Who is the better referral source, a client who sends you 18 leads of which 2 become sales or a customer who sends you 4 leads of which 1 is sold?
This is no place for guesswork. You can't answer unless you have much more information. To learn anything about the value of referral work to your company, you need to collect and analyze data about the source of every job you undertake.Dollar For Dollar
How you look at the data also makes a difference. Back in September 2001, we set the benchmark for referrals at 60%, defining it as the ratio of the dollar value of referral work to total sales. That's an important distinction, because not all jobs contribute equally to your top line.
Comparing referral dollars to total sales is more useful than comparing the number of referral jobs to total jobs. For example, I recently talked with a remodeler who looked back over a couple of years worth of records to discover that his company had converted only a little more than 6% of all referrals to sales. That 6%, however, measures referral jobs to total jobs. As a percentage of total revenue, that same 6% of jobs jumped to 25%.
Here's the thing, though: Had anyone asked this remodeler before he had this data in front of him how much of his work came from referrals, he would have guessed in the neighborhood of two-thirds — close to our September 2001 benchmark.Numbers Don't Lie
The actual numbers tell a very different story.
First, I'm willing to bet that most remodelers overestimate the value of referral work.
It might be that referrals are not necessarily the most effective way to get work. If your referral conversion rate is, say, 25% of revenue, somewhere in the remaining 75% there could be a lead source that is more effective than referrals.
You might also question whether the fact that a lead is a referral is a good enough reason to pursue the work. Not all past customers are sources of good referrals. Someone who badgered you into discounting your price, for example, may give referrals to others who are looking for a contractor they can bargain with (another good reason to stick to your guns on price).
The point of all of this is to suggest that simply counting referrals is not good enough. You need to analyze the value of each referral from all angles. How much top line revenue referrals add is just one factor. You also need to know how referral work affects the bottom line and what difference the type of work you do for referrals makes in the big picture. Referred kitchen remodels may be much more lucrative, for example, than referred bath additions.Not So Simple
It's also important to figure out if the fact that a lead is a referral is disguising more critical elements. It could be that other factors —income, value of real estate, occupation, size of family, neighborhood — are more accurate determinants of who makes a good customer. If four out of five referral conversions came from the same neighborhood, for instance, the fact that a past client referred them may be less important than the fact that the houses in that neighborhood are all about the same age, and the people living in them all meet certain income criteria, all fall into a selective list of occupation types (doctor, lawyer, accountant), and all have families of similar makeup, and so on.
These days, when I ask remodelers what their number one source of work is and they tell me “referrals,” I ask them how they know.