Referral marketing is a cost-effective form of marketing and can produce significant sales results. It?s used by small businesses and large both intentionally and as something that just happens.

As soon as people started gathering into groups word-of-mouth became a powerful tool. From Aristotle in the fourth century BC to today, word-of-mouth has and its effect on consumers has been discussed, studied, researched and written about. With the advent of social media today word-of-mouth becomes more powerful.

At the root of word-of-mouth is a need. It?s a need to talk about something interesting or a need to find something of particular interest. Either the sender or receiver of the information is motivated to share.

Have you ever seen a great movie and couldn?t wait to share your feelings with someone else? Conversely, have you wanted to find a movie to see and asked a friend about it?

People have a need to share information, experiences and emotions. It helps people feel good about themselves to share something valuable with others.

Word-of-mouth is generally passive. You don?t have to take a specific action for it to occur. After seeing a movie people will talk naturally about how good or bad it was.

Referrals are a stimulated form of word-of-mouth. A referral requires something active to happen. At its simplest, a referral is one person, through word-of-mouth, recommending something to another person. Someone intentionally gives information to meet a need or want or someone asked to receive the information. It typically doesn?t occur in the natural, easy flowing manner of word-of-mouth.

In business, a customer recommends a product or service to a relative, friend or associate. Referrals happen in every aspect of business from partners and employees to vendors and customers.

Referrals are driven by reciprocity. Reciprocity says an act of kindness shall be repaid. We feel an obligation to return a favor when someone does a favor for us. It?s an inborn human characteristic. ?The norm of reciprocation?the rule that obliges us to repay others for what we have received from them?is one of the strongest and most pervasive social forces in all human cultures. (Gouldner 1960).

For a referral network, social norms like reciprocity are essential to the continuation of the network. When someone gives a member a referral the member is obligated to return the referral. A group makes the reciprocity easier by handling the obligation for the referral through other members.

Bob gives Tim a referral and Tim is obligated. However, another member can give Bob a referral and satisfy him. Tim is still obligated to provide a referral but it doesn?t specifically have to be given to Bob.

Referral Marketing Is Hard to Control

Don?t rely on referral marketing to drive your sales unless you have a very close network of reliable and loyal friends and associates. For the most part, referral marketing isn?t controllable.

You can ask someone for a referral but they aren?t obligated to provide it. Even in referral groups where you pay to join there is no guarantee you are going to get good referrals.

Referrals should be a part of your marketing strategy but not the whole marketing strategy.

Recommendations from personal acquaintances was cited as the most trusted form of advertisement by U.S. Internet consumers (76%)
Nielsen: State of the Media: Advertising Spend and Effectiveness June, 2011

92% of consumers trust recommendations from people they know.
Nielsen Global Trust in Advertising Survey, April 2012

The average value of a referred customer is at least 16% higher than that of a non-referred customer with similar demographics and time of acquisition.
Journal of Marketing, January 2011

90% or more who are dissatisfied with the service they receive will not buy again or come back. Worse still, each of those unhappy customers will tell his or her story to at least 9 other people, and 13% of those unhappy former customers will tell their stories to more than 20 people.
Desatnick, R.L. (1987) Managing to Keep the Customer

59% fewer people now rely on advertisements to buy products and services
Journal of Marketing, 2009