The Power of One Customer

In a Harvard Business Review article on "The One Number You Need to Grow," Fred Reichheld wrote that, "the value of any one customer does not reside only in what that person buys ... what they are prepared to tell others about you can influence your revenues and profits just as much."

As a result, full customer value needs to include a measure of his or her ability to bring in profitable new customers. Your referral rate reflects an output metric that gauges the value of your customers' referral power or referral value.

Per Reichheld, referral rate is positively related to a company's profit growth, a valuable outcome metric. What's more important is the impact of referrals on your business.

A study by Matt Heinz found that 60 percent of companies with a referral process experience faster close rates, 59 percent report higher customer lifetime value, and 71 percent report higher conversion from contact to customer.

Target Correctly

When you can accurately target customers who are likely to make profitable referrals, you will earn a better return on your marketing investment. When done correctly, referrals are one of the most powerful forms of marketing and among the least expensive.

The ROI of a referral is significant because the cost of sales is low and the sales cycle is generally shorter. Researchers at the University of Pennsylvania's Wharton School of Business found that the time it takes a referred customer to leave a company is 18 percent slower than the average, off-the-street customer.

Be Selective

The old adage "birds of a feather flock together" applies. Some customers are better than others. Know what kind of customer you want, and seek referrals from customers who reflect this criteria. Regular customers who only purchase when you offer a coupon may not be part of your referral program.