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By BRADLEY J. SUGARS
The McGraw-Hill Companies, Inc.Copyright © 2006 Bradley J. Sugars
All rights reserved.
Part 1 Understand What a Referral-Based Business Is
Charlie had always been keen on the idea of sitting back and waiting for customers to call and book their cars in for service. And in this respect he is no different than the vast majority of car-servicing businesses. You see, his training is in the field of motor mechanics and not business or marketing.
But as we all know, the world doesn't work like that, but it can, if you put in place certain strategies.
I remember Charlie becoming very excited when I first mentioned this possibility to him. He said that, while this was the ideal business model he dreamed about, he didn't think it was something that could work, even if it were feasible. He also said that he had never heard of a business that operated that way before.
Imagine his surprise when I told him it was not only a realistic possibility; it was also very easy to achieve.
"What you want is a referral-based business, Charlie," I said. "But before you dive in and begin changing the way you do business, you need to have a clear understanding of just what a referral-based business is."
"Why's that, Brad? I mean, I love the sound of a business in which I don't have to do all that marketing stuff—I dream about having customers showing up out of the blue and wanting me to service their cars. This, I know, is the ideal business because I am not really a marketing type. I'm not comfortable doing all that stuff. Give me a set of spanners rather than a computer and telephone any day."
I knew exactly what he meant. I had come across this comment countless times before.
"Charlie, you still need to do a certain amount of marketing. It's just that in this type of business, you go about it in a different way. There may be a lot less marketing to do, but you still do need to market your business. The real difference is that the leads you get are more qualified and your emphasis will be on sourcing customers who will be with you for a long time. This in itself will mean the type of marketing, as well as the amount you do, will be radically different than that done by normal businesses. But before we get into that, let's discuss what a referral-based business actually is.
He agreed, so I pressed on.
"Well, as the name implies, a referral-based business is one that relies largely on referral strategies to generate business.
"A business doesn't have to always have been set up to run on referrals; it can be changed to become a referral-based business at any stage."
So if you, the reader, already have a business and would like to alter the way you go about your business by tapping into your existing customer base more, then read on. It's never too late.
"Before we look now at various referral strategies, let's first consider what a referral strategy is," I continued.
"A referral strategy is simply a way of introducing new customers to your business for a low acquisition cost. Basically, it's a way of getting your existing customers to promote your business for you. It's a way of getting them to introduce their family, friends, and colleagues to your product or service."
"Hang on, Brad," Charlie interjected. "What does an acquisition cost have to do with it? For that matter, what exactly is an acquisition cost?"
Here we'll leave Charlie for the time being as we take a closer look at some of the concepts involved with business in general.
Imagine having to work out how much your business should spend on sales and marketing. Setting a budget this way is as hard as finding a needle in a haystack.
Let me show you how you can have an unlimited marketing budget, and buy—that's right, buy—as many customers as you want. It's like turning on the tap to business profits.
Instead of spending a fixed amount on sales and marketing, when you take on the idea of investing in sales and marketing you've got to understand that every investment has a purchase price. In business most people think that you just invest in the stock you sell—but the same is also true of customers.
In fact, from a marketing point of view, the only thing you've got to buy are new customers. The question really is, how much are you paying for them?
If you put $1000 into advertising and this generates 100 phone calls, then you're paying $10 for each lead. Then if you only sell to one in five of those leads, you're paying $50 (5 × $10) for each sale.
Let's look at another example. A clothing store regularly runs an ad in the local newspaper. It's the only ad they run, so testing and measuring its effectiveness is straightforward. The ad costs them $370 a week and it generates, on average, 25 inquiries. The owner is understandably delighted because he understands that he is paying $14.80 per inquiry. And he knows that he couldn't get them cheaper. And to make this marketing strategy even more attractive, he also knows that closing sales is his strong point. Of the 25 prospects that come in every week, 19 leave with a purchase. His conversion rate is 76 percent. The net result of his marketing campaign is that each new customer costs him $19.47.
Now, here's where this all gets exciting.
