Seven Reasons Not To Be So Proud Of All Those Referrals

I regularly hear agency principals boast of two things. It seems cruel to burst their bubble, so I don’t say anything in the moment, typically. But I’ve now heard these two things said so many times that it’s probably worth a quick discussion. The first one goes like this:

“We’ve built our agency entirely on referrals. We’ve concentrated on doing good work and our reputation has just spread over the years and we can hardly keep up with the opportunities that come our way organically.”

I do understand the sentiment, which seems to be a combination of these things:

  • Selling is a nasty process and we don’t have to stoop to it like the other firms.
  • Our work is better than average and it speaks for itself. Doing great work brings great clients.
  • Clients love us and they talk about us so much that we don’t need to talk about ourselves.

There’s more going on behind the scenes, though, and I’ll offer an alternative interpretation of a firm that relies largely on referrals:

  1. Referrals might be a positive spin on a lack of discipline. The truth behind firms that claim this could just be laziness.
  2. Referrals are passive by definition. You aren’t in the driver’s seat when depending on them. You are at the mercy of your clients. Some clients want to share you and others don’t.
  3. Referrals are not a reliable source of business if your firm is oriented around a horizontal positioning (practice area, demographic, etc.). They are more so if your firm is positioned vertically because clients–when they change jobs–typically move to a new employer in the same vertical.
  4. Referrals bring you more of the same. So relying on them is fine to the extent that you want more of the same, but relying on referrals makes it difficult to transition to more strategy as a percentage of the whole and so on.
  5. Referral chains tend to decay over a period of 6–9 years, primarily because people listen to the opinions of someone at or above their own perceived level of influence. The referral you receive, then, is at or below the level of the referring source. The person who listens to a given client respects that person’s opinion, and that’s where the decay begins.
  6. Referrals, when they come from one consistent source–are a client concentration issue in disguise. If the referrals stop flowing, you’ll feel that pain severely.
  7. Referral-heavy firms stay busy but they seldom generate a price premium.

It would be just as troublesome if none of your work came from referrals, too. There’s a healthy balance here that will hopefully leave you proud of the right things.

A steady stream of referrals is a wonderful thing, but those referrals should supplement the inbound interest that you find through a compelling positioning and strong insight generation.

What’s the right mix? I don’t have a scientific answer, but try aiming for an even split. Half of your clients are referred to you by a client and the other half become prospects by following your thought leadership.

The other misplaced pride I hear a lot is how long their typical client relationships last. We’ll cover that soon.

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