Why Referrals Don’t Scale And Create Risk For Your Company
Published: November 28, 2022
Last Updated: April 13, 2023
With the recent wave of layoffs in the tech sector, I’ve seen a big uptick in the recently departed deciding to try their hand at running their own consulting business. This has led to a lot of fresh faces in some of the networking meetings I attend asking some flavor of the same question. How do I get clients? The most common answer I hear as a response is “Just ask for referrals and tap your existing network.” This is a dangerous sentiment and in my opinion a noob trap for a lot of people. “Just ask for referrals” is a frequent piece of advice given to business owners of all shapes and sizes, not just new consultants, and is one of the most prevailing pieces of wisdom that floats around as a marketing/lead generation strategy. I also hate that answer because I strongly disagree and find it to be largely terrible advice for a couple of reasons. In this post, we’re going to dive into why referrals are not a viable marketing strategy and why they create a large amount of intrinsic risk in your business when relied upon.
Asking For Referrals Can Work, But Not For Everyone
When I started Tortoise and Hare Software I was 31 years old. Prior to starting the company, I had spent a few years working full-time as a software programmer and getting an MBA. My social life consisted of hanging out with my fiance and playing League of Legends with a few old friends. I was happy with it, but it wasn’t exactly the sort of lifestyle that leads to an enormous network of business contacts.
When I launched the company I’m sure more than a few people thought it was a bone-headed decision that reflected my distaste for corporate culture rather than any sort of well-reasoned business decision, especially my parents. I say that not to garner sympathy, but to illustrate the point that when I launched, I basically had zero network and zero support to help get me started. I would hear the advice of asking for referrals then and the first thought that would jump to my mind was “who the hell would refer me any business?” The answer, no one. Even now after 4 years in I can count the number of referrals I’ve received that turned into business relationships on one hand. If I launched the business when I was 45-50 with the bulk of my career behind me, things may have been different, and many times when I see people giving this advice they are usually well into their 40s and likely started their company before the world changed as it has in recent years.
These were my circumstances but there are more than a few people who likely have similar circumstances when launching or operating their businesses. Experts with in-demand skills that want(ed) to break free from the 9-5. In a lot of cases, the personality type that leads people to become experts in a technical discipline has some degree of introversion or lack of broad societal appeal. I talk to many forms of technology and marketing service providers on a near-daily basis and many of them fit that profile. Introverts don’t have robust networks of contacts that they can easily tap to send them enough work to create a sustainable business.
My point is this: If it was easy as just quitting the 9-5 and asking a few friends, family, and business contacts to send you referrals, wouldn’t there be a lot more successful entrepreneurs floating about?
Consider that fewer than 5% of all businesses in the U.S. grow to be more than $1 million in annual revenue.
Don’t get me wrong, I do see referrals work for some people, but they are typically people who naturally have the sort of personality and physical attributes that make them very likable and popular. Think Chris Hemsworth:
Chances are, if you’re the sort of person who hit that type of genetic lottery, you aren’t reading this post. For the rest of us that have to rely on our wits and determination to create a successful business venture, you’ll have to find a more viable and scalable marketing strategy to create the flow of new business required to scale an enterprise.
Why Referrals Create Risk Even If They Work In The Short Term
So let’s say referrals do work for you in the short term. I frequently see the story of the accidental agency owner, MSP owner, or other tech/marketing service provider. A lot of times the story goes something like…. a previous employer goes out of business or a wave of layoffs have to be done but the employer reaches back out to a key employee to continue doing their old job as an outside entity and boom, a new company is born. They do some good work, get a few referrals from there, and organically grow their company to maybe a few hundred thousand in annual revenues and a handful of employees. Awesome!
However, these skilled folks are often great at doing whatever it is that they were doing, but never really get around to building a real business, more so just a job. They gladly pocket the additional profits a boutique service provider can come with, and never quite get around to re-investing them into the needs of the business. They assume the referrals will keep on truckin’ until the end of time. Then a recession hits, or another negative economic event, they lose a couple of key customers which comprised the bulk of their revenue, referrals dry up, there’s no existing marketing or sales infrastructure in place, and there’s no money in the bank available to both survive the recession and create any form of sales/marketing engine. They are forced to go out of business, oftentimes finding themselves stuck in middle age, short a revenue stream, and having to try to re-enter the corporate workforce to the tune of a huge pay cut. It’s really sad, to be honest, but also very common.
Relying on referrals is not a viable marketing or sales strategy. When resources get scarce they are highly vulnerable to drying up and leaving you with no way to acquire new business. Durable business entities have established marketing programs and sales processes. The sooner you can create one for your company, the better off you’ll be, and the more likely you are to create a lasting business entity that can provide you both the lifestyle you desire, a comfortable retirement, and all the other bells and whistles that come with business success.
The other thing to be aware of is that building a marketing or sales program is very expensive in the beginning. Once you get one established, the cost to acquire a new customer becomes more digestible, but until you’ve made that initial investment and crossed that initial hump, it will be a non-trivial investment and likely 6-18 months of time to create something that has a pulse. If you wait until the last minute, you’re not going to like what it takes to undo that lack of foresight and planning.
What Can I Do If Referrals Don’t Work?
There are a lot of ways to generate new business. There’s no right answer or one-size-fits-all piece of advice I can give you. Some options are:
- Cold calling
- Cold email
- Paid search
- Social media
- Direct mail
- YouTube/Video Marketing
I got my first client by going to trade shows and picking up every business card that was available and then emailing them after the show to see if they needed help with their website (if it looked like they needed help). I would also pull up Google and look around on maps at companies that looked like they had crappy websites and call them to see if they wanted to upgrade. I would also connect with people on LinkedIn and tell them what I could do for them, I would attend basically every networking meeting I could find, both in-person and virtual, and I would also monitor 10+ slack groups waiting to pounce on anyone that might be asking questions that indicated an interest in my services. On top of that I was also spending a small fortune and drawing down my savings running pay-per-click ads, while writing blog posts monthly, and social media posts daily. I would also go share my content on forums and Slack groups as it was created. It was brutal, I’m not going to lie to you. I worked basically every waking moment for years to create that initial pipeline, but I also had the disadvantage of not really having a clear idea of what type of company I was trying to build or who I was serving. There was a lot of figuring it out as I went along. If you’re clear on who you’re serving and what you can do for them, you can save a lot of time in that regard. These days I do almost nothing but write a blog post every now and then and get a steady stream of inbound leads via organic search. If that needs supplementing I can turn on a few PPC ads and let them run with a small budget while I focus the majority of my time on servicing clients and trying to put the process and systems in place to scale even faster. It took a lot of work to get to this point, but this is the position you want to put yourself in.
Running a business is difficult and the odds are against you when you start. Referrals are great when they come in, but they should really be viewed as an added bonus that augments existing success and not relied upon as a sales or marketing strategy. If you ignore this advice, you create a lot of intrinsic risk in your business. If you’re going to launch a business and scale it to multiple millions in annual revenue and beyond, you need to make sure you have a scalable repeatable marketing and sales engine in place to ensure the continuity of your companies operations, or you’re leaving your companies fate in someone else’s hands and that’s a very precarious position to be in.
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