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Why most referral schemes don’t work

Having a little knowledge really ought to be better than having no knowledge at all and yet we are warned it is dangerous. Why is a little knowledge dangerous? The author of this quote probably intended to advise us to acquire a more comprehensive level of information about a topic before opening our mouths or taking action based on what we knew. By research and due diligence we might avoid making stupid mistakes and revealing how foolish we are. In essence, it seems a bit like not jumping to conclusions then, looking before we leap and why we should never to assume anything (because it makes an ‘ass’ of ‘u’ and ‘me’ – proving it has US origins or we’d all be taking care not to arseume anything).

All of which is a bit impractical and nonsensical in the real world.

To function, we have to assume a few things and we can’t hope to know everything, or even enough to be considered an expert when it comes to the wide variety of matters which affect our daily lives. Mostly, common sense sees us through, that and the fact that most issues are a complex array of grey areas not black and white. Mistakes don’t always result in catastrophic failure, just a few degrees less success than may have otherwise been achieved. Without a better model of success to compare the results to, underperformance isn’t necessarily recognised as such and greater degrees of failure can leave people questioning the wrong things rather than the underpinning rationale of their thinking. To loosely quote General Schwatzkopf, there are things we don’t know that we don’t know.

Einstein made a statement about being one of the last people to have a good working knowledge of pretty much everything. That’s everything as in history and politics, geography and literature, science and the arts and oh, you name it. Everything. He’d needed to swot up on his weakness, mathematics, before he could make the claim, but who’s to argue? He wasn’t bragging about how much he knew, rather pointing out the rate the base of human knowledge was expanding so fast, no one could hope to keep up with all of it and so would have to choose the specific area of their expertise.

Einstein went on to say that the future would be one of experts who knew much about their field but little about others, sad but inevitable because there was so much more physics than there used to be, more mathematics, more discovered history, more of everything. The cleverest folks would know a great deal about a few things, have a good working knowledge of several other matters and be largely ignorant of much else. He has been proven right and now, experts and specialists abound, dragged on to our media to explain things to the rest of us, turning up at accidents to do their specialist research, examining patients in hospital, servicing our cars, growing crops, manufacturing our televisions, phones and hair straighteners, forecasting tomorrow’s weather, and inventing dual-cyclone vacuum cleaners. Things have progressed so far, it’s now inconceivable any one person could do it all.

Which brings us to referral programmes. Referrals are a significant aspect of customer-relationship-marketing, itself a division of the wider field of marketing, which is one part of a group of specialities involved in retailing – the way we bring products to consumers.

About twenty years ago, a group of market research experts (I think it was those clever folks at the Australian operation; Raggats) proved there was a major flaw in the thinking behind rewarding buyers for referrals.  It’s a bit too complicated to explore fully here, but the nub of things is that paying people to sell the details of their friends and acquaintances actually deters them from doing so.  What’s more, the larger the amount paid, the fewer referrals are forthcoming.

Referrals are a great source of business. Their low cost of sale and high closing ration makes them a kind of nirvana for sales operations but asking sales-minded go-getters whose lives have been predicated on commissions and bonuses to invent a method of encouraging more referrals is likely to invoke problems. Fundamentally, referrals arise from high levels of satisfaction and the sense of belonging and/or affiliation buyers feel. Most people don’t work for bonuses and commissions and are inclined to be suspicious of those that do. Large referral payments raise questions about profit margins which affect the way buyers feel about the deal they ought to be able to get at the point of purchase and importantly, rewards are not the same as incentives, they overlap but there are inherent tensions between them.

The research demonstrated that quality products, good service and good customer relations provoked referrals while payments had a negative effect. Increasing the size of payments reduced the inclination of buyers to provide referrals still further and had additional negative effects on the buyer.

Referral schemes are not redundant. For lower value products, modest, realistic incentives which benefit both the referral and the referee and which are paid in kind can work. Messing with those fundamentals tends to cause negative effects.

And so, people who know something of sales and marketing, but not quite enough about the field of referrals to claim real expertise prove the validity of those old sayings. A little knowledge is dangerous, the incorrect assumptions make asses of those involved but looking before you leap is pointless unless you are wearing the spectacles of genuine experts.