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Using Referrals To Grow

Rewarding customers who are referred to you may be more effective than rewarding the people who refer them.

Using Referrals To Grow

Earlier this month, I explained how a business doesn't have to make a lot of money to be worth a lot. Reducing risk is one of the most overlooked opportunities for growing business value, sometimes by several multiples. However, the top line on your income statement is obviously still important.

There are only three ways to increase turnover:

1. Get more customers.

2. Sell more to your customers.

3. Raise prices.

(We cover this in more detail during our Ownership Wealth & Freedom course)

Many business owners prioritise getting more customers (which, to be fair, is a very high priority when your footprint is still very small). Most of them rely on passive word of mouth, but there are plenty of tactics for actively encouraging more referrals.

The most obvious starting point is to reward your existing customers for introducing new ones. However, this ubiquitous tactic may be shortsighted. As a recent RIMtailing article highlights, it can be more effective to reward referred customers than the people who refer them.

This flies in the face of conventional behavioural economic theory. Nonetheless, researchers from the University of California-San Diego, Washington University, and Harvard University all recommend allocating referral incentives to customers who are referred instead of those doing the referring.


First, it is usually much easier to recommend a new customer than to become a new customer. Switching to a different brand introduces a number of tangible and psychological costs. Rewarding referred customers will incentivise them to push past these hurdles.

Second, referring new customers is often inherently rewarding because we tend to appreciate and praise people who introduce us to beneficial offers. Just the anticipation of this gratitude can be a very potent incentive. Providing external rewards for something inherently self-rewarding is less impactful.

Field trials reinforce this theory. Rewards for referring and referred customers were both effective, but the latter resulted in higher customer referral rates as well as better customer retention.