What Makes Referrals Work?

Referrals occur everyday, in every industry around the world. And, sure, excellent service typically results in a high level of referrals being generated over time. But what actually drives referrals in the consumer's context?

To answer this question, I am going to describe a common situation - the BBQ referral situation.

"Bill" informs "Bob" over a drink at a BBQ that he is planning to build the family dream home in 12 months. Bill asks Bob if he knows a good builder that he would recommend. Bill responses with the name of a building company and mentions that they used this company to build their home 5 years. Bob thanks Bill for the recommendation and the conversation changes direction.

This referral is based on trust. Bill trusts Bob's judgement. However, in a society which is becoming decreasingly trusting of others, this level of 'blind faith' is in rapid decline. If "Bill" was more sceptical (i.e. more representative of the modern day consumer), he would ask "Bob" a series of questions to delve further into the performance of the building company. Enter performance predictors...

Assuming the building company being recommended communicated a number of performance predictors, Bob could simply quote these as his justification. For example, they offer a 100% unconditional satisfaction guarantee (and in 23 years only one customer has ever asked for this to be envoked), you can visit their display home to see their craftsmanship for yourself, they only use quality products in their homes [list off the quality suppliers], etc.

Make it easy for your existing customers to lead you to your new customers (via referrals) by communicating your performance predictors to them. Performance predictors make referrals work.

Justifying Purchases with Performance Predictors?

Performance predictors are a very powerful force in post-purchase evaluations.

There is a psychology term used widely in marketing circles called "cognitive dissonance" and it applies when consumers are evaluating their decision post purchase. Post purchase dissonance is the insecurity a consumer feels about the appropriateness of the purchase decision after the decision has been made. This occurs because consumers typically purchase emotionally and evaluate rationally.

Performance predictors provide consumers with the necessary rational justification to feel comfortable about their purchase decision when the dust has settled.

My wife is a master of the art in this regard. Michelle regularly justifies paying more than the category median price by steering my attention to a performance predictor. For example, she loves to shop at Pumpkin Patch for our girls clothing. These purchases are justified by the fact that this clothing lasts longer, even though it costs more than other department and clothing stores in the children's clothing market. Pumpkin Patch offers a 100% satisfaction guarantee with all their clothing (to make it easy for Michelle to justify her decision to me).

Four Questions to Assess the Potential Impact of a Performance Predictor

When considering the viability of a particular performance predictor, the following questions will assist:

(1) How immutable will the performance predictor be?

Does the performance predictor provide prospective customers with clarity of truth? The performance predictor should answer questions in the prospective customer's mind, not spur an avolanche of doubts. You want prospective customers to believe your claims without a shadow of a doubt.

(2) Is the performance predictor aligned to your market position?

Ensure your performance predictor reinforces and contributes to your chosen market position. Don't 'launch' a performance predictor which may create confusion in prospective customers as to your market position. If you occupy a 'budget' market position, then only select performance predictors which will reinforce a budget image.

(3) Will the performance predictor reduce the prospective customer's pre-purchase risk?

Resist the temptation to introduce performance predictors for the sake of the exercise. All performance predictors must be relevant to prospective customers in as much as they reduce pre-purchase risk and ensure the decision is made with certainty.

(4) Is the performance predictor sustainable?

When asssessing your performance predictor, ensure it is sustainable within the context of your business model. There is no point in launching a performance predictor only to find out it is costing a small fortune and returning very little. All performance predictors should contribute to driving profit, either directly or indirectly. If it doesn't pass this acid test, drop it.

Performance Predictors and Product Development

It astounds me in the current business environment, with hyper-competition, globalisation and highly sceptical consumers, that marketers are not always included in the product development phase of marketing.

In order to reduce marketing communication budgets and gain consumer trust, marketers must be involved in product development. Why?

Marketers need to build lead generation capabilities into the product, rather than artificially (and often ineffectively) 'tag-on' on lead generation capability at the end of the production line.

Performance predictors should be considered whilst the product is being developed, not after.

A Performance Predictor worth US$2.17 Billion!

Do you know "Jared the Subway Guy"?

Jared Fogle is famous around the world for losing 235 pounds in 12 months by eating Subway sandwiches and walking. He has become somewhat of a pop-culture icon and travels some 230 days a year to promote healthy eating amongst school children.

He is a performance predictor for Subway and created US$2.17 billion in additional sales revenue between 1999 and 2003. If you were trying to eat heathier and needed something fast, where would you visit?

Performance predictors work.

The Proof of the Pudding is in the Eating

This commonly used phrase (or more commonly used shorthand version: the proof is in the pudding), perfectly summates performance predictors.

