The Curse of Repeat & Referral Business
The Biggest Barrier to Growing Your Company Might Be Tied to The Way You Think About Your Easiest Leads
Let’s start with a question: How much should you spend on marketing, as a percentage of sales?
Ten years ago, the most common answer I’d hear was 10%. So in other words, if a company was selling $100,000 a month, they’d shoot for a $10,000 monthly marketing budget. A $4 million dollar company would budget $400,000 for marketing and advertising.
More recently that percentage, on average, has gone up even higher. 12% to 15% is pretty common and many spend even more than that—up to 20%. Lead generation has definitely gotten more expensive, and since leads are the lifeblood of many businesses, well, you gotta do what you gotta do.
But whenever this question of budget as a percentage of sales comes up, there are always a handful of companies that shudder at the notion of 10%; for this select group, even 5% seems like way too much for a marketing budget. They give me answers like 2% or 3% and seem outraged at the thought of spending a penny more.
And whenever I hear those lowball answers, I automatically know that these are companies that get the majority of their business from a combination of repeat and referral business. Always. Without fail. Usually, when pressed, these companies will proudly declare that 60%, 70%, 80% or more of their business comes from these two lead sources.
And unbeknownst to them, this equation—3% marketing budget, 75% of business from repeat and referral—is killing their chance to grow their business.
Isn’t repeat and referral leads the holy grail of lead sources? Wouldn’t all companies KILL for a profit machine that continuously churns new business out of old business? Wouldn’t it be great to free yourself from the shackles of the lead generation treadmill?
So here’s the problem in a nutshell: Companies that rely so heavily on repeat and referral business lack the ability to grow their business.
They don’t Understand Their Real Numbers: If a company is doing $2 million in sales, and $1.5 million comes from repeat & referral and they spend 3% on marketing, that’s actually the equivalent of spending 10% to 12% on marketing. Why? Because that 3% ($60,000) is being spent to generate the $500,000 in sales that are NOT coming from repeat and referral. And in my experience, these kinds of companies usually have ONE major thing they’re “good” at—usually trade shows. Which leads to the next problem…
Mindset Prevents Growth: These companies inevitably assign the 3% marketing budget against ALL sales, which causes them to draw a false (and deadly) conclusion: “Any marketing activity we engage in should have a comparable 3% lead cost or we will refuse to participate.” This is a death-spiral mindset that at best will prevent growth and at worst cost you the business you already have (see weathering downturns, below).
Not Scalable: This means a business that can, by definition, only grow very slowly. You can only generate so many referrals and repeat purchases. If you want to grow from $2 million to $3 million, you can’t magically generate an extra million dollars in sales from referrals. Realize—if you’re getting the lion’s share of your business from repeat and referrals, that means you’re already really good at it and you aren’t going to find a lot of table scraps on the floor. If you want to grow, you’re going to have to advertise—and advertising of any kind is going to cost you a heck of a lot more than 3%.
Can’t Weather Downturns: But you are comfortable with your $2 million company, you say and you’re not really interested in adding another million dollars in sales. Fair enough. But what happens if you experience a dip in repeat and referral business for some reason? You’d be surprised at how many of these companies end up talking to me for this very reason. Then when I bring up alternate lead generation activities that cost as much as 20% to 30% to START (i.e., before they optimize and settle back into the 12% to 15% range), they freak out. Rough waters ahead.
Prices Not High Enough: I’ve also found that high-percentage R&R companies frequently have low prices, relative to their competitors. This is often a major reason why they have so many people coming back in the first place. That’s not a bad thing, in and of itself. But if your prices are low because you don’t have to spend the same money on advertising that your competitors do, then you’re going to be in bad shape if and when you’re forced to jump into the lead generation pool later. You simply will not be able to afford it. Meanwhile, your higher-priced and lead-generation-savvy competitors are going to eat your lunch.
So what’s the takeaway? What is the actionable next step?
First of all, if you fall into the category of companies that are fortunate enough (yes, fortunate!) to generate a ton of business from repeat and referral, check your pricing. This is a serious issue. I’d consider immediately raising prices by 5%, with a goal of ultimately raising prices by 10% to 15%. You don’t want to raise prices so quickly that your salespeople lose confidence in their ability to sell and you don’t want to alienate the customers who are coming back and sending their friends. But if you have quality products, treat customers right, and stand behind your work, you will be able to raise your prices WITH NO PROBLEM. Remember, all your competitors already have higher prices!
Next, start immediately with a FARMING marketing activity with 10% to 20% of your marketing budget. By FARMING, I mean advertising activities that are designed to generate some leads now, and lots of leads in the future. The cost might run as high as 30% to start, but over time it will fall to 25%, then 20%, then 15% and maybe even less. But you have to start now. And you have to have prices high enough to finance it.
Finally, keep an open mind. Just because you’ve always been able to get away with a 3% marketing budget, realize that growing is going to cost more. Read this article again and let it sink in. Prepare yourself mentally to do things differently in the future.
And hey. Take a minute to pat yourself on the back. 75% of business from repeat and referral shows that your customers absolutely love you and that you run a great business. You should be proud of yourself. But don’t let that pride get in the way of doing what’s necessary to grow your business in the long term. Don’t let the blessing of repeat and referral business become a curse.
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