What is Referral rate?
The referral rate divides the new customers in a period who came through a referral by all new customers in the same period. Depending on the business you count customers, jobs or enquiries; what matters is that numerator and denominator use the same unit. A referral counts when a specific person pointed someone to you. If an enquiry only says "referral" without a name, it belongs in a separate column, "referral, source unknown", otherwise documented and assumed referrals get mixed up.
The metric measures what comes in, not what people intend. The Net Promoter Score asks how likely someone would be to recommend you. The referral rate counts how many actually reached you through a referral. Distinct from this is the opposite direction, the share of your existing customers who recommended at least one person in a period. Both figures are useful, but they answer different questions: where your new customers come from and who in your base is doing the recommending.
The rate can only be captured at the source. Web analytics sees referred visitors as direct visits or searches for your name, and attribution does not see them at all. What works is the question "How did you hear about us?" in the first conversation and a "referred by" field in the CRM that is filled in when the contact is created. With small numbers the rate fluctuates heavily: with 20 new customers a year, a single customer moves it by five percentage points, so a twelve-month view is more useful than a single month.
Why does Referral rate matter?
How much a referred customer can be worth was measured in a study of around 10,000 retail customers at a German bank: customers acquired through a referral programme were worth at least 16 per cent more over six years than comparable others, mainly because they left less often (Schmitt, Skiera, Van den Bulte, Journal of Marketing 2011). Whether that holds for your referrals only becomes visible once the source is in the CRM. Without that field, the channel many service businesses consider their most important remains a guess.
Referral rate in practice
- 01Of 24 new customers in a year, 9 came through a referral with a name and 3 with "referral" but no name: the documented referral rate is 37.5 per cent, including the undocumented ones 50 per cent.
- 02A tax practice now asks how clients found it in every first meeting and enters the answer in the "referred by" field instead of estimating the split at the end of the year.
- 03An agency puts the direct visits from its web analytics next to the CRM field and sees how many of the supposedly direct visitors were in fact sent by an existing client.
