Common sales wisdom tells us referrals are better for business than the long, uphill climb of filling the sales funnel any other way. Regardless which source you prefer to cite, all seem to agree that your closing ratio is guaranteed to be higher with referrals. Non-referral lead sources tend to result in closing ratios of 10 to 30 percent. Meanwhile, referral-based sales usually close at 50 to 70 percent or higher. How could that hurt your business?
For about half of my business career, we relied heavily or entirely on referral business to grow, and we were extremely successful. We had a solid reputation for our creativity, our value, our expertise and our high level of proactive service. As a result, we closed over 80% of our referral business and had the luxury of refusing to participate in any bid situation. The result was noticeable growth that felt easy and accessible. What I realize now is that we actually limited our growth far below what it could have been as a result of our reliance on referrals. Here is where we went wrong:
The Tail Wagging The Dog:
If you provide me a referral for my business, I will happily pursue it. Referrals are worth gold, and this article will in no way negate that. However, I might not work with the person or company you are referring my way. Depending on how well they align with my offerings, I may politely decline, or send them on to a better fit. The reason is obvious: not every referral is a good piece of business.
Although this may be obvious, I cannot count the number of referral-based companies I have known who have let referral business define what is a good fit for them.
“Here’s a piece of government business. You handle government work, right?” asks the referring Samaritan. “Sure! We do now!” you reply enthusiastically, with a wink.
Businesses embrace referrals often without stopping to consider that the unique nature of the referral work and the infrastructure required for fulfilling it might dilute their core offering and internal resources.
The result is a mishmash of verticals and offerings that are loosely related but cobbled together based on what a client or partner thought was a good fit, not what actually is a good fit.
Additionally, there can be a deep fear that the business offering is not what customers actually want. This creates the mindset that it is better to grab the low hanging fruit than to actually focus core competencies.
Lack of Strategic Direction:
Referrals make an excellent component of an overall sales effort. They do not, however, constitute a complete sales effort. When a sales team is asking for referrals every single day at the same time that they are having conversations with non-referral potential customers, then an enormous shift can occur towards radical growth.
Referrals are also a powerful way to kick-start a business initially with little or no funding. These referrals become, de facto, the investors who bring the company to life. But when there is a steady stream (or at least a reliable trickle) of referral business coming in the door, it is easy to be distracted from working on the business by the very real need to work in the business and service the work you have in hand.
The result is the referral-based business is so consumed with work that it never stops long enough to strategically plan how it will grow. Exploration of targeted customers, areas for expansion, revenue, profit, people, and processes pales beside current workload. Some referral-based businesses will occasionally plan strategically, but consistent, committed dedication to nurturing an ongoing growth strategy is limited.
The result is a business that is volatile and hits a certain limiting growth ceiling. Until and unless the owners (not employees) stop focusing on the referral business and shift their attention to strategic growth instead, they will hit a limit to their growth.
No Fire in the Belly:
Referral growth is reassuring. It makes a business feel valuable and self-sufficient. When a business reaches this crossroads, risking investing the profits from a solid book of closed business into other, harder to close, forms of lead generation can seem just too dicey.
Additionally, the passivity of simply receiving and executing referral business can provide the illusion of passion-fueled momentum. It is not. You might be excited to receive and close an “easy” piece of business, but that’s far from targeting a portfolio of customers in your sweet spot. When you reach out and present your offerings to exactly those who need what you have to offer – at the risk of being rejected – you are doing so out of a powerful belief in yourself and the value you provide.
As a result, the entrepreneurial muscle that is built on stretching outside the zone of comfort begins to atrophy. A referral-based business becomes soft and self-satisfied too easily. It soon gets stuck.
Unclear Messaging
Building a business on referrals alone stunts an organization’s ability to speak powerfully about itself to new clients. There is little incentive to build marketing, email strategies, lists, SEO, advertising, or even networking pitches and hooks. Why should we? We have all the business we need from referrals!
I meet these companies when it begins to dawn on them that they have hit the inevitable ceiling. They have gone just about as far as they can go on referrals alone, and they aren’t sure what to say to cold call customers. They haven’t done the strategic work to understand precisely who their customers are, what keeps these customers up at night, and how to position their offerings as the single best solution.
Referrals are a great way to begin a business and complete a sales strategy. They are not a solid foundation for unlimited growth. When you understand both the real value referrals provide, as well as the potential pitfalls they can create, you are well on your way to leveraging referrals effectively without being seduced by their siren song.