Going back to the first example above, imagine that you were a business owner who was about to develop a new marketing plan. Let's say your business was a camera shop. Now you already know that each new customer costs you $50. Let's assume now that you also know, from analyzing your sales records, that each customer spends, on average, $500. This means your average dollar sale is $500. Your records also show that your average profit margin is $100.
What does all this tell you? It tells you that for every $50 you invest you make $100.
The next question you need to ask yourself is this: How many times could you invest that $50?
The answer is as many times as you want, because every time you spent $50, you'd make $100. That would be a good deal, wouldn't it? You bet it would.
It almost sounds too good to be true, doesn't it? But it really is as simple as that! Once you know how much it costs to buy a customer, and as long as you make more per customer than the acquisition cost, you're ready to start reaping the profits.
OK, so let's look some more into this notion of "buying" a customer.
Buying a Customer
What's the difference between buying a customer and what you're doing at present in your business? That's the difference between selling to a customer and buying one.
The difference is huge.
When you switch from selling to new customers to focusing on buying new ones, you'll start to see a whole new and unlimited world of sales and marketing results.
Try to see the entire function of your business as nothing more than a buying exercise—an exercise of buying customers, not selling products or services. Then the only real question you've got to ask is this: can you buy customers for less than you'll profit from them over their lifetime of buying?
As soon as you start to see your business as a total marketing entity and not a production, service, or retail entity, you'll understand why the price you pay for customers is your biggest expense.
But here is something even more powerful. What if you could buy them for less than your profits on your first sale, and what if that first sale came within days of the commencement of your marketing campaign?
It's around this time in the learning cycle that people start getting really excited. And it's only the beginning because when we start getting customers to keep coming back and spending more per visit, that's when real wealth starts accumulating.
There's one more concept I want to explain at this stage. It's the lifetime value of a customer, and something I referred to earlier.
Think about this for a moment. How much are you going to spend in your lifetime on something as simple as toilet paper? Thousands of dollars?
So let me ask you this. How much will the average customers in your business spend with you over their lifetimes?
Let me give you an example. In my dog food business, I knew the average person would spend $800 a year on her dog, and the average dog lives for 10 years. So, assuming a customer only stays with me for half of that time—five years—then she is worth $4000 to me.
Then, what if she refers to me two new customers in the first year. Now the original customer is worth three times $4000—or $12,000.
What if she also then referred another two every year, and every referral sent us another two customers a year? How much is she now worth to me now? Hundreds of thousands?
Now more to the point; how much are your customers worth to you over their lifetimes of buying from you?
You must establish this long-term view of their value firmly in your mind before you can appreciate how important it is to develop a relationship with customers and to ensure everything is done to keep them for as long as possible.
The Difference between a Promotion and a Business
This raises an amazingly powerful business point. What's the difference between a promotion and a business?
Many business owners have just a promotion and go through life thinking they have a business. Confused? Let me explain.
With a promotion, you have one product, one service, and once you've sold it to someone, that's it. You've got to go out and find yourself another customer. So what you have is an ongoing marketing promotion, not a business.
On the other hand, a business is where you buy customers and then sell something or many things to them over and over and over again.
By the way, who ever said you can't sell someone else's products or services and get paid a commission for the referral? This happens all the time and it's very profitable business. Are you missing out?
Strategic alliances with other businesses can be a very powerful way to increase your customer base for a relatively low outlay. And, what's more, by linking up with the right businesses, you can target the exact type of customer who offers the best return on your acquisition cost.
What Makes a Successful Referral Strategy?
At this point it's important to consider just what makes a strategy successful. You see, it's pointless to have a strategy in place if it doesn't contribute to your bottom line.
There are a number of elements which, when combined, make a referral strategy successful. These range from finding the right type of customer to the strategy that best suits your type of business. But there are two things you need to understand above all else:
Your service must be extraordinary. Having good or even great service just won't do. If you want people to refer their friends, then make sure your service is first-rate. How do your customers really feel about doing business with you?
The first thing you need to understand is that customers expect to be satisfied when making contact with any business. They have a need they want satisfied. They've also gone to the trouble of finding out which businesses can satisfy that need; then they've done something about it—they've either phoned or actually traveled to your business. What happens next will determine the lasting impression they have of your business.
They expect satisfaction, but will actually talk to others about your business if they get more than they expect.
