Welcome to episode thirty of the SaaS Backwards podcast, where we interview CEOs and CMOs of fast-growing SaaS firms to reveal what they are doing that's working, and lessons learned from things that didn't work as planned.
You can listen to the full episode directly below via Spotify, or visit SaaS Backwards on Buzzsprout or wherever you listen to podcasts.
How to automate and scale referrals for your B2B SaaS
With Kirsty Sharman, founder of Referral Factory
Edited for clarity and readability
Host, Ken Lempit:
Welcome to another episode of SaaS Backwards, a podcast that helps SaaS CMOs and CEOs to accelerate growth and enhance profitability. Our guest today is Kirsty Sharman, founder at Referral Factory, a no-code SaaS product that enables referral programs for B2B and B2C companies. But before we dig in, could you tell us a little bit about yourself and the company you've founded?
My name is Kirsty Sharman. I've been an entrepreneur for just over 10 years now and always been in the SaaS and marketing space--building SaaS products in the ad tech or advertising industry. And the current startup I'm busy building at the moment is a company called Referral Factory, as you mentioned. We help companies all over the world build their own referral programs so that they can get their customers to spread the word about them and help them grow.
We'll get a little bit more into the referral business in just a bit, but I wanted to start with a topic that I think is important for founders, which is what are your goals? We often think about where we are going to end when we start a business, and you have a point of view that I think is worth sharing with people about what are you actually trying to accomplish when you're done.
I've learned over the years, if I go back to my first startup (when I was 25), I had one clear picture in my head, which was that unless we were going to be the next Facebook, it was going to be a failure. And a lot of that was really driven by media.
A lot of the content and media that you see online is the exception, not the rule.
I have a saying, “Are you building to be the exception or are you building to be the rule?” And something I learned over that journey was, my first business, we were building a great business. We were servicing our customers. We were doing our best to add value. And I almost think that part of the reason One AI had so much anxiety and couldn't sleep half the time. I'm sure most founders know this, was just because of these huge, big, audacious goals that I set for myself unnecessarily, if that makes sense.
I've met a lot of entrepreneurs over the past 10 years--some build businesses that will sell for a billion, and some build businesses that will sell for a hundred million, and some build businesses that will sell for 10 million, some have failures.
We all have failures along the way, and what I've really learned is it's so important as an entrepreneur to find what the right mix is for you and what the right type of company is for you. Because the bigger the goals and the more audacious you become, the higher the risk you put on yourself as an entrepreneur, the higher the risk you put on your team and your staff that are helping you every single day to build this company.
When I look at today’s content, it's all pointing to a billion dollar exits--unicorn style companies. And I just think we need to remind a lot of entrepreneurs that it's actually okay for you to set your own goals and have a niche business.
I know a lot of people that run brilliant businesses and make a lot of money, and they do it in a niche. And it's never going to be a billion dollar organization, but they're a lot happier than most of the entrepreneurs I know that are chasing for the moon.
I don’t advise against shooting for the stars, but I think there's a time and a place for everything and sometimes entrepreneurs get too ahead of themselves, creating a difficult environment to grow because you’re acting today to solve problems five years down the line.
I’ve learned that a phased approach is best.
Phase one for us was get us to $10K MRR. If we can do that, then I'm really happy and we have a great business and we are serving our customers. And our next target after that is $50K, and our next target after that is $100K.
At any point in the journey, you can also decide that the business really has enough leverage that we can take it to unicorn status. I almost feel like we are creating an unsafe space for a lot of entrepreneurs with becoming not okay to run a business worth $50 million, which is a huge accomplishment and a lot of people could be really proud of.
I remember in my first business, I just ended up on this chasing journey and never quite getting there. And even though having an exit in a smaller one and feeling very much like a failure. And as I went on and the years reflected, I look back and I really don't look at it as a failure anymore because I got a smaller amount of money out. That amount of money allowed me to build the next business and it allowed me to continue my journey. So, over the last few years, I've become a lot more strict on writing my own story and building a business in the direction that you know there's customers that you can serve and you know you're solving a problem, and you know people are willing to pay money for this. And pushing as hard as you can to grow your business, but being okay with the fact that if it ends up at this value, it's fine, and if it ends up at that value, it's fine, and the market will take it.
The truth is that nobody can force a business to a billion-dollar valuation if a market doesn't need that service. I've found that building in phases has helped me focus a lot more on what my customers need today, rather than what I'm trying to achieve tomorrow for shareholders.
And by focusing a lot more on what my customers need, we turned revenue in our second month. After six months, broke even. And then we raised a small amount of capital and used it to grow even further until we could catch up.
I believe referral marketing is amazing channel, and that the best businesses in the world can get a lot of value from asking their customers to spread the word. I’ve found that by focusing on that, I’ve made more revenue than we ever did before, where I was rather focusing on a spreadsheet and a target.
I also make decisions based on what would help us make more money and look good to investors today. Sometimes it's difficult for me, because I'll make a decision that is better for our customers than shareholders, and I have to answer to that.
But long term I believe that by switching the focus to, "I'm going to build this business for our customers and we want to serve as many businesses in the world as we can," and pushing, and pushing, and pushing, and if the idea and the value provide is good enough, naturally that will grow into a large organization, if that makes sense.