The phrase means to demonstrate something to be true. Or defined in marketing terms, the true value or quality of something can only be judged when it's put to use.

In the case of performance predictors, I would argue that the prospective customer does not need to actually experience or use the product or service to make a purchase decision (or the implication would be that every business in the world would have to provide 'pre-purchase trials' on all products).

Powerful performance predictors will remove the pre-purchase doubt and result in prospective customers feeling confident in the ability of the business to deliver on its promise.

The Proof of the Pudding is in the Performance Predictors.

Performance Predictors and Market Position

Performance predictors should be used to reinforce your chosen market position. Well crafted performance predictors create evidence to support a position of quality, safety, speed, budget, or whatever your market position happens to be.

Let's look more closely at the Australian success story Bunnings Warehouse and how they have used performance predictors to reinforce their market position.

Bunnings Warehouse have been successful in 'owning' the budget position in the Australian hardware market. The performance predictors they have employed to achieve this positioning includes:

• Oversized warehouse-style stores, including concrete floors, unlined ceilings, colourbond external cladding and chalkboard signs;
• Lowest Prices Guarantee;
• Loss leaders inside the main entry of the stores; and
• 'Cheap perception' promotions using staff in TVCs and black illustration catalog drawings.

Select your market position and subsequently employ a range of performance predictors which provide evidence to prospective customers that the market position is reality.

Performance Predictors All Around (Part 3)

This is the final instalment in this series about the wide application of Peformance Predictors. Let's put schools under the spotlight...

I mentioned we had moved from Perth to the Central Coast. We also moved from Queensland to Perth 18 months prior and whilst living in Perth we had an exchange student from Brazil living with us. The organisation coordinating the exchange student sent us a notification prior to Natalia arrive of the school she would be attending.

My wife and I decided to drive past the school to ensure it was within walking distance, and if not, that a bus service existed. However, when we arrived out the front of the school the conversation changed dramatically starting with the comment, "I would never send our children to a school that has barbed-wire all the way around the top of a 8ft high fence".

Further, "Do you think the barbed-wire is there to keep the children in, or undesirable nearby residents out?" "Either way, this can't be a good thing."

As you can see, negative performance predictors have a significant impact on prospective customers. The school could have had a range of positive performance predictors too, such as a large percentage of leaving students with high OP results, quality extracurriculum facilities and outstanding teachers ... unfortunately these weren't given the opportunity to shine because they were encased with a negative performance predictor.

Performance Predictors All Around (Part 2)

When I moved my family from Perth to the Central Coast of NSW some 18 months ago, my wife had some apprehension about our new community when we first arrived.

When I asked why she was feeling this way about the Central Coast she replied, "Oh, I just have a bad feeling about the place".

I probed further with, "Is there something specific that has resulted in this bad feeling?"

My wife then proceeded to rattle off this list of negative performance predictors:

• "There are two cars on the side of Wyong Road that have obviously broken down, and now there windows are smashed and tyres slashed";
• "There are several crimes stories on the news every night" [Nb. the majority of crime reported was occurring in Sydney, but the perception of high crime was being absorbed by my wife];
• "Hearing sirens is common - almost daily"; and
• "Residents don't seem very house-proud, because many yards have overgrown lawns".

Not displaying negative performance predictors is equally as important as displaying positive performance predictors, as the story above indicates.

[Nb. Lucky for me, my wife and I have a very supportive relationship. We still live on the Central Coast, and happily so.]

Performance Predictors All Around (Part 1)

The application of performance predictors is wide spread. So far, I have applied performance predictors to business, however they are equally relevant to people, communities, schools, etc. Consider this example...

You are recruiting a new CEO for a publicly listed company of which you are on the board. The following applicant presents themself with these performance predictors:

- During their last position as CEO the company increased profit by 415% (ethically).
- They can speak and write English, French and Mandarin Chinese fluently.
- Michael E. Porter says, "This person is the most capable business strategists and leader the world has ever witnessed" and Jim Collins comments, "This person should teach other CEOs how to do their job".
- They are entry No.1 in the world business edition of the Who's Who Book.
- They have a Harvard Business School MBA and completed the McKinsey & Co. graduate program.
- They run 5 marathons a year, and have done so for the last 3 years.

Assuming they 'fit' your corporate culture, are you likely to hire them based on the above?

In our low-trust society, performance predictors are the confidence we can provide to others about ourselves.

What marketing can learn from the boiling frog story

As you have no doubt heard, they say that if you drop a frog into boiling water, it will hop straight out to escape the danger. However, if you drop a frog into cold water and very gradually heat the water until it is boiling, the frog will not become aware of the threat until it is too late.

