The challenge in marketing is usually how much of the limited budget most startup companies have should be used in advertising.Conventional advertising is expensive and is not a guarantee that an audience will purchase your product. It does, however, give you a chance to get your product or business or service out to the public and create a pull towards your business.
Referral marketing or word of mouth advertising is a new trend that is taking the business world by storm. It is simply a process by which consumers share their knowledge about a particular product or business with other fellow consumers and this continues to grow and eventually expand the market coverage for that product.
The movie industry is notorious for using this method of advertising as most movies tend to release previews a month in advance to the movie opening and then the preview showings are completely stopped. They then rely on the movie viewers to continue spreading the word about the movie and so their advertising budget does not need to be over-extended.
The best part about referral marketing is that it is inexpensive. This is simply because the people who are advertising for you are doing it voluntarily. A lot of the social networking websites like facebook.com, myspace.com, youtube.com and the like are all booming as a result of referral marketing.
According to consumer reports, 57.7% of all products purchased online in the year 2007 were because of word of mouth. That's more than half of the revenue generated online in a whole year. This goes to show you that if people like a product not only will they buy it but they will talk about it and encourage other people to do the same.
The nature of referral marketing is that it continues to expand by itself without any external force applied. The law of inertia states that an object in motion stays in motion. Well in this case, once you get this started it will continue as long as people are enjoying your product or service.
The famous e-mail account Hotmail.com was started in a similar fashion. One person created the concept of free e-mail but required that if you signed up for it that you had to refer at least ten of your friends.
After a year he had over one million people in his network and then Bill Gates came along and purchased the rights to his already built network. Now I don't think Bill Gates would have needed help building his own network so why did he pay this kid over $400 million for it? Because it was a "self-perpetuating" subscriber base. It was growing regardless of what was going on because it was free and people liked the service.
That is the power of referral marketing.
People Carry More Credibility
Here is the big takeaway for why referral marketing works: people do the advertising. People will naturally have more influence than any other conventional form of media advertising like billboards, television ads, newspaper ads, etc.
If you think about the products you are currently using now, you probably did not get convinced to use the brand of toothpaste you use because of a commercial on television. It was probably your mother that told you it was the best one and you took her word for it.
That's the key: you took her word for it. People carry more credibility because they are actual users of whatever it is they are promoting. The same goes for the movie industry example. If you saw a movie you really enjoyed you would have no problems referring to someone else with enthusiasm. Same goes for a movie you really didn't enjoy.
But here's the reason why this is so effective: if you saw a fantastic preview to a movie and decided to go see it and a good friend of yours told you it wasn't worth your time, you probably wouldn't go see if even though the preview was good.
The credibility from your friend outweighed the credibility of the conventional form of advertising.
Referral marketing works if you know how to access it and use it for your own personal business. Sure you might have to initially spend a little money and dapple in conventional advertising as your primary source for getting market coverage, but in the end happy consumers will always bring you happy consumers. Good luck!