As a source of new business, referrals are the stuff a home improvement company's dreams are made of. “I wouldn't call them a slam dunk,” says Mike Burgess, vice president of sales for Gold River, Calif.–based K-Designers, one of the industry's largest companies, “but they generally close at a much higher rate than any other type of lead.”

At Accent Windows in Westminster, Colo., the closing rate on referral leads is around 75%, compared with approximately 50% for other leads, says company owner Richard Roeding.

ABC Seamless of Northeast Ohio, in Fredericksburg, enjoys a referral closing rate of 47%, according to Ann Peterson Miller, marketing coordinator. “I looked up leads from the yellow pages as a comparison, and those close at 32%,” she says. “So referrals are definitely a better and much cheaper source of leads.”

Low to No Cost

As Miller and others note, referrals not only close at a much higher rate than all other kinds of leads but they cost a lot less to generate. Roeding estimates that the cost of referrals is typically less than one-third of other lead costs.

“Our cost of appointments is currently in the $400 range,” says John Vondra, general manager of Renewal by Andersen, Milwaukee. In contrast, Vondra says, the company pays about $200 for referral leads — $100 to the consumer who makes the referral and $100 to the salesperson who solicited the lead. “You take $200 times, perhaps, 1,000 leads and that is a lot of money,” he says.

Still, referrals as a percentage of a total lead generation program vary widely from one home improvement company to the next. Some well-entrenched companies — often those with long standing in their marketplace — generate half or more of their business from referral leads. On the other end of the scale, operations that invest little in marketing to past customers or provide few or no incentives typically generate less, usually much less, than 5% of their leads from referrals.

In any case, no one disagrees that in an era of rapidly escalating marketing costs — costs that could push marginally profitable companies into the red — boosting referral leads is more important than ever.

For example, although consumer referrals are “a small percentage” of the total marketing plan right now for the Home Remodeling Group, Mark Four Enterprises, Fairfield, N.J., “it is ever increasing,” says Marc Leen, vice president. Consumer referrals from the company's customer loyalty program are “probably less than 5% of sales,” Leen says, with another 5% coming from a parallel subcontractor rewards program.

Leen says he keeps tinkering with the program because “the more [referral] leads you get, the more costs go down, from a marketing perspective.”

In effect, the cost of referrals is zero, he argues. “There are no [direct] marketing costs involved in referral business,” Leen says. When a referral comes from the customer rewards program, Leen has already spent the marketing dollars to create that customer appointment. “Typically, you are going to get that referral from the sales rep who is out there dealing with the homeowner anyway.” While there is a cost for the rep to be out there, he explains, there is no direct, additional impact on the company's bottom line.

Because referrals close at significantly higher rates and cost so much less to produce, an upsurge in referral leads can have a disproportionately positive effect on a company's profitability.

Customer referrals are 10% of the leads that come in to Modern Remodeling, Manassas, Va., but they make up 15% of sales, according to company owner Jonathan Ballard. Miller, of ABC Seamless of Northeast Ohio, says that referral leads cost 1% of sales, “but between referrals and repeats, we get 59% of our business.”

“Referrals equal profits for the company, it's as simple as that,” Ballard says. “If you have a successful referral program, it's definitely going to drive the profits of the company.”

Ramp it Up

With so much potential for enhancing profits, you might think that refining a referral reward program would be at the top of any home improvement company's marketing to-do list. But that's not always the case. Many replacement contractors have a referral reward program they hope will encourage customers to refer friends, family, neighbors, co-workers — anyone in the market for that contractor's product and service. How effective they are is another matter. However, in an era of restricted telemarketing and rising consumer suspicion, when leads are getting harder to come by all the time, that may be changing. Even companies well known in their area and able to generate referral leads with comparative ease are recognizing just how valuable such leads are to a marketing program with well-integrated multiple sources and are ramping up efforts to turn happy clients into new business.

For most of its 40 years, for instance, ABC Seamless of Northeast Ohio got along just fine without a referral reward program. “We have a good reputation in the area, and we've always been able to get a lot of referrals,” Miller explains. However, a few years ago, she says, “we recognized that this is something we have to promote, encourage more, and reward people for.”

Leen is emphasizing his program, too. He believes it will become even more important because of “telemarketing laws and everything else that's going on in the world.” And Roeding is currently building an elaborate system of rewards — similar to credit card programs that award points for use — to extend his existing reward referral plan.

The Goods

By and large, contractors proclaim their reward programs successful, and yet, in the next breath, they will tell you their program has plenty of room for improvement. Leen thinks he could get 30% or more of his leads from referral programs “if we really had people working the program.” Vondra says he feels Renewal by Andersen of Milwaukee could double its referral leads. “I think we can generate a referral from almost every single customer if it's approached properly, because everyone knows someone who has old windows.”

How do you improve your program? There's little consensus among contractors with referral programs about what works and what doesn't. Some contractors, for example, reward consumers for referrals that result in appointments. Some only pay a reward when the sale is made. Ballard sends out a $100 refund check for a referral sale or knocks $250 off the referrer's next project. K-Designers pays “for each prospect they send us who becomes a customer,” Burgess says. Renewal by Andersen of Milwaukee pays $100 as a cash award that goes to the referring customer after the job has been installed. Many find it effective to pay a small fee for each referral name, with an additional incentive if the referred prospect becomes an installed job. Some contractors also award bonuses to salespeople who produce a high percentage of referrals. And some find it worthwhile to supply extra rewards to those past customers who become an ongoing source of referral names.

