Take the Reichheld Referral Challenge

I recently ran a Google search for companies with a refer-a-friend program. Many names—from a variety of industries—popped up. Apparently, their marketing departments recognize the advantage of getting customers to refer a friend. Presumably that’s the reason they invested in marketing programs that encourage—and incentivize—customer referrals.

Unfortunately, if these firms are like most, they also have something else in common: They can’t reliably report to their board of directors and investors just how much of their new customer revenue over the past year was generated by referrals. Firms with these sorts of incentivized referral programs can track the referral revenue those programs generate, but that’s not the whole picture. To quantify all referral revenue would require also tracking recommendations that happen naturally outside of referral marketing programs.

To me, an inability to account for all referral revenue is a serious blind spot—akin to not knowing your customer retention rate.

Referral-generated revenue varies widely from company to company. From Bain’s NPS Prism data, we see that in a mature industry such as mobile telephony, referrals account for up to three times as many new customers for the strongest brands as compared to the weakest brand. Paid TV services have a similar range. For newer brands that are growing fast I have seen referrals account for over 50% of new customer revenues.

Even more striking is data from Mention Me, a customer advocacy tech platform where I serve as an advisor. Using standardized customer origin surveys with new customers of more than a dozen clients, Mention Me has begun tracking all types of referrals and breaking out the portion of new customer referral revenue generated through their incentivized programs. The company has discovered that total referral revenue from new customers is actually two to ten times greater than what comes from those formal referral programs. So, even firms that run an incentivized referral program and are beginning to understand the economic value of those tracked referrals don’t know the full impact of referrals on their growth and profits.

Company leaders and investors should care about this gaping hole in their data. Readers of Winning On Purpose will understand that rates of referral (relative to competitors) provide the purest signal of the health of a firm’s competitive strategy. Referrals are the most efficient source of new customer growth and fresh turf for expansion. No matter how loyal a company’s current clients, unless their referrals are bringing in new customers, its long-term prospects won’t be good.

So, what is this Reichheld Challenge? I challenge every leadership team to figure out what portion of new customer revenues is generated primarily through referrals, and what their target should be for this strategic objective. The subset of firms that already run an incentivized referral program can also look at the historical behavior of the referral customers they track and quantify how valuable these referred customers are compared to those acquired through all other marketing channels.

Firms that accept the challenge will fix the blind spot that obscures the fundamental driver of their profitable growth: treating customers so well that they refer their friends. As I study the quantification efforts by firms like Mention Me and NPS Prism to establish rigorous league tables and benchmarks of excellence, I can say this: I will not invest my money in a mature brand unless referred new customers account for at least 20% of all new customer revenue. For a newer brand, I want to see referrals generating more than 50% of new customer revenues.

We have a long way to go to understanding how best to track, value, and earn more referrals, but it is irresponsible to continue flying blind. Does your leadership team have the courage—and wisdom—to accept the Reichheld Challenge?