How effective is word of mouth marketing for small businesses? If performed correctly and consistently we suggest it is the most effective marketing a small business can employ. It may not deliver all the new prospects a business needs each month but it should certainly be part of the mix and here’s why.

If you are good at what you do and use a word of mouth marketing process rather than some ad hoc approach I suggest you could expect 1 in 3 past customers to refer on average. If you run an established business (for example a small builder) all you may need is a new project (customer) every other month and word of mouth could be your only source of new business. You effectively live or die on your business reputation.

You will occasionally come across someone who will refer many prospects over an extended period of time, Others will never refer and in reality, averages are meaningless. Some people will refer you even though they have never done any business with you. They will do this just because you are visible and credible. The dynamics of why people refer can be complicated. To gain an understanding of why read The Tipping Point by Malcolm Gladwell.

If we assume you need 10 or more new customers a month then, unless you have an established existing customer base of at least low hundreds securing them all by word of mouth marketing will be difficult. However, dismissing word of mouth as a source of new business is a mistake. 

The reason is simple. The chances of converting a referral to a sale is much higher than converting a marketing generated lead. Those who come to your business after a recommendation by a friend, colleague or family are already partly sold on your business. It is not unreasonable to expect a 60% plus conversion rate. Perhaps not immediately, but over the medium term. 

You can expect the conversion rate on marketing generated leads to be much lower. Remember that marketing activity first delivers enquiries. Those enquiries then need to be converted to leads.That requires some effort (depending on your specific business) and there will be some dropout between the two steps.

What have you paid out to secure referrals? Even if you run a formal word of mouth marketing process, not a lot I suggest. Compare that to what you pay (marketing costs) to generate an enquiry?

As outlined above many businesses cannot survive on word of mouth marketing alone but it is a mistake to exclude them from the lead generation process. It is important to understand why people refer and to build a formal word of mouth marketing process. It will probably be your most cost effective marketing activity.