In the most recent issue of the New Yorker, author Nathan Heller interviews AngelList founder Naval Ravikant for his piece on the Bay Area’s entrepreneurial culture, “Bay Watched.” Ravikant discusses how the costs of launching a startup have fallen dramatically over the past several years:
“The same systems that make outsourcing of small tasks more efficient have driven down the cost of launching a company. Once, an entrepreneur would go to a venture capitalist for an initial five-million-dollar funding round—money that was necessary for hardware costs, software costs, marketing, distribution, customer service, sales, and so on. Now there are online alternatives. ‘In 2005, the whole thing exploded,’ Ravikant told me. ‘Hardware? No, now you just put it on Amazon or Rackspace. Software? It’s all open-source. Distribution? It’s the App Store, it’s Facebook. Customer service? It’s Twitter—just respond to your best customers on Twitter and Get Satisfaction. Sales and marketing? It’s Google AdWords, AdSense. So the cost to build and launch a product went from five million’—his marker skidded across the whiteboard—’to one million’—more arrows—’to five hundred thousand’—he made a circle—’and it’s now to fifty thousand.’”
While the explosion of new businesses is a good thing for the Bay Area economy (unless you’re looking to rent an apartment here — but that’s a different story), it makes life difficult if you are one of those startups or one of the companies in the same industry the startups are disrupting. Why? Because as more and more companies and products flood the market, it’s harder and harder to reach customers with your marketing. Plus, as Ravikant mentioned, budgets are getting smaller. Even if a startup wanted to rely on traditional advertising, they may not have the cash. That’s where referral marketing comes in.
Extole recently surveyed 169 sharing economy companies most of whom have been around for only a couple of years. These are companies like AirBnb or Rent The Runway. More than 40% of them have referral programs reinforcing the importance of the referral marketing channel to new businesses.
Or, to put it another way: “Yes, you could spend exorbitant amounts of money on marketing to launch a company. Or you could use the time-tested, much more affordable approach: referrals. In other words, make your customers do the work for you.” That’s what Inc. Contributing Editor John Brandon says.
Referral marketing allows you to acquire new customers by taking good care of your existing customers, encouraging them to send new customers your way. (The principle here is called reciprocity.) By engaging smart referral marketing, you can focus on delivering the best possible experience for your existing customers. If you treat them right, they’ll help you acquire valuable new customers while everyone else has to battle it out in the ever-more-crowded startup landscape. In no small part, it’s because the new social landscape reflects a shift in trust from figures of authority, like brands, to peers and peer networks. That’s according to Forrester analyst Charles Golvin, quoted in Brandon’s article.
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