How effective is word of mouth marketing for small businesses? If performed consistently, I suggest it is the most effective marketing a small business can employ.
It may not deliver all the required new prospects each month, but it should be part of the mix and here’s why. If you are good at what you do, I suggest you could expect 1 in 3 past customers to refer on average. That assumes you use a word of mouth marketing process rather than some ad hoc approach
If you run an established small business (for example, a small builder), all you could need is a new project (customer) every other month. Word of mouth could be your only source of new customers. You then live or die based on your business reputation.
You will occasionally come across someone who will refer you to many prospects over an extended period of time. Others will never refer and in reality, averages are meaningless.
Some people will refer you to others even though they have never worked with you. They will do this because you are visible and credible. The dynamics of why people refer are complicated. To gain an understanding of why read The Tipping Point by Malcolm Gladwell.
If we assume you need ten or more new customers a month then, unless you have an established existing customer base securing them all by word of mouth marketing will be difficult. You will need an existing customer base of several hundred to have any chance.
However, dismissing word of mouth as a source of new enquiries is a mistake. The reason is simple. The chances of converting a referral to a sale are 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 small 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 your leads to be much lower. Remember that marketing activity first delivers enquiries. Those enquiries are then converted to leads. That requires some effort and there will be dropout between each step.
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 small businesses cannot survive on word of mouth marketing alone, but it is a mistake to exclude them from the marketing process. It is important to understand why people refer and to build a formal word of mouth marketing process. It could be your most cost-effective marketing activity.