One of my favourite questions to ask Agency Leaders is how they build new business. Together with questions around size and specialism, how an Agency brings in new business tells you a lot about how the business ticks. When I do ask, there is no source most Agency Leaders like to talk about more than referrals. And, why not? Referrals are great. They’re not only a relatively easy and affordable source of high-converting leads, but every one is also testament to how great our work is. Business referrals are something to be proud of. After all, there is no greater endorsement than… well, endorsements.

Landing new business from referrals is undoubtedly a good thing, to be encouraged and grown. The problem with referral business comes when we become reliant on it. When agencies tell me “All of our new business is from referrals” I can see the pride they have, but I can barely hear the words over the sound of ringing alarm bells. In the words of a famous Admiral; “It’s a trap!”.

Referrals: The Convenient Excuse

Let’s tackle my most contentious issue with referrals first, and deliver some tough love: Sometimes they are just an excuse to avoid the work.

Most people who start Agencies start them from a position of doing the craft. We enjoy “doing the thing” and start a business to do that thing for others. Not to do business development. If you don’t love business development then “Our business all comes from referrals” can be a convenient excuse to tell yourself in order to avoid what needs to be done. Trust me, I speak from experience here and definitely hid behind this excuse myself in the past.

All of your new business may well come from referrals, but should it? Ask yourself this: If a perfect fit client dropped into your inbox today, would you take the work? If your answer is anything but “No”, your referral business probably isn’t enough. Even if you answered “Yes”, would you give that same answer every time if you were asked it every day for the next year?

Referrals are Finite

If we are relying on existing customers to refer new customers to us, there is a finite limit to the referrals we can expect. Most will only know a handful of suitable prospects and that list shrinks the more specialised or high-value our offering is. Factor in that many people just don’t refer and the list shrinks further still.

The pool of potential referrals is finite and frustratingly slow to grow. We only grow the pool by winning more business, which is exactly the problem we are trying to solve. This becomes most relevant when we are looking to grow, rather than just maintain a level. If we want to accelerate business growth then we need not to be reliant on factors that trail growth.

Referral Pools Stagnate

There is a tendency to think of referrals as being a pool that expands ever more quickly with each new customer: Almost a chain reaction of each new customer multiplying the size of our pool. When we rely solely on referrals the opposite tends to be true and we see ever decreasing returns from referrals.

When we ask for referrals we are asking our customers to find prospects from their network. By definition, the network of anyone they refer will overlap. An exaggerated example would be asking your doctor to list other Doctors they know, then asking each of those to do the same. The list that each Doctor gave you would contain many names you had already seen.

If we never add new customers from outside of those networks, the pools will stagnate.

Referrals Take the Targeting Out of Our Hands

The passive nature of referrals introduces another problem: We can’t effectively target the effort towards certain types of prospects. The slightly unkind way to think of this is that “Beggars can’t be choosers”. Whilst I don’t imagine many of us are actually begging for referrals, the truth remains that we get the referrals we are given rather than the ones we might dream of.

This can cause problems for any Agency, as it can leave us with the choice of either turning down work in a way that doesn’t seem ungrateful to the referrer, or taking on work that is less than ideal. For Agencies looking to change or grow the problem is worse still: Change means pushing boundaries, which the look-a-like audience nature of referrals makes difficult. Targeting more profitable projects, new niches and moving into new territories are not naturally the strengths of referrals, which gravitate towards “more of the same”.

Referrals are Becoming Less Important

If there is one point in this article that I am going to find myself having to defend online, it is this one: I honestly believe that referrals are diminishing in value. The ease at which we can now find multiple reviews of almost any business (and probably question the legitimacy of any without reviews), means that referrals have been demoted. Rather than being a decision making tool, they have become a tool of discovery. I’ll explain with an example:

Past-me needed an accountant. I asked other business owners I knew and booked a meeting with two that were recommended to me. I chose one of those.

If Present-me needed an accountant, I would still ask business owners I knew. I’d add their recommendations to the pool of candidates I had found from online search. I’d read reviews of them all, check their websites, and build a shortlist to speak to. The recommendations still played a part, but were a smaller part of the decision making process. Their other marketing played a part too both in creating the short-list then again in narrowing it down.

The higher commitment the purchase the more true this is likely to be (and the more channels are likely to play a part).The Real Issue: Control

The above are all issues to consider when relying on referrals alone, but the biggest for me is the issue of control. Referral marketing is, at best, passive. If you had to increase your referrals by 50% this year you have limited buttons to push: You can prompt your customers more, but everything else is out of your control. You might be able to increase by 50% this year, but if you did, could you do it again next year? What button would be left to push?

When we rely on referrals alone, we give up most of the control of our pipeline. That might be OK when growth targets are low and business is buoyant. If targets are more assertive, or the markets get tough due to outside factors it can leave Agencies unable to react and adapt to change.

Is Your Agency at Risk?

Despite the negatives I’ve listed above, there is a huge amount to be said in favour of referral business. Issues only arise when we become too reliant on any single channel for new business. That begs the obvious question of “What is TOO reliant”? As with most things in business, the answer is complex. But there is a rule of thumb that can give you a good idea whether you need to be thinking about this more:

Look back at your last 6 months of significant work and consider the source for each. If >50% came from customer referrals it might be wise to get other channels working harder for you.

If you have more time to look into it, then a more accurate approach would be to model how the business looks if referrals start drying up. Look at drops of 25%, 50% and 75% and see where that leaves you to get a good picture of how exposed you really might be. How practical an exercise that is will depend on how good your reporting is.

If this article has left you feeling exposed then the best way to address that is to pick another channel and start working on building it. Which channel is less important than the need to diversify. The good news about the passive nature of referral business is that increasing focus on other areas of new business is unlikely to detract from it. Building those channels will likely increase net new business as a happy side-effect of diversification.

Did you find this insight useful? Business growth and resilience are key areas that I work on with my Agency Coaching & Mentoring clients. By asking questions like these, then supporting the Agency Leaders to find and execute the best responses for them, I help them move towards their business goals more effectively. You can learn more about what I offer here.