Typically, ABC Seamless of Northeast ” Ohio gives rewards both for a referral appointment and a subsequent sale. The person being referred must schedule an appointment before the referrer receives a $25 restaurant gift certificate, Miller explains. When a sale results, the referrer is entered into a monthly drawing “for a $500 gift certificate or furniture or a hotel stay. We change it every month,” she says.

Power to the Salespeople

In some cases, salespeople get an incentive for referrals, over and above sales commission, and the opportunity to run the referral sale. In other operations, referrals are more or less a condition of continued employment for salespeople.

“The first job of the salesperson is to get the sale, and the second is to get referrals,” says Mervyn Hollander, owner of Weathertite Windows, headquartered in Youngstown, Ohio. The company pays salespeople for referrals over and above their commission on sales. Hollander says his business gets some 30% of its leads from referrals.

Burgess says he rewards salespeople for referrals but declined to say how much. However, “it's a flat amount and it is definitely big enough to get their attention,” he says.

Of course, contractors try to make reward programs as attractive and compelling to consumers as possible but without going too far. It's illegal to present a referral reward as a sales inducement, so contractors must be careful to introduce the program to buyers after the sale is complete. Beyond that, companies must balance their efforts so as to get as many referrals as possible without alienating or offending their customers.

“It's a fine line and you don't want to force it down their throats,” Ballard says. “We don't want to push it too hard and make them feel like we are trying to make them sell for us. But at the same time, we do want to remind them of the financial benefits of referrals, for them as well as for us.”

Make it Some Thing Special

When it comes to the success of reward referral programs, much depends on the level of service the company provides (as determined by customer satisfaction surveys), the extent of outreach to past customers using databases combined with direct mail and warm calling, and the investment in stationery (company postcards, forms, and the like) and other marketing materials to make it painless for past customers to suggest future ones.

Many contractors try to make their reward referral programs more effective by adding some unique element. Leen, for instance, puts an expiration date on every reward offer but resurrects the program immediately after it expires, with minor differences. A time limit, he points out, serves as an incentive for the customer to act and also says “this is not an open-ended offer.” It is, Leen adds, important to follow up quickly on the heels of a job successfully produced and a customer feeling good about it. The customer who's pleased immediately after a job is done will lose that focus as time goes by, he points out. “We feel we get the biggest bang for the buck within that one- to three-year window, when people are still excited about what we did for them.”

Accent Windows rewards consumers with personalized gifts rather than the typical cash or gift certificate — and not just for referrals, explains Roeding. For this, he makes good use of company spokesman and ex-Denver Broncos linebacker Karl Mecklenburg. “I get an idea of what interests you from working with you, and then the day of the installation I will typically show up with an autographed football or jersey or whatever it might be,” he says. The reward can just as easily be a round of golf at a favorite course, if golf is an interest, he adds.

“Rewarding” the customer in this way often prompts an immediate referral, he says, and lays the groundwork for more. A check for $100 “comes and goes pretty quickly,” while an autographed football or jersey hanging in the den tends to last longer, Roeding explains. Then, when customers call later with a referral, they'll often ask, “Hey, can I get another one of those footballs?” he says.

While the particulars of a program can help, most company owners agree that the missing ingredient for getting more referrals — and the ingredient you must have for success — is management attention. Hollander, for example, says you've got to stay focused on the program. It's something he covers frequently in sales meetings.

“It's like any other lead generation program,” Burgess says. “The hardest part is pushing the envelope to get it done on a daily basis. It has to be worked consistently to get consistent results, and the moment you stop doing it is the moment referrals stop coming in.”

Leen agrees. “It comes from the top. If you have a leadership that believes in it, it will trickle down and eventually it will sink into everybody and be successful,” he says.

For maximum results, a referral reward program has to be part of the company culture, Roeding says. “A lot of times I think companies come out with a great idea, but they don't structure and implement it in a way that is going to get the results they want. These programs have to be part of your culture, part of your routine. They just have to be automatic.”

What A Trip

What's it worth to you, and your company, when you can get past customers to bring you new business? Carl Hyman, chairman and part-owner of Alure Home Improvement, figures it's at least worth the cost of a trip.

Several years ago the Long Island, N.Y., company began a Partner Points program. Past customers who earn 200,000 points win an eight-day, all-expenses-paid vacation for two to the Caribbean. Customers of the $27 million company, which installs kitchens and baths, Owens-Corning basement finishing systems, and roofing, siding, windows, and gutter protection, accumulate points based on the dollars spent by those they recommend to Alure. In addition, of course, their own projects count toward the point total. Beyond that, past customers get 10,000 points for attending the party that Alure throws in its showroom every other month, a soiree that allows salespeople to network for new business.

Theoretically, Hyman says, a customer could do one small job and rack up points simply by recommending friends to Alure.

Alure, which has been sending referral sources to the Caribbean for 14 years, used to award the trip to the customer who sent the most business to the company in a year's time. With Partner Points—a registered trademark—that broadened to include anyone who referred a certain volume of installed business. Points never expire.

In the program's first year, Alure sent five couples to the Caribbean. In the second year, the company sent eight couples.

Hyman estimates the cost of sending two people to the Caribbean — including hotel, transportation, meals, and special luxury services, such as manicures and massages — at $8,000. “So if they give me $100,000 worth of business, that's 4%. If you can hold marketing to 4%, for repeat and referral with higher margins, what more do you want than that?”

Hyman estimates 60% to 65% of the company's work is repeat and referral, and 80% to 90% of the company's profit comes from that source. Alure spends about $800,000 annually on advertising. The Partner Points program is explained in depth on the company's Web site (www.alure.com).