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Want business growth? Depend on kindness of strangers

Most companies believe their existing customers are their best source of referrals. Data suggests they may be wrong.

Nearly 82 percent of firms get referrals from people who have never worked with them before rather than through existing clients, according to a recent study by Hinge Research Institute.

Why do complete strangers make referrals to a firm they have never worked with or never met?

Business card
Fabrice Lerougel | ONOKY | Getty Images

When we asked the referrers, the vast majority said it was because of a company's reputation and what we call "visible expertise." In fact, the visibility of a firm's expertise is the single most important factor in someone making a referral.

Many referrers became aware of a company's capabilities when a member of its team spoke at a conference or wrote blog posts and articles that demonstrated the firm's knowledge. In some cases, the company showcased a successful project on its website or otherwise publicly demonstrated its skills and knowledge. In other words, professionals made their expertise visible to the outside world.

Some types of visible expertise are more important than others, we found. According to an earlier study, which we conducted in 2014, the most common sources of expertise-based referrals are speaking engagements and blog posts.

But that's not the end of the story. Existing customers are still a good source of referrals for many firms. According to Hinge data, about 80 percent of firms' clients are willing to refer their current service providers to others, though their willingness varies by industry.

When word-of-mouth marketing from satisfied customers is the main way a firm spreads the word, the number of referrals it can receive is limited by the number of clients it has. This means firms with better-known, more visible brands have a larger pool of potential referrals.

Many firms try to raise their visibility by spending thousands of dollars sponsoring tables at industry conferences and sending employees to networking events. In light of our research, they may want to reallocate those funds. Sponsorships result in less than 1 percent of all referrals. Networking did little more to drive referrals to a firm, producing just 3.4 percent of total referrals.

Cultivating friends at other noncompeting firms is a better bet, the research found. These contacts are often happy to send business to reputable firms they know. For instance, an accountant who works on a specific kind of financial transaction is often happy to refer a client to a knowledgeable attorney who also has expertise in such deals.

Making referrals yourself can pay dividends, too. In fact, the more referrals a firm makes, the more it is likely to receive. The average participant in a 2014 survey received seven referrals in the past six months, while the top 20 percent of referral makers received more than 21.

Of course, not all referrals work out. In our research, we found that nearly 52 percent of prospects have ruled out a referred service provider without even talking with them.

What went wrong? While the data doesn't provide a definitive answer, a wide variety of factors could tip the scale against a firm, especially in a competitive marketplace. Perhaps a prospect Googled the firm and couldn't find a single item about its experts. Or maybe a potential customer was unimpressed with or frustrated by the firm's website.

The good news is that firms can address deficiencies in visibility and perceived expertise — after all, many financial and professional services firms are chock full of experts with a track record of success. By showcasing their best features and past performance, firms can win a lot more referrals.

Sources that affect the number of referrals

— By Lee W. Frederiksen, research director of the Hinge Research Institute and managing partner at branding and marketing firm Hinge.

Note: The 2015 study on referral sources included more than 500 companies in the financial services, accounting, management consulting, architecture, engineering, marketing and legal industries, among others.