How do you effectively measure referrals?

Last week a business friend of mine was telling me just how important customer referrals were to the ongoing health of her business. She had been flicking through some data on new customers and was delighted to see that a fair proportion had been referred to them from existing customers.

I think it’s fair to say that most businesses feel this way. Certainly the column inches devoted to the subject of customer referrals would have you believe that every business regards existing customers as the quickest and most effective way to source new customers.

But for such a ubiquitous strategy it is surprising then how few businesses actually measure their success with it.

Yes, many companies (my business friend included) measure the percentage of new business that comes from referrals, but few measure the percentage of customers that are doing the referring. At first blush this looks like a subtle difference but when you stop to think about it you realise that this is exactly the sort of information that separates the highly profitable businesses from the also-rans.

The reason we probably don’t do this measurement is because we don’t know how to do it easily. Fortunately a group of experts (Satmetrix, Bain & Company, and Fred Reichheld) have done the tough stuff and have come up with an incredibly simple, yet powerful way of measuring customer advocacy. Don’t be put off by the fact that a group of boffins came up with this, in true genius fashion they have actually made the complex very simple. Try it, it’ s called the Net Promoter Score and it works like this:

• You start by asking your customers the simple question “How likely is it that you would recommend our business to a friend or colleague?”
• The customer responds by marking your business on a scale of 1 to 10.
• Customers that score you 9 or 10 are called promoters, they are your loyal enthusiasts.
• Customers that score you 7-8 are called passives. They are satisfied with you but unenthusiastic and are quite likely to turn their attention to your competitor.
• Customers that score you 6 or less are called detractors. Quite simply they don’t like you. These guys are dangerous and could damage your brand.

To calculate your company’s Net Promoter Score you simply take the percentage of customers who are Promoters and subtract from that the percentage who are Detractors. Clearly if you want to grow your business you need to increase the percentage of promoters and decrease the percentage of detractors. In other words you need to increase your Net Promoter Score.

The real magic of the NPS is not simply in measuring it once but in being able to measure it over and over again. Tracking your results will enable you to determine whether the efforts you are making to improve customer advocacy are actually working.

And of course you will be making that effort because, as they say, what gets measured gets done.

Julia Bickerstaff’s expertise is in helping businesses grow profitably. She runs two businesses: Butterfly Coaching, a small advisory firm with a unique approach to assisting SMEs with profitable growth; and The Business Bakery, which helps kitchen table tycoons build their best businesses. Julia is the author of “How to Bake a Business” and was previously a partner at Deloitte. She is a chartered accountant and has a degree in economics from The London School of Economics (London University).

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