CHAPTER 1

Part 1Understand What a Referral-Based Business Is

Charlie had always been keen on the idea of sitting back and waiting forcustomers to call and book their cars in for service. And in this respect he isno different than the vast majority of car-servicing businesses. You see, histraining is in the field of motor mechanics and not business or marketing.

But as we all know, the world doesn't work like that, but it can, if you put inplace certain strategies.

I remember Charlie becoming very excited when I first mentioned this possibilityto him. He said that, while this was the ideal business model he dreamed about,he didn't think it was something that could work, even if it were feasible. Healso said that he had never heard of a business that operated that way before.

Imagine his surprise when I told him it was not only a realistic possibility; itwas also very easy to achieve.

"What you want is a referral-based business, Charlie," I said. "But before youdive in and begin changing the way you do business, you need to have a clearunderstanding of just what a referral-based business is."

"Why's that, Brad? I mean, I love the sound of a business in which I don't haveto do all that marketing stuff—I dream about having customers showing upout of the blue and wanting me to service their cars. This, I know, is the idealbusiness because I am not really a marketing type. I'm not comfortable doing allthat stuff. Give me a set of spanners rather than a computer and telephone anyday."

I knew exactly what he meant. I had come across this comment countless timesbefore.

"Charlie, you still need to do a certain amount of marketing. It's just that inthis type of business, you go about it in a different way. There may be a lotless marketing to do, but you still do need to market your business. The realdifference is that the leads you get are more qualified and your emphasis willbe on sourcing customers who will be with you for a long time. This in itselfwill mean the type of marketing, as well as the amount you do, will be radicallydifferent than that done by normal businesses. But before we get into that,let's discuss what a referral-based business actually is.

He agreed, so I pressed on.

"Well, as the name implies, a referral-based business is one that relies largelyon referral strategies to generate business.

"A business doesn't have to always have been set up to run on referrals; it canbe changed to become a referral-based business at any stage."

So if you, the reader, already have a business and would like to alter the wayyou go about your business by tapping into your existing customer base more,then read on. It's never too late.

"Before we look now at various referral strategies, let's first consider what areferral strategy is," I continued.

He nodded.

"A referral strategy is simply a way of introducing new customers to yourbusiness for a low acquisition cost. Basically, it's a way of getting yourexisting customers to promote your business for you. It's a way of getting themto introduce their family, friends, and colleagues to your product or service."

"Hang on, Brad," Charlie interjected. "What does an acquisition cost have to dowith it? For that matter, what exactly is an acquisition cost?"

Here we'll leave Charlie for the time being as we take a closer look at some ofthe concepts involved with business in general.

Acquisition Cost

Imagine having to work out how much your business should spend on sales andmarketing. Setting a budget this way is as hard as finding a needle in ahaystack.

Let me show you how you can have an unlimited marketing budget, andbuy—that's right, buy—as many customers as you want. It's liketurning on the tap to business profits.

Instead of spending a fixed amount on sales and marketing, when you take on theidea of investing in sales and marketing you've got to understand that everyinvestment has a purchase price. In business most people think that you justinvest in the stock you sell—but the same is also true of customers.

In fact, from a marketing point of view, the only thing you've got to buy arenew customers. The question really is, how much are you paying for them?

If you put $1000 into advertising and this generates 100 phone calls, thenyou're paying $10 for each lead. Then if you only sell to one in five of thoseleads, you're paying $50 (5 × $10) for each sale.

Let's look at another example. A clothing store regularly runs an ad in thelocal newspaper. It's the only ad they run, so testing and measuring itseffectiveness is straightforward. The ad costs them $370 a week and itgenerates, on average, 25 inquiries. The owner is understandably delightedbecause he understands that he is paying $14.80 per inquiry. And he knows thathe couldn't get them cheaper. And to make this marketing strategy even moreattractive, he also knows that closing sales is his strong point. Of the 25prospects that come in every week, 19 leave with a purchase. His conversion rateis 76 percent. The net result of his marketing campaign is that each newcustomer costs him $19.47.

Now, here's where this all gets exciting.

Going back to the first example above, imagine that you were a business ownerwho was about to develop a new marketing plan. Let's say your business was acamera shop. Now you already know that each new customer costs you $50. Let'sassume now that you also know, from analyzing your sales records, that eachcustomer spends, on average, $500. This means your average dollar sale is $500.Your records also show that your average profit margin is $100.

What does all this tell you? It tells you that for every $50 you invest you make$100.

The next question you need to ask yourself is this: How many times could youinvest that $50?

The answer is as many times as you want, because every time you spent $50, you'dmake $100. That would be a good deal, wouldn't it? You bet it would.

It almost sounds too good to be true, doesn't it? But it really is as simple asthat! Once you know how much it costs to buy a customer, and as long as you makemore per customer than the acquisition cost, you're ready to start reaping theprofits.

OK, so let's look some more into this notion of "buying" a customer.

Buying a Customer

What's the difference between buying a customer and what you're doing at presentin your business? That's the difference between selling to a customer and...