Are referrals a risky business?

Arnaud de Bruyn of ESSEC Business School examines the pros and cons of recommending a supplier, and as a customer what you should know about asking

Referrals in business can be a tricky situation. On the one hand, clients who ask a business owner for a referral for another business clearly place a lot of trust in them. On the other hand, by providing a referral, you could risk losing your own opportunity to make another sale. It can be hard to find a balance. Our research explores these challenges in more detail.

The term “horizontal referrals” refers to a situation where one supplier recommends another supplier to their customer when asked. Suppliers in B2B markets have more knowledge about their industries than customers do. Therefore, when asked for recommendations, suppliers have to weigh up the pros and cons of providing details about their competitors to their customers.

For example, let’s say that the CEO of an analytics consulting firm was asked by a client if they could help them to develop an advanced predictive model after a consulting engagement. The firm lacked the specific resources, so the client then asked if the firm could recommend someone who could perform the task. Despite having a recommendation, it was a competitor of the consulting firm. The CEO then found themselves at a crossroads, do they provide the referral? By doing this, they can prove to be trustworthy, knowledgeable, and build the relationship up further. However, they could also end up losing that client to their competitor. So, what do they do?

The benefits of providing the referral are huge: by providing a good referral, you can prove to your client that you truly have their best interests at heart. It can demonstrate trustworthiness, but do the pros really outweigh the cons?

Happy to ask

In order to understand horizontal referrals further, we conducted two exploratory studies: a survey of customers’ perspectives on asking for – and relying on – horizontal referrals, followed by in-depth interviews addressing referring suppliers’ perspectives on giving referrals. Among the customers we surveyed, 72% had asked their current suppliers to recommend other suppliers, 74% had received unsolicited horizontal referrals from their current suppliers, and 65% had experienced both.

Participants were then asked to recall one specific situation and answer questions based on that. Their responses as to why they asked for referrals were largely based on the fact that their suppliers know the industry better than they do. They also usually asked for a recommendation for a different service or good that is not provided by their usual suppliers.

In a key finding, respondents often mentioned their relationship with their suppliers as a reason for asking for the recommendation at all. Some responses noted that they had worked together for a long time, or that they had a very good relationship. Only three responses out of 126 reported that they would be cautious about asking for referrals, as they couldn’t be sure that they would be unbiased.

Overall, the survey revealed that customers rely extensively on horizontal referrals to reduce their search costs for a new supplier and that they largely trust the referring supplier to act in their best interests.

Confidence conundrum

To gain a deeper understanding of how suppliers feel about providing recommendations, we conducted 10 interviews with customer-facing managers in B2B supplier firms. These firms ranged from large companies selling industrial products to small firms offering technological and analytical services. The interviewees also agreed that being asked for referrals is a common practice.

The findings showed that the managers are eager to maintain a good relationship with their customers, but are apprehensive about sharing recommendations due to the implications and the potential of losing valued customers. One manager explained their model – which is to “land and expand.” They want to build the relationship to get more business in the future, and providing referrals puts that model at risk. Other managers answered similarly, and were wary of what could happen if they did provide a referral.

Some managers explained that they have enough faith in their business and their relationships to provide good quality referrals without any worry. The interviews proved that there are conflicting feelings and opinions about providing referrals.

From our studies, we learned that suppliers are unlikely to provide no referral or a substandard referral. Therefore, we developed a new question: under which circumstances will a referring supplier give a best possible referral versus an obligatory referral?

Previous research into the roles that sales managers take found that they can either take on a friendship role or a businessperson role. Pretty self-explanatory, a supplier who takes on a friendship role will co-operate with and act in the interest of their client. A supplier who takes on the businessperson role will act in the best interest of themselves and their company. This will greatly affect the quality of the referral they provide to their client.

With this in mind, we conducted another three studies into the effects of this role, and the effects of horizontal referrals on supply-customer relationships. We learned that by understanding the roll a supplier takes on, we can gain a better understanding into the quality of a referral.

In short, we found that suppliers are more likely to act in the interest of their customer and less on obligation. The strength of the relationship is often what takes priority, despite the fact that, by doing this, they are potentially limiting their own chances to cross sell. However, suppliers that are economically highly dependent on the customer’s business are the most likely to protect themselves by giving a less-than-optimal referral.

So, customers, if you have a good relationship with a supplier, it seems like you can put your trust in them to give you a worthwhile recommendation, even if it’s for one of their competitors. Nevertheless, try to avoid suppliers who are too dependent on your business. You might think they owe you a great recommendation, but the risk for them is too high.