Harsh Truths

Levi Strauss hammered the last stud in the rear pocket, put the brand new De Nimes trousers on the counter and said:

"O'Reilly, I don't want money for this pair. Yesterday a guy called John came in and ordered four of 'em. Said you sent him here, so thanks. I appreciate it."

The following week, another three friends of O'Reilly's came in.

The moral of the story?

Referral marketing has been around for ages.

Back in the days of Levi Strauss it obviously wasn't called that - the word marketing itself didn't even exist.

But smart entrepreneurs have used the principle of referral marketing for centuries.

It's only in recent years that we can approach referral marketing systematically - scientifically even, if you want to take it that far.

On the surface this sounds good: we can finally use automated systems to track and measure metrics, so we can sensibly adjust our campaigns.

The downside is that it takes preparation, study, research and careful planning.

Yes you can build an automated referral marketing system. But you gotta build that sucker first, before it becomes automatic.

Now, I'd be the last to rain on your parade.

You can do this.

But, you have to want to put in the hours.

And before you decide you're not up to the task of researching and crunching numbers, let me tell you: it's not all that hard.

As long as you're willing to put in the hours and learn a little, you can do this.

Pay attention, and I'll take you through the steps over the next few weeks, one by one.

Let's get started.

Step 1: Preparing your campaign: Research and analysis

Instead of calculating simply how much financial incentive the customer needs to come to you, you also must consider what financial incentive a customer needs to promote your product to their friends and what they think of as a 'good deal' when offering their support for your business.

~ Ambassador whitepaper: Building An Effective Referral Program

In practical terms, this boils down to: Who is active, with whom are they active, and what can you offer them so they stay active.

We break this down into three parts:

1. What do they find valuable about your business?
2. Where are they sharing your brand?
3. How are they sharing your brand?

When we answer those questions, we look at the data and move to the next question, the most challenging one because here we're making decisions on social movement and relationships.

Were going to try to predict where the most weight will be, and focus on our efforts there.

This is exactly why research is so important: there is a degree of guessing involved and you can't do that with data do base your decisions on.

Action:

Take your time for the research phase. The worst thing you could do is go with a gut feeling, without reliable data to back it up.

You'll want to figure out which group of your customers are most active in promoting your brand.

Within that group, look at the customers who have the most active connections.

Maybe John is constantly raving about your product to all his 10,000 Facebook friends.

But if his friends never follow through, you're better off focusing your efforts on Jill, who has only 2,300 friends, but a high percentage of her friends also talk about your product.

Step 2:

The beauty of a referral system is the reach of your network and its value over time.

Building a referral network is an asset that stays with you for years.

The consequence is that it typically takes some time before your campaigns are fine-tuned and humming along on autopilot.

The goal at stage 2 is designing a plan that has a chance of succeeding, based on research and intelligent predictions. There's a lot of psychology that goes into it as well.

As I'll explain in my next article, we have a fundamental psychological tendency to help others, so you'll need to understand the mental triggers as well.

For now, you need a plan that can easily be adapted, so that you can go through the famous wash-rinse-repeat cycles.

Launch, analyze data, compare with plan, revise plan, relaunch. Repeat until Ferrari.

What you don't want to do here is guess. Instead, qualify each decision based on your data: check carefully the reach of each of your customers and the activity of their network.

Action:

In our whitepaper (which you should download and study) we outline the basic calculations of lifetime value, CPA and so on. Make sure you analyze those KPIs. Double check your calculations before committing to a plan, whichever plan it is.

Step 3:

Once you start the program, create a schedule to track, evaluate and optimize your program to direct resources where the most activity is generated.

This is where the fun starts. Once you launch your campaign, you start seeing movements in activity and conversions, and you begin to recognize patterns.

At this point you need to active actively in two things:

1. Cost and predictable ROI

Because referral marketing can easily go viral, there is a risk: In the spikes of traffic and registration, you can quickly end up spending a lot of rewards on people who won't pay off for you.

Meaning, if you're not paying attention, you could end up with many signups from John, whom we've seen doesn't have a high quality network.

That's why you need to be on top of your stats daily, to make sure you don't end up paying out commissions that aren't likely to get you more customers and referrers.

2. Keep teaching your customers what they need to know to promote you

Just like you had to learn how to identify key referrers, your customers need to learn as well. After launching, you'll see people come to you and ask you all kinds of questions.

Make sure that you're prepared to answer, and that you have the time. These people are now your ambassadors, and they will look to you for governance.

If you can't help them quickly, you'll see your rate of inactive customers rise quickly.

Action:

Launch that sucker and start paying attention to:

• Building and maintaining a database of existing and referred customers.
• Automated marketing resources to keep customers engaged.
• Send updates to social networking sites on a consistent and real-time basis.
• Update records to know how many ambassadors have signed up, and adequately reward those who have made successful referrals.

And above all: Show up. People are waiting to hear from you more than you think. If you don't show up and talk to them, they miss the extra motivation to get and stay active.

Communicate and be consistent.

Good luck.