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Example of Business Strategy: Why Referrals Matter and How They Can Make You More Money

Referrals are a very good way of getting more business, and they're excellent incentives to clients to get better deals for themselves. They've now become a standard method of passive business hunting for companies around the world.

Referrals were originally a 'guerilla marketing' methodology, but they've now gone mainstream. They're basically a form of word of mouth marketing, recommending a business opportunity to another party.

The benefits of referrals vary depending on the situation. A business may offer additional money to the referrer and incentives to the new referral, or simply offer benefits to the referrer.

For example:

Business A offers a 5% benefit to referrers on all sales made by people referred by them. That can mean big money in some businesses, particularly if the referrers find people able to move large volumes of sales.

Business B offers 10% benefit to referrers and a special 5% discount to new members who are referred by existing members. This added incentive is related to volumes of sales, so the 5% offered to the new referrals is an added incentive to the new members.

Business C offers a range of personal value based discounts to members with a given number of referrals, improving their margins on sales. A sale of $100, for example, with a commission of 10%, is discounted so the commission is effectively 20%.

The business model for referrals

Referrals are done on a bottom line basis and form part of a standard business plan. The benefits to members are based on a profit margin well above the discounts and benefits offered. Generally speaking, a benefit range of 10% will be based on a profit margin of at least 40% after sale, and the costs of administration and processing are also factored in on this basis. The new referrals, being even cheaper, pay for themselves, and if their sales volumes are high.

Referrals are extremely effective in unique proprietary goods like designer materials, where the access of the market is controlled by the business. These goods can't be bought on the open market, so prices and margins are good for both the business and the members and their referrals.