A plumber who has run his own business for twelve years once sat down and listed his twenty best clients: the ones who pay on time, call him back year after year, trust his advice and rarely haggle. He noticed something he’d never consciously registered before. Seventeen of them had come to him through a recommendation from a friend, neighbour or family member.
His online ads, by contrast, brought in plenty of enquiries, but many were price-shoppers who rang five plumbers and chose the cheapest. Few became regulars.
Most business owners sense that referred customers are different. They seem to arrive with more trust, fit the business better and stay longer. For a long time, that was mostly anecdote. Then a team of researchers decided to measure it properly, using years of data from a large bank.
One Like insight: Your happy customers know which of their friends would suit you better than any advert ever could.
What the bank discovered
In 2011, Philipp Schmitt and Bernd Skiera of Goethe University Frankfurt and Christophe Van den Bulte of the Wharton School published a study in the Journal of Marketing that won an award for its contribution to marketing practice. They tracked roughly 10,000 customers of a leading German bank for almost three years. The bank paid existing customers a €25 reward for each new customer they referred.
The researchers compared referred customers with similar customers, of comparable age and joining at a similar time, who had come in through other routes. They found that referred customers initially generated higher profit margins, although that gap narrowed over time. More lastingly, they were more likely to stay: their rate of leaving the bank was about 18% lower, and that difference persisted. Overall, the average value of a referred customer was at least 16% higher than that of a comparable non-referred customer.
The researchers suggested a simple explanation, which they called better matching. Existing customers know both the business and their friends, so they tend to refer people who will genuinely suit it. As Van den Bulte put it, he knows his friends better than his bank does.
The study involved one bank in one country, and the authors found the benefit varied across customer groups, so they recommended a selective approach. But the findings put numbers on something many small business owners have long suspected.
Making referrals easy
Most small businesses rely on word of mouth but do very little to encourage it. Happy customers are often willing to recommend you; they simply don’t think of it at the right moment, or don’t know quite what to say.
A few habits can make a real difference.
Ask at the right moment. The best time is just after a customer has expressed satisfaction: a thank-you message, a compliment on the work, a glowing review. A simple “If you know anyone else who might need this, we’d love to help them too” is enough.
Make it specific and easy. Give customers something to pass on: a short message they can forward, a card, or a link. Help them describe who you’re best for, so the people they refer are a good fit.
Say thank you. A reward isn’t essential, and in some professions it may not be appropriate, but acknowledgement always is. A personal note, a small gift or a discount on their next visit tells people their recommendation mattered.
Track where customers come from. Ask every new customer how they heard about you, and note referrals. Over time, you’ll see which customers refer most, and whether referred customers really do stay longer in your business.
[Infographic placement] The referral advantage. Two simple bars comparing referred and non-referred bank customers: Customer value: referred at least 16% higher. Rate of leaving: referred about 18% lower. Beneath, a small cycle: Happy customer → asked at the right moment → refers a well-matched friend → friend stays longer. Caption: Schmitt, Skiera and Van den Bulte (2011), roughly 10,000 customers of a German bank.
Building a referral habit
Start with your own data. Look at your best customers, the ones who are profitable, loyal and pleasant to work with, and find out how they first came to you. If, like the plumber, you find that many arrived through recommendations, that’s a strong signal to invest more deliberately in referrals.
Then choose one simple step: perhaps a personal thank-you message after every completed job that gently invites a referral, or a small card customers can pass to a friend. Keep it genuine. People recommend businesses they’re proud to be associated with, so the strongest referral programme is still excellent work and a good experience. As we explored in The Second Mint, small, sincere gestures often do more than elaborate schemes.
A few questions can help:
- How did our best customers first hear about us?
- When do we ask satisfied customers if they know anyone else we could help?
- How easy is it for a customer to recommend us, in words or with something to pass on?
- How do we thank people who refer others?
Which brings us back to the plumber and his list of twenty. His best clients were already telling him where his growth lay. Spending a little less on ads that attract price-shoppers, and a little more effort on thanking and encouraging the people who recommend him, could bring in more of exactly the kind of customer he wants: well-matched, trusting and inclined to stay.
Sources
- Philipp Schmitt, Bernd Skiera and Christophe Van den Bulte, “Referral Programs and Customer Value”, Journal of Marketing 75(1), 2011.
- Knowledge at Wharton, “Turning Social Capital into Economic Capital”, for the better-matching explanation and Van den Bulte’s comments.
