Referral relationships: how do you put a number on success?
According to research conducted by Macquarie1, third party referrals trump all other forms of business leads. But what does a successful referral relationship look like?
More and more businesses are learning that it's not good enough to just know where your business is likely to come from – understanding the impact on your bottom line is paramount.
Fewer and deeper partnerships are the way to go; otherwise you spend more time relationship managing than doing business.
David Clatworthy, Division Director at Macquarie Banking and Financial Services Group, says many businesses put so much time into a relationship yet never really calculate the cost of the effort relative to the revenue return.
"We call this the Return on Effort. To work it out, you need to ask a few fundamental questions: 'What constitutes a lead, what does that look like, how many are you expecting, what revenue will they bring and how will you report back?'
Clatworthy says defining metrics is the key to understanding if a referral relationship is worthwhile.
For example, if a financial planner wants to evaluate an accounting firm's capacity to produce qualified leads, they need to define how many and what kind of leads per year will generate an acceptable revenue increase for their business.
That could be 12 to 15 qualified leads per annum at a 30% conversion rate or more, generating $5,000 to $10,000 per annum in fees (which could relate to insurance, assets under management or fees for service) from each client.
In terms of the number of partnerships, less is more.
"Fewer and deeper partnerships are the way to go; otherwise you spend more time relationship managing than doing business. If, for example, five partners each bring in 12 to 15 leads per annum at a 33% conversion rate, then that will yield 20 new clients per year. Now things are starting to look good," Clatworthy says.
But it's not the numbers themselves but rather defining them that counts. And once you've put the numbers on paper, it's much easier to track progress and make adjustments to your model where necessary.
The referral relationship mindset
So you've got your model, and your numbers, and yet your referral arrangements aren't yielding the results you had anticipated.
Like any relationship, referral relationships are not set and forget – they need cultivating and strengthening over time.
Grant Robson, Executive Director at Macquarie says there are a few key things you can do to build an effective referral relationship.
"Like any relationship, it's important to understand in order to be understood. Focus on really understanding your potential referral partner's business. Can you explain what they do day-to-day or summarise their value proposition?"
Next, he says, you need to think about the client. Giving before expecting something back – whether that's information, contacts or referrals – builds trusts and sets the tone for the relationship.
"When it comes to clients, don't try to control the client relationship. Instead, be open about how you want to work with your clients throughout the year," Robson says.
And don't underestimate the value of personal chemistry.
"While there is merit in identifying which characteristics are important to you in an ideal referral partner, if you don't feel like sharing a meal with each other, then forget it – you won't want to refer your client to that person," he says.
Robson says to take a fresh look at each of your referral partners at least once a year to consider whether they're still positive supporters.
The cardinal rule?
"Don't waste your referral partner's time," Robson says. "Referral relationships are one of the most common ways in which businesses can work together for mutual business benefit. But if there is a gap between you that can't be bridged, move on."