Businessman yelling into a megaphone with money coming out of itReferral marketing is an underappreciated means of reaching new customers and potentially increasing sales. Despite the fact that this approach helps attract a steady stream of new, high-quality customers, only 39 percent of marketers espouse it, according David Deal of Gigaom Research.

Deal calls the practice a digital marketing “dark horse” because 43 percent of those who do focus on referrals find that they attract more than 35 percent of new customers this way — double the number of marketers who find such success with email marketing. Yet it isn’t a go-to for most marketers.

But business owners who ignore this option are missing a big opportunity.

Extole’s Referral Marketing Best Practices for 2014 [PDF] calls referral marketing a “must-have for brands” and has dubbed it the “third channel” for online marketing after SEO and SEM. After all, 84 percent of customers trust referrals from friends, and are seven times more likely to trust a personal recommendation than traditional advertising, according to Nielson.

Extole’s guide describes how to create, manage, and optimize referral reward programs, the kind that give cash or other rewards to current customers for recommending friends. These programs have come under some amount of scrutiny, however. Some wonder whether word-of-mouth recommendations will be trusted [PDF] if they are incentivized, while others remain skeptical whether customers attracted through referral programs are likely to be valuable to the business.

Referral Marketing: Worthwhile to the Bottom Line

While skepticism can be healthy for small-business owners, the research on referral marketing makes a solid case for its effectiveness.

A 2011 study written up in Journal of Marketing looked at whether customers attracted by incentivized referral programs were more or less valuable than other customers. The team of U.S. and German researchers looked at customer value at a leading German bank and found that the referred customers were indeed better: They tended to contribute more revenue, especially when first being engaged, and were more loyal over time than other customers.

As well, a 2012 study featured in Journal of Service Research found that the effect of incentives can be negative, neutral, or positive, depending on a variety of factors. The important takeaway is that the presence of a reward — and the potential erosion of trust it might cause – isn’t necessarily a hindrance to quality referrals.

Start With Referrals That Don’t Require Incentives

Still, given the mixed findings on incentive-based referral programs, it might be best to look first at how your business can generate referrals without incentives. According John Jantsch, author of The Referral Engine: Teaching Your Business to Market Itself, entrepreneurs should structure their entire business around the idea of wowing customers so profoundly that referrals become inevitable.

“The most effective, long-term cultural shift for most organizations comes when the focus is put on making the total customer experience something worth talking about on a case-by-case basis,” Jantsch writes in The Referral Engine.

He finds that most businesses focus too much on impressing their customers with the price, features, and benefits of their products. While these things are undoubtedly important, Jantsch advises business owners to emphasize “the emotional rewards that are essential for the total customer experience.”

After all, the act of purchasing a product or service is not entirely logical: “Buzzed-about businesses have a good solution draped in a total experience that excites, delights, or surprises the customer and motivates them to voluntarily talk about their experience,” Jantsch says.

When your business generates referrals without you having to offer any reward for them, you’ve written yourself a ticket to sustainability and growth.

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