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Customer-Referral Marketing Programs Help Boost Sales at Little Cost

Customer-referral marketing programs can help boost sales at little cost


Recently, I spoke with a manager at a brand-name retailer with more than 12,000 U.S. stores. I asked him about their customer-referral marketing program and to my astonishment he replied, "We don't have one." The conversation could have stopped there, but he proceeded to tell me about a local used-car dealer's customer-referral program. That program was very simple: The dealer makes a one-month car loan payment for any customer who makes a referral that results in a sale.

On one hand, a brand-name company with a huge untapped opportunity; on the other, a used-car dealer who knows the value of customer referrals. What a contrast.

The importance of selling new memberships through customer referrals is well understood by savvy health club owners and managers. They know the acquisition cost of referred business is less than half the cost of acquiring new customers from other sources. They also know lifetime revenues are higher because referred customers are more loyal and their retention rates excellent. The challenge is to determine how to continuously increase the percentage of new membership sales from referrals at favorable acquisition costs.

Many businesses build their referral marketing strategy around teaching their sales force the techniques of how to ask for referrals. The importance of training your sales and service personnel cannot be overemphasized. However, you can dramatically improve the effectiveness of your referral marketing program by expanding referral sales training into a broader referral system. One such system could be called AIM (Ask, Incentive, Measure):

ASK Customer-referral marketing programs start with training on how to approach current customers for referrals. The sales organization and all personnel that have frequent customer contact must be trained as a team on referral prospecting. Communications plans focused on how to ask satisfied customers for referrals should address not just what to ask, but also when.

Many businesses recognize the importance of e-commerce, but are reluctant to embrace it fully in fear of upsetting their current patrons with unwanted e-mails and other privacy concerns. These issues must be addressed, but they should not prevent you from utilizing this channel of communication to seek referrals.

INCENTIVE Financial and membership upgrade incentives get referral results. However, incentive payments and upgrades are business expenses that require rigorous cost-benefit analysis. When the costs of referrals are viewed as advertising expenses (it is generally true that customer-referral programs are best approached as an advertising campaign), a stronger emphasis must be placed on measuring their effectiveness.

Selecting the incentive amount and deciding when to pay it to both referring and newly referred customers is one of the most important decisions in developing your referral program. It is recommended that businesses start slowly by initially limiting incentives to only referring customers. Giving them one free month off their membership fee is a good starting point. Some incentive programs delay the billing credit until the new customer has been a member for a specified period of time. It is suggested, though, that the referring member's invoice be credited the next billing cycle after the new member enrolls. If this is the method chosen, it is important to clearly tell the referring member that a charge back will be made if the new member does not maintain his or her membership for a predetermined period of time (for example, 120 days).

After your program is operational for a few months, you can begin to make modifications. When changes are made, the results should be measured and tested to determine their impact. Also, like advertising promotions, referral incentives need to be routinely refreshed.

Incentives should be designed for members who make referrals, referred members, the sales force, service departments with frequent customer contact and sales management. Incentive amounts should be benchmarked to the average cost of acquiring new first-time customers from all other sources. It is recommended that incentives be targeted at between 10 and 40 percent of the average cost for acquiring new customers through other means.

MEASUREMENT The old adage, "If you don't measure it, you cannot manage it," is particularly true for referral sales programs. Too often, the most fundamental question - whether referral sales are increasing or decreasing - remains unanswered. There are two key questions that your referral measurement system must answer. First, how does your acquisition cost for new first-time customers compare to your cost of acquiring customers from advertising and other sources? (It should be managed to be less than 40 percent of traditional acquisition costs.) Second, are your referral sales percentages consistently increasing each quarter? Goals must be set, along with strategies to achieve them.

There are two ways to measure customer-referral results. First, you can set up measurement systems that identify the income and cost for each referral - something that should be within the reach of most health clubs. That is obviously the most accurate, but for some businesses tracking each referral isn't practical or cost-effective. An alternative is to periodically sample all sources of new business to determine their source. Either tracking method will provide the necessary information for you to manage your referral sales programs.

The best argument for beefing up referrals is that their value is even greater than whatever price tag can be put on them. Quite simply, word-of-mouth advertising - by putting your message in the mouth of someone who has the trust of friends, family and co-workers - is more powerful than any ad campaign you could ever dream up for your business. As a recent story in the Chicago Tribune ("Word of Mouth Loud with Credibility") noted, referrals are "especially important to small independent businesses that can't afford to spend big dollars advertising on radio or television or in the city's major newspapers." Putting greater effort into soliciting positive word of mouth is literally like putting money into your pocket.

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