How NOT to Generate Referrals for Your Small Business

By Karen Axelton

Are you paying or otherwise compensating your clients when they give you referrals to new prospects? If so, you may be shooting yourself in the foot, new research from the Enterprise Council on Small Business (ECSB) shows.

While it might seem like common sense that getting an incentive would make business owners more likely to refer new customers your way, the ECSB research found that contrary to conventional wisdom, rewards for referrals are not effective. What’s worse, the practice of paying for referrals may actually damage your business’s reputation among the very customers you’re hoping to attract.

Just 12 percent of small business owners in the ECSB study agreed with the statement, “If I made a supplier recommendation I would expect compensation.” Thirty-one percent neither agreed nor disagreed, while the majority (57 percent) did not expect to be paid for referrals.

On the receiving end, ECSB found, when business decision-makers know that their contacts were paid to refer them to your business, they are far less likely to do business with your company–4.3 times less likely, to be exact, when compared to a “genuine” recommendation made without expectation of payment.

What’s the main takeaway from these results? Whether your clients recommend you or not is less about you and more about them. What makes people recommend you (or not recommend you) is whether or not they are confident your product or service will help the other business owners they know. If it’s not going to help, or if they’re not completely confident you’ll provide great service, they don’t want to take the risk of making a recommendation that their colleagues will be disappointed with (and blame them for later on).

What does it come down to, then? The best way to generate referrals is not to pay for them, but to give great service and provide the right product. Of course, you should always let your customers know you appreciate referrals; make it easy for them to give referrals by creating print or online forms or a button on your website. Let clients show it when they’re “feeling the love” for your firm. But don’t turn referrals into a cash exchange. Bottom line, it just doesn’t work.

Image by Flickr user Corrie Barklimore (Creative Commons)

This entry was posted on Thursday, August 4th, 2011 at 6:00 am and is filed under Business Development, Marketing, Sales Process, sales process, Small Business, small business. You can follow any responses to this entry through the RSS 2.0 feed.


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