Referral Marketing Equation for Success

By Daryl Logullo | March 31, 2009 | Popularity: 53% | 3,758 views

I’m heading to Augusta for this year’s Masters Tournament (my second).  Before I split, I’ve posted some referral marketing diagrams I’d like for you to carefully consider.

They’ll quickly tell you whether you will enjoy great success with your referral marketing efforts or… get the same ol’ results in your business that you’ve been experiencing.

The first diagram below is based on the  “80/20 Rule,” called the Pareto Principle.

Basically that universal Rule states that 80 percent of your effects (ex: results in your business) come from 20 percent of your causes (ex: your efforts).

Or, said another way: 80 percent of your income comes from your 20 percent of your clients… or… 80 percent of your success comes from 20 percent of your marketing activities… and, so on.

In my 20 years of experience, the same can be said of building your business by referrals and word-of-mouth.

But let’s relate this to something else, shall we?

THE DOLLARS YOU SPEND

For example, the typical person running their own marketing budget is likely gonna spend 80 percent of their dollars on traditional marketing (advertising, branding, online marketing, public relations, direct mail, etc.)

The remaining 20%, they toss at referral marketing (if they’re lucky).

Note: I’m being over generous when I say 20 percent is spent on referral marketing. Most professionals spend way less than 20 percent of their marketing bucks on referral marketing (if they spend any money at all.)

So visually speaking, our marketing-spend looks like this:

 

You probably can relate to that diagram in your business, agreed?

Lessons: a) Start viewing your referral marketing activities (the red area above) as a legitimate marketing line item. b) Make a commitment to expand the red area. c) Begin allocating more of your marketing budget towards referral marketing activities.

But before you do that, let’s flip the diagram upside down to see if this makes most business sense for you now, shall we? Let’s re-focus on the green area:

So what just happened here?

First of all, you’ve re-allocated 80 percent of every dollar you spend going foward on the highest possible payback activity, giving you the fastest return on your investment of cash and time: Spending your dollars on your existing clients and your colleagues.

This creates freedom and peace of mind in your life. And it makes things in your business much more enjoyable for you.

I won’t go in to all the reasons for this. I’m sure you understand it already (established credibility, known relationships, proven work, minimal risk, etc.)

Secondly, you can reasonably project an average ROI scenario. And one that is larger, too.

Right now, you pretty much know that for each client or colleague you engage, you’ll have a certain closing ratio and earned-revenue scenario. Maybe it’s 30-50 percent, let’s say. 

You can say with certainty that those ROIs are a much higher percentage because you are marketing to established relationships rather than complete strangers.

Said another way: Would you rather enjoy a 3% success rate on your client acquisition efforts (direct mail/newspaper ads), or a 30, 50, 70, or 90 percent success rate (introductions and referrals).

But something else even more powerful is going on here.

Let’s look at the diagram again now:

What if you took 80 percent of those new referral marketing dollars you are using for acquisition, and split them equally (for arguments sake) into two separate line items (buckets):

Spend 40 percent of your dollars on your current clients; spend 40 percent on your Centers of Influences (COIs) & Strategic Alliances (SAs)?

What could that yield you in terms of ROI? 

Have you ever thought seriously about this?

Have you ever run some numbers that would tell you how much more money you’d be making?

Here’s a free tool that can do just that for you: The Referral Multiplier Tool.

I’ll bet the ROI is a lot more than throwing away 80 percent of your money on the same old traditional marketing and advertising that you’ve been doing.

“So what types of referral marketing activities should I do with 80 percent of my budget reallocated to referral marketing activities?”

That’s a topic for another time. But I will say that you’re only limited by your imagination and some basic organization skills.

Here’s just a few that I threw together quickly:

40% Referral Spend – Clients

  1. Appreciation Dinners
  2. Private Wine-Tasting Event
  3. Museum Luncheon Tours
  4. Orchestra Recital
  5. Appreciation Drawing Twice Yearly – Caribbean Cruises, Broadway Tickets, etc.
  6. Spa Day/Tennis Day/Golf Pro Day

40% Referral Spend – Centers of Influence (COI) & SAs (Strategic Alliances)

  1. Incentives for Referrals (referral rewards)
  2. Spa Day/Tennis Day/Golf Pro Day
  3. Joint Event – Speaking, Radio, Television
  4. Chef’s Table and Joint Networking Mixer
  5. Tour of Facilities and Catered Dinner

Obviously such a radical shift in your marketing spend–from 80 percent of your budget going toward traditional marketing/advertising… cut down to 20 percent–is a serious move. And you have to balance the impact on your cash-flow and operations. I respect that.

You might even have to take a step back for the next 3 to 6 months.

But serious times often call for serious measures. And at a minimum, it will cause you to consider some serious thinking… especially if you want to get to the next level in your business.

As they say, keep doing what you’ve always done, and you’ll always get the same results.

So start thinking 40/40/20, not 80/20!

Again, it might not be something you are able to do immediately; but over the course of the next 6 to 12 to 18 months, it may be quite doable to move yourself and your business in that direction.

The choice is yours.

I say go for it.

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