Referrals are an invaluable tool for small businesses — with a proven record of driving new sales and empowering customer loyalty.

Here’s a quick look at what makes “word-of-mouth” marketing successful and tips on how your small business can start generating more referrals.

People Trust Referrals

From entrepreneurs to marketing experts, everyone agrees — referrals are golden opportunities for small businesses to increase sales and brand awareness. 

As far as swaying consumers, nothing beats word-of-mouth advertising, exclaims Business News Daily senior analyst Max Freedman.

People who get recommendations from their friends and family are more likely to follow up compared to just someone coming across an advertisement, explains the BND article.

“That level of trust is something that simply cannot be bought in a paid ad so learning to encourage your satisfied customers to spread the word can be a powerful tool for any small business,” Freedman writes.

The stats seem to support the power of referrals. For example, research shows conversion rates for referrals are higher than other forms of marketing. 

More specifically, Business Networking International (BNI) says conversion rates for referrals are almost 4 times higher than other marketing channels.

“It is one of the biggest levers on sales, business growth and ROI,” says a post by BNI, which has more than 345,000 member-businesses and thousands of chapters worldwide.

“Referrals can help supercharge your conversion rate because they’ve already been vouched for by someone they trust. They know what they need and are ready to make decisions faster.” 

In a survey by Impact.com, a commerce partnership marketing platform, 86 percent of consumers said they consider personal recommendations crucial in their purchasing decisions, compared to 2 percent who find traditional advertisements important.

Further, research from the Wharton School indicates referred customers deliver 16 to 25 percent higher lifetime value than those acquired through traditional channels.

“They convert faster, spend more, and demonstrate significantly stronger loyalty,” says the Impact.com blog by Wafiqa Abbas, the company’s affiliate publishing and referral content manager for small business.

Tap Customer Loyalty to Generate Referrals

To get more referrals, small business owners need to make a plan for doing so, and that includes reaching out to their customers.

You can’t expect referrals to automatically come in just because you have a great product or service, explains a SCORE article by Daniel Kehrer. Basically, you have to ask for them.

“Most loyal customers are open to providing referrals. Some even appreciate a chance to tell others about something good they’ve discovered,” Kehrer writes.

When done right, referral marketing, when businesses ask their customers to recommend them to others, creates “a self-sustaining cycle where happy customers bring in new ones who become loyal advocates,” says the Impact.com article.

It’s a low-cost way for small companies to expand their client base and grow brand awareness, explains Erica Sweeney in a Business Insider article.

Nova Customer Printing founder Michael Nova attributes word of mouth marketing as playing an important role in his company’s growth and longevity, particularly in the early years after starting his New York-based business, says the Insider post.

"The greatest advertising you can get is when one person tells another," Nova says. "There's nothing like it."

Referral Programs

For a more systematic approach, small business owners should consider creating a referral program to outline details, and as a means to bolster their word of mouth marketing strategies.

“When customers love your brand, a strong referral program makes it easy for them to spread the word,” says a Salesforce article by Nicole Watson, the company’s director of product marketing supporting small businesses.

They’re built on the concept of word-of mouth marketing, Watson adds.

“A well-designed referral program not only helps your business grow its customer base but can also strengthen relationships with existing customers and make them feel more appreciated and engaged.”

While customer referral programs vary in scope, at their most basic level, they offer rewards to customers who share your products or services with their friends and networks.

“This is the most common type of referral program because they are relatively straightforward,” says a post by referral and loyalty solution provider Talkable. “They do not depend on managing individual relationships, and they do not require administrative effort beyond the point of sale.”

So, one of the first steps is to decide what your business wants to offer in exchange for referrals.

“In many cases, the easiest thing to offer is a discount,” says the Talkable blog. “If they already like your service or product, why not encourage them with 10 to 20 percent off their next purchase.”

Freebies are also popular as an enticement, the article says.

“Of course, any offers must be considered within reason — after all, the referral does not come free. The trick is in finding the sweet spot between what customers respond well to and what you can afford to give them.”

For more on this topic, see The Selling Power of Customer Referrals.