Few things have the power to drive customers to your business like a referral. Having someone recommend your product or service carries with it an implied sense of trust and value that is hard to top with advertising or marketing alone.
So what is the key to encouraging someone to recommend your business to others? How do you reward or incentivize people to refer new clients?
Showing Your Appreciation
You could just thank people for sending business your way. You could show your appreciation through a small gift or gesture. Or you could reward them with a discount or other offer tied to your business or service? So which to choose?
The question is really about social norms (doing things to help someone out or feel good about yourself, asking for a favor) vs. market norms (being financially rewarded for something, paying for a certain action, creating financial incentives to provoke actions). Either can play a role in what someone chooses to do.
The Science Behind Our Behavior
In his book, Predictably Irrational, behavioral economist Dan Ariely illustrates the effects that social and market norms can have on our behavior and how fragile social norms can be.
He shares the following story about a day care center in Israel:
An excerpt from Dan Ariely’s Book Predictably Irrational
My good friends Uri Gneezy (a professor at the University of California at San Diego) and Aldo Rustichini (a professor at the University of Minnesota) provided a very clever test of the long-term effects of a switch from social to market norms. A few years ago, they studied a day care center in Israel to determine whether imposing a fine on parents who arrived late to pick up their children was a useful deterrent. Uri and Aldo concluded that the fine didn’t work well, and in fact it had long-term negative effects. Why? Before the fine was introduced, the teachers and parents had a social contract, with social norms about being late. Thus, if parents were late — as they occasionally were — they felt guilty about it — and their guilt compelled them to be more prompt in picking up their kids in the future. (In Israel, guilt seems to be an effective way to get compliance.) But once the fine was imposed, the day care center had inadvertently replaced the social norms with market norms. Now that the parents were paying for their tardiness, they interpreted the situation in terms of market norms. In other words, since they were being fined, they could decide for themselves whether to be late or not, and they frequently chose to be late. Needless to say, this was not what the day care center intended.
But the real story only started here. The most interesting part occurred a few weeks later, when the day care center removed the fine. Now the center was back to the social norm. Would the parents also return to the social norm? Would their guilt return as well? Not at all. Once the fine was removed, the behavior of the parents didn’t change. They continued to pick up their kids late. In fact, when the fine was removed, there was a slight increase in the number of tardy pickups (after all, both the social norms and the fine had been removed).
This experiment illustrates an unfortunate fact: when a social norm collides with a market norm, the social norm goes away for a long time. In other words, social relationships are not easy to reestablish. Once the bloom is off the rose — once a social norm is trumped by a market norm — it will rarely return.
The fact that we live in both the social world and the market world has many implications for our personal lives. From time to time, we all need someone to help us move something, or to watch our kids for a few hours, or to take in our mail when we’re out of town. What’s the best way to motivate our friends and neighbors to help us? Would cash do it — a gift, perhaps? How much? Or nothing at all? This social dance, as I’m sure you know, isn’t easy to figure out — especially when there’s a risk of pushing a relationship into the realm of a market exchange.
More Than Just Money
Which brings us back to your clients. Clearly there is some market relationship between you, as there is a financial exchange for the service you provide. But the best client relationships also share a social bond. Besides enjoying your work, your customers should like you as a person (we all want to do business with people we like). And when you are liked, your clients will want to help you. They will also want to help the person they are referring you too, as they feel the service you provide would be of value to them.
The Importance of Giving
This social bond should also be a two-way street. I encourage my clients to reach out to me with questions, even if I don’t charge them for it. And I occasionally sprinkle in a little work here and there that I don’t charge for. Some people would call this working for free. I consider it doing someone a favor. And it’s been my experience that people are always excited to be able to return a favor (like through a referral). I usually only do this for clients who I feel are friends as well as customers. And it’s usually that same group that sends me new business.
Plus, a referral is much more powerful when it’s delivered due to social norms. When there is a financial reward involved, it dilutes the value of the recommendation. It creates the perception that someone may be recommending you not because they value your service or want to help you, but because there is “something in it for them.”
This isn’t to say a reward can’t be offered at all. A nice bottle of wine or tickets to an event can always help you express your gratitude for their support. But keeping any rewards seperate from whatever service you provide can help establish and protect the social bond.
Keeping The Balance
Balancing the social and market aspects of your client relationships can be tricky at times. But keeping the right mix of both is crucial to success. Otherwise, you run this risk of becoming just another vendor.
One of the Co-Founders of SideTour, former TechStar (NYC Summer 2011), ex-NBA'er, and past TechCrunch Disrupt Hackathon Winner.