The amount of new business generated by referrals can vary significantly from one firm to another. Returns depend on various factors, including the business size, reputation, and practice areas.

Some sectors rely more on word-of-mouth recommendations than others. Smaller firms may depend heavily on referrals. While they are less important to larger firms with extensive marketing budgets.

In this post we discuss how to determine if investing in a referral process is a good idea for your business. In the next installment (Building A Referral Process For A Services Based Business), we will cover how to build a referral process.

The Potential Advantages Of A Referral System

The majority of firms (assuming they do good work) can rely on a few referrals each month without too much effort. To reach the next level requires a process. Implementing that process requires resources including funding, systems and technology and manpower.

The potential benefits of a referral system include:

  • More clients.
  • Reduced servicing/quoting costs.
  • Reduced marketing costs.
  • Faster client acquisition.
  • Improved relationships across the professional services community.
  • Improved client retention.
  • Sustainability.

The first step is to define which potential benefits might apply to your firm, given your unique situation. We review each element in turn below.

More Clients: While a referral system delivers more clients (and that’s nice), the real advantage for many firms is different clients.

Your current clients may not be ideal. Referred clients can be better suited, as they could be more local or easier to service. Referrals are usually further down the path to sales than other prospects, which leads us to our next point.

Reduced servicing/quoting costs: If you prime your referrers with the type of client you want, then some initial screening work is done for you. Past clients who refer generally suggest your services to people who are similar to themselves. This should reduce your quoting costs.

Reduced Marketing costs: Digital marketing is less effective and Ad costs are higher than in 2020. A referral process can be cheaper than digital marketing and social tactics. These costs can be reduced (or eliminated) while events, PR and sponsorships remain.

Some professional services businesses pay introducer fees. As more referrals come in, this cost decreases. Assuming, of course, ‘easy life syndrome’ does not stop your referral process in its tracks.

Let me explain. I recently talked to a professional services firm that obtained all the clients they needed from an introducer. They were busy, so busy in fact that they didn’t have the time (or inclination) to quote past clients or referrals who called in for a quote. High introducer fees were not something they considered. They had used the same introducer and internal processes for years and resisted change.

Faster Client Acquisition: The typical digital and social-based marketing process takes time to deliver results. If properly trained and incentivised, referral partners may have a bank of prospects they can refer immediately. As discussed above, any prospect referred by existing or past clients is further down the path to sale than a cold prospect.

Strengthen relationships: You can secure referrals from past clients and from businesses in similar (better still – complimentary) market sectors. Various professional bodies have rules on referral relationships (see below), but you might be able to develop a mutually beneficial process. This can strengthen your presence across the professional services community.

Client Retention: A major reason past clients refer is it boosts their self-esteem. They have helped someone solve a problem and that raises their social currency. People like to be consistent with what they have already done. They have worked with you, so if someone else they know works with you, it justifies their decision.

Delivering referrals can also make past clients feel involved. It gives them a sense of membership and, therefore, improves retention.

I once watched an elderly couple at a business social event. A professional service firm had invited some of their better existing and past clients.

The couple were clients of one of the senior partners, a relatively high-profile individual. It might seem strange, but being a client almost gave them a sense of pride. It boosted their self-esteem and gave them a sense of belonging.

Sustainability: Assuming you do good work for an ongoing stream of new clients, your pool of potential referrers grows over time. Some past clients will never return, but they are always out there as potential referrers. If you have a process to gently prompt them, it improves your chances of success.

As the number of referrals increases, your business relies less on a few new business generators that can stall (or fail) for various reasons over time.

Incentives & Fees

Referral fees are a thorny issue to address. Referral fees are banned in industries including some legal sectors, debt management and most financial services sectors. Referrals between businesses without direct financial compensation are less of a problem, but rules still apply in some sectors.

Delivering incentives to past or current clients to deliver referrals is easier to address. In my view, don’t do it. A referral process should be built on trust. Delivering incentives compromises that trust. In my experience paying past (or existing) clients for referrals reduces the quality of the referrals received

Given the above, you need to decide if a referral process might work for your firm and what returns you expect within a given timescale. Any resources you allocate are a marketing cost. Hence, you might need to give up on other marketing activities to accommodate the referral process.

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