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Friday, October 19, 2007

Referrals and advertising

A few weeks ago, I questioned construction business consultant Michael Stone's assertion that contractors should only rely on referrals for 25 per cent of their business; while 75 per cent should come from advertising.
This seemed wildly out of balance to me. Our business earns most of its income from selling advertising, but I would never counsel potential clients to rely on advertising for more than a much smaller portion of their business; perhaps the inverse of what Stone seemed to be advocating. So I sent him an email seeking further clarification.
It turns out that Stone has a rather broad definition of "advertising" -- he also counts:

  • Repeat customers
  • Schmoozing
  • Suppliers and subs
  • Other contractors
  • Association leads
  • And so on.
"I consider referrals to be when a customer, friend or relative suggests your name to someone else to have work done," Stone writes. "Referrals are passive -- depending on referral's means you are hoping that other people are talking about you. that's fine when the market is good and business is plentiful, but it's no way to build a long-term business."
Stone says a referral means you have no control over:
  • Who is calling
  • Where they live or where their building is located
  • Their income bracket
  • The type of job they are calling about or want done
  • The time of year they call.
"Most important, you will never know how much business you missed because you did not advertise. Referrals are easy, but easy doesn't cut it in business. Business owners need to take active steps to promote their business."
Ok, I understand things now. Stone is saying essentially you must engage in activities to market your business. I suppose this could be seen as advertising, but since we are in the advertising business, I have a more closely defined perspective. Keeping repeat long term customers happy really is the best way to go, especially if it results in relevant referrals (such as the DesignGold story just posted.)
Advertising, not planned right, can be by far the worst use of your money. The reason is that it is so easy to buy. The ad reps will gladly take your order, prepare the ad, ad make it 'easy'. Of course that doesn't mean the advertising will be effective.
Effective marketing requires work, effort, measuring, and careful planning. Advertising of course can be part of the mix; but I still think if advertising is narrowly defined as paying money for promotion with the hope that your phone will ring, you (unless you have tested the advertising for effectiveness, or see it as part of a strategy to maintain and develop relationships with current clients) should be a minority part of your marketing; and the number and quality of referrals should be a key indicator of your success.

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