Why referrals are the best customer acquisition channel

Last week I was giving a keynote speech at a tech conference in San Jose. I always enjoy public speaking — at least after the first two minutes that I am on the podium. One of the many things that I take away from these experiences is how smart everyone else in the room is. I got to meet some of the IT professionals that were in the audience and listen to their trials and tribulations about running their businesses. One of them shared a graphic with the audience that I thought was important.

pestechIt was a pie chart shown here with the cost per customer acquisition for various methods: Yellow Pages advertising, online, and word of mouth referrals from existing customers. It also showed the proportion of customers who came in through each channel. Not surprisingly, the Yellow Pages had the highest acquisition cost and delivered the fewest actual customers, and nearly half of his business was coming from online.

This is a small retail business, and what is important is that my friend actually collected this data. Too often many business owners don’t step back and do this kind of analysis — no matter what their size and market segment. Either they don’t keep track of the numbers, or don’t bother to ask their customers how they came to knock on their door. They have no way to effectively examine whether their ad programs are actually bringing in customers, or are just expensive window dressing or ego satisfaction.

What the pie chart immediately shows is why Yellow Pages advertising is going the way of the dodo: at least for this business, it costs the most and delivers the fewest customers. The best option is to get referrals, which is something that should be obvious but oftentimes isn’t.

Speaking of ego gratification, this reminds me when I travel how I always spot the tech companies that spend a lot of money with backlit displays in the airport concourses, usually featuring box shots of their products or head shots of their CEOs. Do you really think by putting a picture of your firewall or some other 19 inch hardware in an airport is going to generate business? Unlikely. Another take is what I saw when I was changing planes in the Phoenix airport last week: one tech vendor had hung banners across the concourses and set up special “charging stations” around.

My IT contact also mentioned about his referral fee policy that I found interesting. He offers a $20 rebate to any of his customers that refer business. The trouble he has is actually paying out this bounty. It isn’t for lack of trying, or because he is cheap. It turns out his customers are so happy doing business with him that they don’t want to take his money: they are just glad to spread the joy and to have their friends benefit from being a customer too. How often do you find that situation?

Certainly, providing great customer service is critical. No amount of data analysis is going to make up for poor service (just ask your local cable company — on second thought, you probably are going to spend too long on hold so you probably won’t be able to ask them). But if you do have a great service record, having a customer for life is priceless.
This makes me think about my auto mechanic that I have been using for many years. A few years ago, I took my car into his shop for a repair. He called me an hour or so later, which is usually a sign that he has found the source of my problem and wants me to approve spending a bunch of money to fix it. Au contraire. This time, he told me that my car was fixed and it took him so little time that he didn’t feel good about charing me anything for what he did. It was at that point that I became his customer for life. The few dollars that he might have received for my repair have been eclipsed by the many more times that I have brought my car in for subsequent service visits. And of course I have told my friends and neighbors about my mechanic so he has generated more business from that single repair. Referrals can really deliver.


4 thoughts on “Why referrals are the best customer acquisition channel

  1. I’ve been successful in my own PR business with an un-scientific 95% of all customers coming from a direct referral or a direct, previous working relationship. Crazy question – could there be a sales strategy/tool – in which a company can grow from startup to SMB to mid-sized and even become a Fortune 500 company some day if their strategy and tool only works with referrals – thereby eliminating any cold leads – curiously yours.

  2. Your “referrals” blog is right on target, and really illustrates the value of direct sales support as opposed to “branding” (CEO photos, billboards, etc.)


    FYI, you may remember me when I did PR for WebTrends. Your work back in the 1990s was sharp and insightful, and I’ve enjoyed your work ever since.

  3. Kathy Sierra writes in Badass about WOFO being better than WOM. That is Word OF Obvious as in someone uses an awesome, say, video editor and it is obvious so people know without being told by the person who created the video.
    Cheers – Rick

  4. Right on, David – and I’m sure you’re still giving referrals for your mechanic (as I am for mine, for a similar reason).

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s