discount on their next purchase, etc.

Related: How to Drive Customer Referrals (When You Aren’t Airbnb, Dropbox or Uber)

6. Develop a program that is designed to encourage customers who fit the ideal profile to be a referral with the same kind of person they are. The program should address various types of referrals and acknowledge these types differently. For example, what you do for someone willing to take a call will most likely be different from what you do for someone willing to send a note to make an introduction. This will be different from how you acknowledge someone willing to make a call for you, compared to someone who gives you three names and phone numbers to contact. Have a plan in place for each type of referral.

7. Track which new customers come from which referral type and from which customers.

8. Keep in frequent contact with people who provide referrals and keep these people informed of any new business as a result of their efforts.