The Good and the Bad of Referrals
Part 2: The downside of a referral program
Last week we took a look at referral programs and why you might want to start one. It’s a useful marketing tool and has a lot of advantages. To make the right choice, though, you need to think about downsides as well. So this week let’s talk about the pitfalls to look out for.
Referral Programs: What to Watch Out For
There are some really compelling reasons to implement a referral program, and it can really jump-start things for your business. But before you pin all your hopes for growth on referrals, let’s check out the potential downsides:
Narrowing Your Marketing
There’s a risk if you rely too much on referral marketing instead of pursuing other leads. If one of your customers has a bad experience, or you reach a dead end in the referral list, you might find yourself suddenly scrambling for leads.
Risking Your Reputation
Your brand hinges on providing the best service to your clientele. And while normally one bad experience can do limited damage, a referral program means one disgruntled customer could spoil a good chunk of your future business.
Slimmer Margins
A referral program usually involves giving discounts to the referring party and sometimes for the client as well. But too many discounts are just as bad as not having enough work, except your team might be working extra hard to support less profit.
More Pressure
We’ve all had that book or restaurant recommended to us that could never live up to the hype, even if it was really perfectly fine. If your referral sources talk you up too much, the bar might be set impossibly high for you to reach it, which can leave everyone feeling disappointed.
Over-saturation
You might find yourself pigeonholed in a specific industry as you get referred to more companies doing the same thing. A lack of diversity in your client base can be dangerous. Plus, you'll have to be careful to avoid conflicts of interest.
Low-quality Referrals
Sometimes you might be referred to someone who isn’t a great fit for your shop because the referring company wants their commission. Since the whole reason you started the program was for higher-quality leads, this might end up having the opposite effect. And not taking a lead can cause fewer to be shared in the future.
Of course, all this isn’t to say that a referral program is bad. I mean, we just went over all the benefits last time. But there are some things to keep in mind, and if you are aware of the pitfalls you can plan for them in advance. You should carefully consider the incentives to make sure you’re not hamstrung by too much expense for a referral. It might even be a good idea to limit the total number of referrals so they don’t makeup too much of your customer base at a given time.
You should also take some time upfront to think through all the ins and outs of your program, including who will take charge of the logistics and administration of your referrals.
Most importantly, you need to create a formal process to vet those referrals and make sure they are the right fit for you. It can be complex, but I'm confident you can find the right balance that will work for you.
The tl;dr of the discussion here is that while referral programs can offer numerous advantages, they should be one part of your broader marketing and growth strategy, which should include multiple ways to find and retain customers. It takes time to get it right, and that’s why I love watching our Bureau members help one another find success.