Consumers (the soul of marketing and its reason for being) have changed gradually over the past couple of decades, but has marketing kept pace?

Sure, we have moved our messages online and explored new concepts like open source marketing, guerilla marketing and one-to-one marketing, but has marketing fundamentally changed?

Is marketing slowly boiling to death?

Premium Pricing: A Performance Predictor?

As I previously mentioned, performance predictors are not performance perceptions, they are reality! Following is an excellent example highlighting the difference.

Premium pricing is a strategy which suggests a business should set prices artificially high in order to encourage favourable perceptions.

As you can appreciate, premium pricing does not suggest you create more value or deliver additional benefits when increasing price ... it is simply about creating a false perception. This is not a performance predictor.

Pricing that reflects the true value (as indicated by consumers) and market position (in the mind of consumers) of the product or service is a performance predictor.

Performance Predictors vs. Performance Perceptions

Performance predictors are not shallow facades 'bolted-on' to create a positive perception of performance. Performance predictors are focused on helping consumers make astute purchasing decisions by providing pre-purchase evidence to the likely performance of the product or service.

This said, there are some individual performance predictors which may be seen as merely perception creators, however such performance predictors should only be executed in conjunction with 'client outcome based' performance predictors. For example, a performance guarantee in conjunction with a client result statistic.

Marketing with integrity

Performance predictors are founded on the philosophy of integrity in action. This is not an exercise of manufacturing perceptions to manipulate consumer's judgement. It is based on delivering results to customers and then communicating the results to prospective customers.

Consumers are fed-up with companies who make empty promises. Organisations need to prove their claims. And prove it by proudly displaying performance predictors which eliminate the perceived purchasing risk. Performance predictors allow organisations to publicly display internal realities.

Performance predictors ‘prove promises’ as they simultaneously draw prospective customers into an organisation. It is the most ethical form of marketing available today.

Two types of performance predictors

Performance predictors can be categorised into tangible and intangible.

Tangible Predictors

Tangible predictors have a significant impact on the perceptions drawn by consumers. For example, Storm Financial has created a perception of quality partly based on their office fit-out. The importance of tangible predictors, such as those listed below, should not be underestimated as consumers subconsciously filter these elements to assist in predicting future performance.

Some examples of tangible predictors include:

- Office or store fit-out
- Location
- Product demonstrations
- Visual branding
- Stationary
- Marketing collateral
- Product packaging
- Staff uniforms
- Tools of trade
- Signage
- Photographs

In the case of a courier delivery company, consumers make the logical progression from dented and scratched vehicle equals dented and scratched parcel. This consumer thought pattern happens instantaneously at the subconscious level. For courier companies, tangible predictors are critical to success.

Intangible Predictors

Not all performance predictors are physical objects. In fact, many of the powerful predictors are actually intangible. The intangible predictors are typically absorbed by the conscious, or rational, part of the brain.

Intangible predictors include:

- Independent research findings
- Before and after demonstrations
- Market position rankings
- Prices
- Celebrity endorsements
- Consumer confidence programs
- Qualifications and standards for the conduct of personnel
- Size of R&D budget
- Industry awards
- Prominent client list
- Testimonials
- Professional memberships
- Years in operation
- Guarantees and warranties
- Critics reviews
- Client result statistics

Intangible predictors can be represented with tangible objects. For example, winning a business award would be considered an intangible predictor; however this ‘win’ can be represented with a trophy or certificate.

It is a combination of tangible and intangible performance predictors working in synergy, rather than any one in isolation that produces sustainable results.

Performance Predictors in Action

To provide some clarity around the concept of performance predictors, let us consider an example.

Hyundai has pursued the ‘low price’ position in the Australia new car market for some time, but consumers were questioning the product quality. As a result, Hyundai introduced an extended 5 year warranty as standard and 24 hour test drives. The extended warranty and 24 hour test drive are both examples of performance predictors. They provide prospective customers with an insight into the likely performance of the vehicle.

From perception to performance

Organisations that embrace the concept of performance predictors and pursue the strategy at all levels, are in essence, changing the focus of their marketing from perception to performance.

Most marketing attempts to sugar-coat the product or service being promoted and create a perception of quality, low-cost, speed or whatever the relevant market position happens to be, however performance predictors simply highlight what exists in reality.

Consumers are becoming increasingly sophisticated and increasingly sceptical, so sugar-coating is losing its effectiveness rapidly. Typically, marketers need to focus more on product performance and less on marketing communications.