The Difference Between Word of Mouth and Referral Marketing

Whereas ‘word of mouth’ was hot a few years ago, we are now hearing a lot about ‘referral marketing’, particularly with the growth of referral focused networking groups. If you think that the two are similar, you are right, but they are not the same. They both involve customers talking about a brand or product, but referral marketing is measurable and repeatable. It can be controlled, focused and targeted. Word of mouth is more about reaction and spontaneity. We really cannot control it.

As business owners, we are (or should be) all about what we can control, right?

Referral Marketing as an End-to-End Solution
Where businesses might have just dabbled in referral marketing in the past, they are now starting to use it in a more involved and in-depth manner, because it can be tracked. With a fully immersed strategy, referrals become predictable; quality improves as do conversion rates.

Businesses investing in a referral marketing strategy that runs alongside their existing marketing programs are discovering what we always knew to be true; referrals cost less, convert faster and in most cases are more profitable.

There is a growing understanding that to be fully effective, the opportunity for real quality referrals can no longer just sit as a call to action at the bottom of a website, in a networking elevator pitch, or within a customer conversation. It has to be planned for, tracked and given the importance its profitability brings.

The Long-Term Value of a Referred Customer
All the bells and whistles of referral marketing are nice, but does it actually work? I have to answer with a resounding yes and here’s why. Based on a study completed in 2011 (yes, 10 years ago, and yet most businesses still do not effectively generate real referrals) the following statistics were given; referred customers are about 25% more profitable per year for businesses than their non-referred counterparts. They are 18% less likely to churn, and they have a 25% higher lifetime value than non-referred customers, even after factoring in any costs.

And What About that Pesky ROI?
If there is one buzzword we are all sick of hearing, it is ‘ROI’. Marketers will argue tactics for measuring things like social media hits, likes and engagement into the ground. But, how can we track the ROI of referral marketing?

Treating referral marketing as a strategy and a plan means we know exactly what we are spending in both money and time for each quality referral we receive, including the rewards we give to advocates and new customers. In the same way as we know (or should know) the cost of sale in our sales pipeline, we also now know the cost per referral. We can track the lifetime value of a customer through both our traditional sales pipeline and now our referral pipeline.

Using Referral Marketing to Gain Repeat Custom
While certainly referral marketing serves to attract new customers, a well-developed strategy can also bring them back and help them refer on. Offering incentives can drive repeat business and whilst opinions on whether this tactic works consistently are divided, there clearly is a place in business for this. After all, some of the largest businesses in the world use this tactic.

My final thoughts – referral marketing works, but only with a strategy and plan. The days of simply reacting and waiting are over. If you are serious about the potential power contained within a quality driven referral marketing strategy, then take action today.