The power of compounding referrals

by REP24 Jul 2015
If you’re not familiar with the compounding effect, consider this: if you start with $1 and double it, you will have $2. Double it again, and you will have $4. Then, if you double your initial $1 10 times, you will have $512. Double that single $1 20 times and you will suddenly jump to having $524,288 in your pocket, and doubling it 30 times will give you $536,870,912! Yes, over half a billion!
 
So, in theory, you could start with $1, gamble it on roulette (betting on red or black), and if you won 30 times in a row (betting all your winnings each time) you would have over half a billion dollars! Of course, the odds of winning 30 times in a row are low (you have a 0.00000009% chance), and the purpose of this article is not to promote or endorse gambling but to get you thinking about how to grow your client base and business fast using compounding referrals.
 
So what do I mean by compounding referrals, and how can one client each week potentially turn into 1,200 clients in just two years?

First, let me explain the numbers, and then I’ll tell you the strategy of how to go about it.
 
Compounding referrals: the numbers
I’m going to assume that you can generate just one new client each week in your business. To keep the numbers simple, we’ll say this equals to four new clients each month, which would give you a total of 96 new clients in two years’ time. Simple maths so far, but a far cry from 1,200 clients.
 
Here’s where the power of referrals comes in.
 
In this example, to get 1,200 clients in two years you will need each new client you see to give you five referrals. Now I know you might be wondering exactly how you would do this, but bear with me as I’ll get to that in the strategy section.
 
The next part of the numbers is where the compounding kicks in. Here we need to assume a conversion rate for the referrals. I’m going to say in this example that you can convert 20%, or one out of the five referrals each month, into a new client (which is a conservative estimate in my view).

You start by generating just one new client a week, or four new clients in the first month. Each of those four new clients gives you five cold referrals – so 20 referrals in Month 1. In the next month, you convert 20 per cent, or four of those 20 referrals, into new clients, and those four new clients each provide you with five referrals. Plus, in this second month you also generate another four new leads, so you have a total of 40 new referrals in the second month.
 
By Month 6: you have a total of 84 clients, having started with just one self-generated client each week. What’s more exciting is that during this time your total database has grown from zero to 444 people. That means there are still 360 people on your database who are not yet clients (444 minus 84) and you can put them on a contact management strategy to ensure a good percentage of those prospects convert into clients at some point in the future.
 
Working the numbers out to the two-year mark, Month 24, you can easily see the significance of this strategy. Simply put, just two years after starting from scratch, you would have 1,200 clients on your books, with a total database of 6,096 people, of which a huge percentage could potentially become clients over time, using a smart contact strategy .

Are you excited by these numbers? Are you skeptical? Good! Now that you’ve seen the numbers, you need a strategy in order to play this game successfully. If you’re skeptical, it’s probably because you’re not following the strategy below.
 
Compounding referrals: the strategy
In the numbers section, I said that for each new client you see you should extract five cold referrals to get your 1,200 clients. Now I’m not talking about being annoying and hard-selling or pressuring clients. I’m not even talking about asking for ‘warm’ referrals; I’m just after ‘cold’ referrals. Here’s the difference, which is key to making this work:
 
• A ‘warm’ referral = a direct personal endorsement or recommendation from the client to the referral. For example, you tell your best friend about a new café they should visit.
• A ‘cold’ referral = provision of contact information (email, postal address, cell number) without the client having to directly engage with the referral. For example, providing a friend’s email address when entering a competition (or taking up an offer) so they too can enter or take advantage of the offer.
 
As an aside, five referrals is by no means a hard-and-fast number. In fact, you can make this number anything you like. Not happy asking for five? Go for three. Not satisfied with just five? Go for 10! Of course, changing the number of referrals per client will dramatically alter the speed in which you grow your database and business.
 
Play around with the numbers and do what suits your goals and makes you comfortable.

3 steps to make this happen:

1. Set yourself a non-negotiable target of extracting a certain number of cold referrals (say three, five or even 10) from every new client.
2. Study the five pillars and design your strategy to cover each of these points.
3. Integrate referrals into your standard sales process with each new client. One suggestion would be to raise the topic of referrals just after you have signed a client up – at the point when you have clearly demonstrated that you can help them and solve their problems

The only downside is that you could get too busy and have to expand and take on support staff or brokers. A good problem to have, I’m sure you agree! My final note is this: don’t fall into the trap of dismissing this strategy before you seriously consider and try it yourself. Go get ’em!



This is a slightly amended version of an article written by James Veigli. It has been shortened to make it suitable for web publishing.

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