Referral sales in management strategy Sales 2/3

Referral sales in management strategy Sales 2/3

In the last column, we have explained from many perspectives, on the importance of shifting from CLV (Customer Lifetime Value) to CRV (Customer Recommend and Referral Value).


This time, we would like to explain about the detailed actions that should be taken in order to maximize CRV.
The four main actions previously mentioned: 1. Selection of customer who refers well 2. Identifying the company’s product or service’s characteristics that could lead to referral 3. Communication method and point of contact with potential referral customer 4. An organization system that supports the standardization of new referral sales, will be introduced as the 4S framework for referral sales.


4S: 1. Segmentation


In order to carry out the referral sales strategy, segmentation is the first action that should be taken. It is inefficient to target all customers, and therefore, segmentation of customers should be conducted in the beginning to narrow down the target group.

Criteria for customer segmentation

Here, the criteria for narrowing down the target customer group is important. The aim of segmentation is the “selection of customer to strengthen referral”. For example, in order to stimulate repeat purchase, RFM analysis, which analyzes customers based on the following three criteria “Recency (most recent purchase date)”, “Frequency (purchase frequency)”, “Monetary (Most recent purchase’s value)”, are considered effective. However, the target of referral strategy are only referral and word of mouth at the most. Therefore, a customer management principle completely different from RFM analysis is necessary.

For referral sales strategy, customer segmentation is based on “Referral tendency (referral record and recommendation tendency)”, “Satisfaction”, and “Most recent contact”.

  • Referral tendency
    Firstly, referral tendency could be viewed from two perspectives. One is referral records, another is recommendation tendency. Customers who have records of referral in the past have a high possibility of referring again. As for recommendation tendency, it is necessary to conduct CS surveys, etc. in order to assess the intention of recommendation.
  • Satisfaction
    As for satisfaction, setting of evaluation criteria such as quality, price, service speed is necessary. Factors that contribute to customer satisfaction and the “extremely satisfied” line should be determined.
  • Most recent contact
    Timing of the most recent contact is also an important decision making criteria. Even though the customer has high satisfaction and referral records, if the most recent contact is 5 years ago, there is a possibility that he may no longer be a valid choice. Even though the number could be different for each business, a standard period of time such as “customers with a contact within two years” must be decided.

As previously mentioned, in order to conduct such segmentation, CS survey is necessary and must be conducted on a regular basis, such as, at a customer’s first purchase.
Next, these three segmentation criteria are used to categorize customer into ranks. The categorization of customer into ranks contributes to an extremely efficient customer approach as an organization.
Figure 1 shows an example of cost distribution and detailed approach for each customer rank.


4S: 2. Satisfaction


In referral sales, how to create as many customers with high recommendation tendency as possible is the issue. Therefore, it is important to clarify “what factors strongly influence recommendation tendency”.
The correlation between recommendation tendency and satisfaction
Figure 2 summarizes “the relation between repeat purchase percentage and customer satisfaction”. It can be seen the level of loyalty rises slowly from “Extremely unsatisfied” to “Satisfied” but rises sharply from then onto “Extremely Satisfied”. This shows the importance of the “Extremely satisfied” level in CLV.

The next graph is a case study from a certain BtoB company showing the relationship between satisfaction and referral tendency. This graph is also similar to the previous one, the percentage of referral tendency that increased steadily until “Satisfied” suddenly take a big leap at “Extremely Satisfied”.
From above, it can be seen that when dealing with referral tendency, it is important to focus on “Extremely Satisfied” not “Satisfied”.

Let’s take a look at the case of one housing sales company. Due to housing being a low purchase frequency, high price product, normally there is no repeat sales and aiming for referral is inevitable in this business.
The document above is a questionnaire conducted on customers who purchased the housing on “What are you satisfied about the product?”. From the answers, “Size”, “Color coordination”, and “Sales service” are found to have the highest correlation with referral tendency.
Based on the result of the questionnaire, the company determined “color coordination” to be the factor which is the most effective in increasing referral tendency, and the company took the measure of increasing the discussion time for color coordination largely.

Timing affects referral tendency


Another factor which affects referral tendency is timing. The best of which is “the time in which the customer has the highest satisfaction and interest” in the buying process. Therefore, when considering referral tendency, the extent in which referral activity is promoted during the period which the customer has high satisfaction and interest is important.
Generally, there are three points in which the customer’s satisfaction becomes higher. The case of a system development company will be introduced as a BtoB business example.

The three points in time in which the customer’s satisfaction increases are, firstly, “after signing contract”, in which the customer spent time in choosing one company among several competitors. Next is “when the system is completed”, after going through several meetings and progress report, and finally, after completing the inspection period and the product is completely handed over to the customer, “during the final check”.
As a company, understanding this satisfaction curve is important. At the same time, organizing detailed actions which is effective in increasing satisfaction and creating a reproducible task flow is also important.
Here, the first two Ss of the 4S framework of referral sales strategy have been introduced. In the next column, the remaining two Ss, “Sales”, and “System” will be introduced.

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