Unlocking Referrals in Tech Services: A Step-by-Step Guide

We close off our series on marketing tactics for tech services founders by talking about referrals. Referrals need to be an essential part of your strategy for two reasons. Research shows leads from referral are not only less expensive but they are also higher quality. Because they are referred through a trusted they have a better understanding of how to engage with your products and don't need proof of competence. Hence they close faster, generate more revenue, and are stickier. There is another deeper reason why setting up your referral channels are important. Increasing referrals require fixing multiple underlying issues that are overall important for your growth.

This article gives a step-by-step guide for tech services partners to set up a referral program.

Step 1: Accept The Economics Of Referrals

Before going into referrals we need to discuss the economics involved. We tend to think of them as free but they are an exchange in value. The value we receive is fairly straightforward to quantify. It is as valuable as the cost of a lead. This should be somewhere between 5-10% of the LTV of the customer. The economics for the referrer are more interesting. The referrer risks their social capital. If you succeed they gain social capital, if you fail it reflects poorly on them. So you need to make a mindset change that it's not free from both sides. There is value you receive and the referrer has a cost in the risk to the social capital.

Step 2: Fix Your Positioning

Before you can be effective on referrals you need to have a clear understanding of your positioning. As a founder you will always be the best sales person for your team. But if you've trained a sales team you've started to realize the difference between you selling and someone else selling. This is because you need to train your sellers to your value proposition so they can evangelize it. With referrers the problem is even bigger. You don't get to train them like you train your sales team. They won't have the aid of your pitch deck. So your value proposition needs to be clear to the referrer so when they see someone in their network with a problem they can immediately identify you as the solution.

This is also a good reason to have a conversation about the value to your customer. You will get an outside perspective on the value you offer from someone that has received it. It will be a great way to understand yourself better. It's also the only way to reconcile your aspirational positioning with the reality.

Step 3: Deliver Excellent Outcomes

We talked about the risk to social capital the referrer makes. Relationships are valuable. People will only refer you if they believe there is a good chance that you will deliver exceptional outcomes for the people that you referred. There's a reason customer satisfaction is measured with Net Promoter Score (NPS). Willingness to refer is considered the gold standard for providing excellent outcomes. The referrer knows that the social capital they are risking will increase if you are able to create great outcomes.

Step 4: Formalize The Process

You need to put formal ceremonies in place to formalize the process. This will include:

Identify: Identify your potential referrers. Your customer's are an obvious reference source because they understand your delivery capabilities and your value well. But your referrers are not limited to your customers. For example, Vixul receives referrals from many veteran tech services founders. Some people provided referrals to us before they ever met us. Of course to get many referrers beyond your customers you need to have a clear understanding of your value proposition that you are consistently advocating.

Nurture: Referrer relationships need to be nurtured like any other relationship. Periodically sync on the topic with them. For customers this will likely be a part of the routine touch points you have with them. For others, you'd need to setup syncs.

Legal: Put legal agreements in place to formalize the relationship. Make sure you are not running afoul of any kickback clauses they may have on incentives you are offering.

Incentives: A monetary incentive to the referrer of 5 or 10% first year's revenue is considered common. But there is a good reason to also think about non-monetary incentives. With incentives you need to think about what people are risking. Social capital is expensive and for many people a friendship and being considered trustworthy is worth more than a few thousand dollars. People may rather receive no incentive in case things go bad they don't get accused by a friend of harming them over greed. Another issue with monetary incentives is that they may lower the value of the leads coming in because the referrer is incentivized to send people and they may decide not to look for as good a fit before referring.

You can use non-monetary incentives as an add-on or replacement to monetary incentives. Giving a discount to the referred customer increases the social capital because by making the referral they have already proven social value by getting you an exclusive discount. Another option is to initiate the relationship by sending referrals to create the the social obligation to reciprocate. Finally you can repay them in social capital by honoring them, and inviting them to exclusive events.

Simplicity: Remember referring you is not someone's full-time job. So for any referral program to succeed it needs to be extremely simple to understand.

Gratitude: Make sure to thank your referrers. Even with incentives they are risking their social capital. You need to invest social capital in them. Thank them and make them aware of successes you bring about for them.

Measure: Measure referrals as a lead source and use them as a barometer on your performance.

Conclusion

Referrals, if cultivated properly, are more than just a low-cost customer acquisition strategy for tech services businesses. They are an affirmation of the quality of your service, the effectiveness of your positioning, and the value you provide to your customers. Cultivating referrals isn't just about asking for them - it's about creating a service that's worth referring. It's about crafting a value proposition so compelling that your customers and partners can't help but see the match when someone in their network needs your services.