How VACO grew to $500M in annual revenue by building referral networks at scale
When I hear about “referrals” I often to think about raffles, giveaways, and other monetary incentives. After speaking with Josh Haymond, partner at VACO, my ideals have changed. Referrals at the enterprise level are more about creating deep, “help me help you” relationships than they are about creating short-term financial incentives.
Josh’s team helped VACO scale from $250M in revenue to $500M in less than 5 years. In his experience, scaling their business is all about scaling personal relationships, something that is obviously easier said than done.
Through my conversation with Josh and a good bit of research and interviews with respected CEOs and managers I boiled down how to build a strong referral network to one simple point: empower everyone around you to sell. While simple on the surface, there are several moving parts to this concept:
How do you measure customer happiness?
How do you empower customers to sell for you?
How do you empower your team to sell for you?
How do you manage these moving parts?
If you’d like to listen to the first episode of our podcast, Scaling with Data, featuring Josh, you can do so here:
Measuring Customer Happiness
You can’t improve anything that’s not measured. The same goes for customer happiness. Establishing yourself as a proven service provider is mostly about making your early customers incredibly happy, documenting that happiness, and spreading that documentation around like wildfire. Practically, case studies are the industry standard for sharing stories about happy customers, but how do you measure the happiness of your overall customer base?
Measuring customer happiness, in the literal sense, is typically done through the use of the Net Promoter Score. The purpose of this score is to identify what percentage of your customers will actually recommend your offering to others relative to what percentage will speak negatively of your service, and ignoring those who are neutral. The format is to ask one specific question to your customer base: “On a scale of zero to 10, with 10 being highest, what's the likelihood that you would recommend us (our company) to a friend or colleague?”
Promoters are those who score a 9 or 10. Passives score a 7 or 8. Detractors score 0 through 6. The score is calculated by taking the percentage promoters and subtracting the percentage detractors.
A key aspect of the net promoter score is that it only weighs promoters and detractors, not people who are relatively indifferent to your product. This has a number of implications, but the one I’d like to focus on follows the advice Paul Graham gave to AirBnB’s Brian Chesky when they were first starting out: “It's better to have 100 people that love you than a million people that just sort of like you. Find 100 people that love you.”
You can’t find 100 people that love you by building an offering that kind of solves everyone’s problems. You have to narrow your offering to a niche group of people that are looking for exactly what you offer, that way you can truly focus on their specific needs.
Narrow your offering
If you are a marketing agency with deep expertise in luxury real estate, you will target similar prospects to your existing customer base. This niche might feel smaller on the service, but you would rather own this niche before moving on to the next one.
The lowest hanging fruit is to target people with a similar background to yourself. For Josh at VACO, his background was a CPA. Most of his clients are CPA's. It’s easy for him to connect with other CPA’s because he’s essentially thinking, “What would be helpful for me?” This is by far the most lucrative niche to start with. This differentiates Josh’s offering because, if his clients work with him, they don’t need to work with three other recruiters for the same positions because they are confident Josh has the expertise to tackle this on his own, he has been in their shoes.
Many times the argument for narrowing your offering is that the market size is too small. You’ll hear VC’s mention this in pitches all the time. For the vast majority of businesses this is wrong. VACO has grown to $500M by building teams of experts like Josh that operate independently in their respective niche’s to grow a large business. Sure, your initial market might be too narrow to build a hundred million dollar business, but can you take that well-oiled machine into new markets? This is the bigger picture.
For example, if you heard a pitch for an email marketing tool for professional bloggers, you would probably think that’s a small market. But what is small relative to where you are and where you’re trying to go? Nathan Barry from ConvertKit scaled to over $9M ARR by doing exactly this. Originally he thought, “this is probably too much of a niche.” Years later they’re doing almost 8 figures without having to expand to new sectors.
Think about it this way: what was the service offering for the last three providers you bought from? Was it about their general helpfulness to a bunch of previous customers that had nothing in common with you? No. You probably read customer accounts from people just like you. In professions just like yours.
Understanding customer acquisition cost
You have happy customers in a specific niche, it’s time to scale the business. Understanding how much it costs to acquire the next new customer through your different channels and business development professionals is hugely important to managing a profitable business. It’s all about unit economics. Is your acquisition cost less than your earnings for each new customer?
