Customer Referrals are Contagious

‍It’s a new week, so here’s some new referral research for you!

It makes sense that referrals are incredibly valuable.

We already know from existing research that referred deals close faster, with less negotiation, and higher ACV. But new research has uncovered an additional benefit: they’re contagious.

Research published in Harvard Business Review in June 2024 found that beyond making more purchases °referred customers also bring in about 30-57% more new customers through referrals than other customers.^[1]

The authors have called this phenomenon where referred customers bring in more referrals the "referral contagion," and they put forward two reasons as to why it occurs. 

1. We tend to build social networks with others that are similar to us. So, if a customer loves your brand they likely have a network that will feel the same way. (The authors call this homophily)
2. Referred customers perceive the act of referring as more socially appropriate. Customers who joined through a referral are less concerned with the social cost (e.g. what if the person they refer doesn’t like it) because the fact that they joined through a referral themselves set a new norm.

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Why does this matter? To quote Einstein, “Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn’t pays it.”

But why is that relevant here?

Because for every referred customer you bring in, you add another customer who is likely to bring you another referred customer (who, in turn, are likely to bring you more referred customers)!

Most GTM strategies are either on or off. If you stopped spending on LinkedIn ads tomorrow you would stop getting leads from LinkedIn ads, well... tomorrow.

But if you build a referral process with your customers it starts to feed itself and not just stay switched on, but grows just like compound interest.

Want to apply this research to your business immediately?

The researchers found that if when asking for a referral you remind the customer that they joined via referral originally themselves they were able to increase the number of successful referrals from referred customers by 21%. 

Try it out yourself next time!

[1] https://hbr.org/2024/06/research-customer-referrals-are-contagious

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