So give them something to talk about.
This is the first step to creating a Raving Fan.
Good customer service is proactive. Don't wait until you have a problem in this area before doing something about it—before you think about ways and means of taking care of your customers. How can you give your customers something more than they expect?
Think of different things you could do to get them talking. Brainstorm. Consult your salespeople. Start becoming innovative in this area. Think outside the box.
Make this part of your routine. Get used to constantly searching for new ways of satisfying your customers. Keep your eyes open, watch what other businesses are doing, and keep innovating. You see, customers actually expect you to keep getting better.
So what actually are Raving Fans? Raving Fans are people who can't stop selling for you. They do this, of course, by continually referring people to you. The exciting thing about Raving Fans is they can almost be regarded as part of your team. They want to see you succeed. Of course, they continue buying from you all along.
If you don't give people a good reason, a "what's in it for me?," your strategy will fail. Some of the strategies you'll discover in this book will rely on your offer more heavily than others, but regardless of which ones you choose, always ask yourself this: "Would I refer someone for that reason?"
In the following pages you'll learn how to put a referral strategy into place, which type suits which businesses, the types of customers you want referred to you, and just as importantly, those you would rather not have.
Part 2 Is a Referral-Based Business for You?
"Before deciding which referral strategies to implement first, Charlie, you need to work out whether this is the right overall approach for you and your business," I explained, not wanting to get Charlie's hopes up unnecessarily. I wanted him to give this careful consideration because it does require a certain level of commitment.
"You need to consider whether adopting a referral-based business model is the correct one for your business," I continued. He didn't object, so I pushed on.
"To help you arrive at a considered decision, you need to compare the potential returns you will get if your business were structured along referral lines to that which it is currently getting, based on more traditional lines. You need to take a close look at the marketing implications of the two approaches."
He now had something to say, and I let him.
"So, how do you do that? And what exactly is the difference between them anyway?"
"While a business that is geared predominantly towards referral strategies typically has a low hard-dollar cost, some referral strategies can nevertheless be quite time-consuming."
"A referral approach is ideal for a business that stocks, provides, or sells a higher-priced product or service—just like you do, Charlie," I continued.
"Whereas almost any type of business can benefit from having a referral strategy (or a number of them for that matter), there are some businesses it doesn't suit quite as well. For example, it's probably inappropriate for a fast food outlet, as these businesses tend to have too many customers at any one time anyway. They would gain very little from having more referred."
I paused to let that sink in. Then I went on.
"Having said that, a strategy where your customers could take a card or a flyer and pass it on to their friends could work quite well in that business. You could also have an offer for groups of four or more. In that business you want to use the right low-cost referral strategy."
Charlie was nodding away to himself as I spoke. This was a sure sign it was making sense to him.
"What you really need to do first and foremost is to understand what your actual costs are. Do you know how many leads you get each month? Do you know what your conversion rate is? This means how many leads are converted into customers when they actually do business with you. And what about the average number of transactions each customer makes? Do you know this number? Of course, you should know the average dollar sale price of your merchandise. And what about your margins? Do you know the percentage of each sale that's profit? These are all vital pieces of information that every business owner needs to know. How about you, Charlie? Can you list these figures? If not, read my book Instant Cashflow to find out how you can measure them."
At this point it's time to leave Charlie for a while and turn our attention to your business. This is where you get to do something.
Do you have a reasonable idea of what those numbers are? If so, it's time to fill in the chart on page 14. If not, take some time now to find out what they are (even if it's only a best-guess) so you can fill in the chart.
Let's work through it one step at a time.
This is the total number of potential buyers that you contacted or that contacted you last year. Also known as prospects, or potentials. Most businesspeople confuse responses, or the number of potential buyers, with results. Just because the phone is ringing doesn't mean the cash register is. And what's even more amazing is that very few businesses even know how many leads they get a week, let alone from each and every marketing campaign. It's great to get a lot of leads, but then you've got to remember your conversion rate.
Excerpted from INSTANT REFERRALS by BRADLEY J. SUGARS. Copyright © 2006 by Bradley J. Sugars. Excerpted by permission of The McGraw-Hill Companies, Inc..
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