There are two general ways to acquire new customers, through outreach and through inbound leads. They each have their respective costs:
In Josh’s experience, cold, outbound sales was a clear loser:
“Frankly I made about one month of cold calls with zero callbacks… I told myself after that first month I was not going to do cold-calling again, and I haven’t done it since. The reality is we have a lot of competition and I quickly found out that the relationships we have are getting cold-calls from my competitors and their response is, ‘delete...delete...delete…” I could hear in their voice how tacky they thought that was.”
Not only was this approach tacky for Josh, there are additional factors that drive down the inherent cost of inbound leads once they’re in your funnel. For one, inbound leads have done a good amount of pre-screening for themselves before your first conversation. They read your post, they talked to someone in your network, or they tried out your free tool. They have identified a problem and identified you as a potential solution. It’s important to also track conversion rates for inbound leads vs outbound leads to monitor your inbound costs over time.
Building a strong referral network isn’t really about incentivizing with money, it’s more about creating a personal and professional relationship with them as people. After all, everyone you sell to is, in fact, a human being. In every piece of marketing or sales material your goal is to connect with people on a human level. The same goes for business development, networking, and establishing referral networks.
Empowering your customers to sell for you
Within your niche group of customers your next goal is to empower these people to sell for you. How do you build a customer base with promoters that greatly outweigh detractors? Again, this may seem obvious: You ask your customers.
What is less obvious is what type of questions to ask your customers. Questions like, “what can we do/build to make you happier?” will yield small solutions that only marginally improve your offering. A better question, according to Brian Chesky, is, “What could we do to surprise you? What could we do to not only make this better, but to make you tell everyone about it?’”
The answers to this type of question will be much more insightful, they will paint a much clearer picture for how you can fundamentally change the way this person does their job. Once you’ve nailed that piece, you’ll have the foundation for a strong referral network.
Empowering your whole team to sell for you
Assuming your customers are impassioned advocates for your offering, how do you capitalize on the network of prospects your team is building? As you grow, it becomes increasingly more difficult for your team to articulate your company’s value proposition. If someone asks your junior developer what your company does at her neighborhood cookout this weekend, will she articulately get that value across? You never know who could be a major prospect. You never know who might be connected to a major prospect.
In Josh’s experience during his first few month’s at VACO, he was so focused on his specific role at that time that he left a lot of opportunities on the table for business development. He spoke with people who were itching to tell him they were looking for a new role but he didn’t give them the opportunity to say it because he was focused on only his role in the company. The same goes for your junior developer. Do they allow the people in their networks to dive into your business’s offering? Do they empower their networks to sell for you?
When you create a culture where everyone in your business is working toward a common goal and is able to clearly articulate your company’s value, you naturally create a referral network. Creating referral networks is really about establishing strong personal relationships at scale:
“I focus on building good relationships. A lot of the new leads I get to work on are either my past relationships who have moved on to a different company, or I get an introduction from someone who is already at the table with the CFO. This quarter we broke into 6 emerging companies, all through referral partners or hiring managers who have moved on to a new place and knows we do good work.”
Organizing leads through CRM
With a strong referral network humming it’s imperative to close on those leads. You have to prevent new business from falling through the cracks. Naturally, this leads teams to invest heavily in CRM systems (Salesforce would agree). I could write hundreds of posts on choosing the right CRM for your team and promoting your team to use it, but we’ll leave those to the experts at DealCloud. Josh attributes much of his success to utilizing VACO’s CRM, Bullhorn, and makes its adoption a huge point for new hires:
“Something that I look at as a requirement versus a suggestion is the use of our CRM tool. We have a robust tool that houses all of our client relationships as well as our client relationships. The way we use that system can really set people apart from being a B player versus an A player… I probably haircut the gross margin I bring in by 35%-40% if I didn’t leverage this tool.”
You can’t improve anything that’s not measured
There’s a lot here, and we are just talking about business development. Throw finance and operations in the mix and we’ve got a mess on our hands. If you’re unfamiliar with Malartu, this smorgasbord of data is why we built our tool to not only help private investors manage their portfolios but to help growing businesses they work with manage their data as well.
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