Not getting as many referrals as you would like for your business?  A formal referral system will help to improve that.  In other words, give your clients and referral partners more incentive to refer people to you.  Give them something of value  (whether it’s money, product, services, etc.) for any referral that turns into a client.

Here’s the catch – many who do this are stingy in what they offer as an incentive and, therefore get less than optimal results with this strategy.  To figure out how much to pay, you need to understand the “lifetime value of your client.”  This is a concept I learned from marketing guru Jay Abraham.

Let’s look at an example:  Say the average profit from an initial sale $100.  You look at that and say, “I’ll give someone $25 for a referral that turns into a sale.  That’s a big piece of the pie.”  That may help get a few more referrals, but what would happen if you paid $100 instead (or even $200)?  On the surface it looks like you would get a lot more referrals, but would not make any money.  What good is that?

This is where knowing the value of a client comes into play.  Continuing with the example, let’s say that that your average new client repurchases three more times that year for average profit of $150 for each purchase.  So, with the average patronage life lasting two years, every new client is worth $1,000.

So theoretically, you could spend up to $1,000 to bring in a new client and still break even.  Now paying $100 or $200 for a referral seems like a good deal to you and offers some nice incentive to your referral source.

Knowing the lifetime value of your client is useful for evaluating other types of business development decisions, such as what to pay your salespeople or how much to invest in marketing and selling programs.  You can also give incentives to new clients on their first purchase by lowering the cost of your product/service or adding more value.  Again this incentive represents the money you are willing to either spend or forgo receiving in order to make the very first purchase more appealing to the prospective client.  It is important to test these systems to make sure you are getting the desired results.

Adopting this strategy will make your competitors look far more expensive and appear to offer far less value.  The referral incentives will skyrocket the number of referrals you receive. You will gain visibility, attract more clients and seed significant profits for the future. 

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