5 Reasons Why Relying On Referrals is Risky Business

Referrals are a double-edged sword. If you’re a business owner, chances are that you have, at some point, relied on referrals for generating new business. And that is absolutely fine. In fact, it’s great.

It means that you have delighted a customer and earned their trust so they recommended you to their friends or colleagues. It could also mean that you have friends that care about your success and are sending business your way at every possible opportunity.

Word of mouth has powerful outcomes, but it’s unpredictable. So, while you should encourage and incentivize friends, family, and strangers to spread the word about your business, you shouldn’t solely rely on referrals.

In this day and age, there are no excuses for relying on referrals only. There are far more reliable client acquisition methods like Paid Ads, Search Engine Optimization, Social Media, and Email Marketing.

You don’t have to try each and every one of these methods, but you should test at least a few of them and figure out what works best for your business. It’s usually a combination of two or three channels complementing each other and delivering an optimal result.

Here’s why depending just on referrals is risky business:

Poor Targeting

As a business owner you want to attract clients that are ideal for your business. You don’t want the time wasters; you want the true believers.

Of course, there’s the process of building relationships and turning strangers into customers, and customers into promoters. but just like dating, being selective works in your favor.

The problem with relying on referrals is that you don’t have control over your targeting. It’s in other people’s hands. And these people don’t necessarily understand who your ideal client is. So, there’s a high chance that whoever they send your way doesn’t match your ideal client profile.

Meanwhile, with Paid Ads for example, you can specify exactly who you want to put your ads in front and where you want them to see these ads. In this case, the leads you generate for your business are highly targeted and much more likely to convert into long-term customers.

Lack of Control

The biggest problem with referrals is the fact that you have no control over the process. Sure, you can have some influence over it by having a solid referral program in place, but even then, you won’t have enough control.

Having control over the process means being able to dismantle it into individual elements that you can test, modify, measure, and optimize. You need a framework that is repeatable and scalable.

For example, if you’re writing a blog about your business, you have full control of what’s being said. You can control the messaging and the positioning to make it resonate with your target audience. More importantly, you can choose who to share this blog post with, test the response, and measure the impact using data and analytics. You can then optimize it and test the effectiveness of the changes you’ve made.

Meanwhile, if John, your high school buddy is trying to recommend your service to someone, he might say: Oh, I know this guy who I went to school with, he used to get all the chicks, but anyway… he’s really good at Marketing and can help you develop your website. See, the problem is that you’re not even a website developer, you’re a marketer who optimizes websites to rank higher on search engines, but John is a little mixed up.

Okay, maybe you’re not a marketer and you don’t know anyone called John, but you get the point. While it’s an exaggerated example, this stuff actually happens and it’s a waste of everyone’s time, including John.

High Unpredictability

Generating new business through referrals feels great. It’s like acquiring a new client at no cost. But it’s not consistent. And if it’s not consistent, then it’s neither reliable nor scalable.

If you’re lucky, it happens every now and then. But do you really want to leave your business in the slippery hands of luck? You can’t sit around and wait for things to happen. You need an actionable plan that is reliable and predictable.

I’m sure we can agree that the “build it and they’ll come” mindset is a recipe for failure. It’s pretty much what you’re doing when you rely on referrals for business growth. Unless of course, it’s only part of a more holistic strategy.

You might be thinking, oh but I know a lot of companies who managed to scale by relying on referrals. Yes, sure. Me too, I know that having a great referrals program helped companies like Dropbox and Morning Brew become what they are today.

However, these companies didn’t rely on referrals only. They have a comprehensive digital marketing strategy that helps generate a large volume of referrals at a high conversion rate and acquire customers through multiple channels.

Opportunity Cost

While you’re waiting for your next referral, your prospective customers are searching online for products and services similar to yours. It’s not an assumption or a best guess, it’s a fact.

According to Hootsuite, 81% of people between the age of 16 and 64 searched online to buy a product or service in 2020. So, what does this mean for your business? It means if you’re not investing in digital marketing, you’re missing out on massive growth opportunities.

The irony is that by relying on referrals only, you’ll end up missing out on even more referrals. Let me explain. The more clients you have, the more likely you are to get referrals. So, if you want to increase the number of referrals, one thing you can do is increase the number of your clients.

It’s a flywheel. More clients lead to more referrals, and more referrals lead to more clients. This means that if you don’t have a reliable and scalable client acquisition strategy in place, you’re missing out on more referrals. Not only that, the quality of referrals that come from your ideal clients is usually much higher than those random referrals you get from your friends. In other words, you’re missing out on quantity and quality.

Isolation Is Risky

Referrals don’t work well in isolation. Don’t get me wrong, I love referrals. I just don’t think they work well without being part of a bigger marketing strategy. Here’s why:

Let’s say one of your delighted clients recommends you to one of their friends. What’s the first thing they’re going to do before deciding whether to get in touch with you or not? You guessed it; they’re going to look you up online.

If you have a website, good reviews, testimonials etc. they’re far more likely to get excited about working with you. However, if you don’t have an established online presence, they will be hesitant.

This leads to poor conversion rates. In other words, your clients are referring you to other people, but you’re failing at capturing those referrals. Your client’s word to another prospect is not always enough to close the deal. There are other elements that need to be in place to make the best out of these referrals.

Final Words

The aim of this article is not to discourage you from getting referrals, but to encourage you to have a predictable growth strategy in place, rather than relying on referrals only.

Referrals and word of mouth marketing are important and shouldn’t be ignored. What people say about your brand has much more impact than what you say about it. However, this doesn’t mean you leave your marketing for chance. You can influence the process, and you should.

Client acquisition is your own responsibility, you must pay close attention to the changing needs of the market and develop a sales and marketing program that keeps your pipeline full of new leads and business opportunities.

An effective client acquisition strategy is one that’s highly targeted, flexible, and measurable. It’s a framework that you have high levels of control over its moving parts and you can test them individually to optimize for better results.

If you need help developing and implementing a tailored growth strategy for your business, please reach out by sending me a message on this page.

You can also get in touch on LinkedIn or Twitter.

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Omara Khaddaj

Omara is a Marketing Consultant based in Melbourne, Australia. He has a master's degree in Entrepreneurship & Innovation. Outside of work, he enjoys playing guitar, lifting weights, and reading.

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