There's a lot here, and I want to unpack a few things. The idea that you're going to look at shorter timeframes and not to the exit as a unicorn, or even the valuation as a unicorn, it makes the business less twitchy. And you're not beholden to artificial measures that you may or may not be able to get to. So, you're now able to focus the business on its own process and the customer itself.
I think the other thing is, that if you sell investors a vision that's going to take you to be a unicorn, you have this obligation to follow that thing you sold. Whereas, say I'm going to be a billion dollar business on the back of referrals. And you might find that there might be another channel that will get you further along with referrals that you're now free to pursue, should that reality present itself.
In your recent webinar, you talk about the best performing programs often include a dark, social, private channel communication. And it might be that in the future, you somehow you get involved with those kinds of communications. As a service, you're free to pursue that because you haven't sold your investor world on one thing that you're going to do. And then there's the lifestyle of not chasing this elusive valuation or fulfilling the valuation, right?
Yeah. And it's a bit easier to work on longer timeframes, because as an entrepreneur, as you get closer to running out of money, your stress gets more and more and more. I find that those smaller incremental goals help us chase the right things because we are chasing revenue to pay our bills, what are things that people are willing to pay money for right now?
That forces me to think what are things that can add value to them. And sometimes we'll make mistakes, but generally I find that approach works really well. And I was listening to an interview the other day with the co-founder of Airbnb, and he speaks quite openly about the danger of companies raising too much money, because it creates an environment with founders that don't have to deal with the hard problems. And if you don’t deal with them now, three months down the line, you're going to be in trouble.
Many times, if your bank balance is bigger, you might put the problem off to next month.
I see it all the time happening, where companies are raising too much money and a lot of that money is going to waste.
And if there was a little bit more desperation in the business, it would force them to make harder decisions sooner. Even though that's uncomfortable, if you can live it, it helps you build a stronger business.
There is a time and a place where you go out and you swing for the fences. The larger we get and the more we grow and the more we acquire market share, the more we also become a target to copy.
So, there comes a point in your journey where you might say, "Okay, we've done phase one by ourselves. We did phase two with a little bit of help. We now have very solid product market fit. We now have a few thousand customers. We now know that our retention rates are really good."
Because we've lived in this desperate lifestyle, we've been product obsessed to the point where we've made sure that everything, we've built is added value because we needed those customers to retain. At that point you might say, "Okay, let's raise a large sum and swing because we now know that the business is good enough that we can scale what we have."
I see a lot of founders raising money early, and then they're scaling something that doesn't properly have product market fit. And they are wasting a lot of money scaling a system that isn't ready to be scaled.
Well, sure. Uber's still paying you to get in the car. They've raised so much money that they don't have to make difficult decisions. And in fact, the decision they've made is that the investors are going to subsidize every single ride. That's a product market fit problem, if ever there was one, who aren't willing to pay for what you've got, it's an extreme case.
Yeah. It's an extreme case, but it's exactly that. You end up in a trap where you're paying for acquisition all the time, reinvesting a lot in things like SEO.
Our referral program is our number one acquisition channel, just because we care, and we spend a lot of time with our customers. We talk to our customers, we build things that they want, and they refer other customers to us.
In my darkest moments, I remember that a business will always pay money if they’re getting value. So, just focus on providing value to them, and if you provide value to them, the money will come. And it's scary to do that at times, but I found it to be a much more effective way of raising money.
Let’s talk a little bit about the founding idea at Referral Factory, where you were before and the germ of the idea, because a lot of founders are subject matter experts, and I don't think enough subject matter experts make the jump. So, I think where you were just before is a really interesting situation.
Yeah, sure. So, the first business I co-founded with a few partners and we had an influencer marketing platform. It's still the largest influencer marketing platform in Africa. I've always been obsessed with product I could code when I was young. And I was always far more fascinated with the internet than I was the real world, which could be a problem sometimes. I was in the advertising and marketing space. But even if you look at the last 10 years, every business I've had has been around helping customers find new and efficient ways to acquire customers. So, 10 years ago, that was influencer marketing. I then left with Webfluential and I didn't really know what to do.
So, I used my methodology working directly with customers and solving problems. And in exchange, I'll get some money for that and it'll help me see what people need. I wanted to compound on my experience in the advertising industry, so I didn't want to switch industries, because I built up a lot of knowledge and advertising and I knew a lot about it, and I knew a lot about tech. So, it made sense to stay there, but I had no idea what product to build. I ended up phoning a few people in my network. One of my customers was one of the investors at my previous business. And now I said, "I know how to grow digital businesses. Why don't I help you do that?" And that just took off.
We became a small agency or consultancy to a degree, but over two years, we ran growth for 12 companies, and I was looking for the gaps. What are the things that we do for these companies that work, that could be solved with the product?
Hands down, every single one of the businesses that we help grow, we built a referral element or a referral program into it. So, you have 10,000 users just ask them to refer for it. But it just really started to bother me because I was like, "I don't understand why every business in the world doesn't do this, and this just makes sense." But I realized, the reason these companies were doing it was because I was advising them to do it. I was explaining how to build your referral program. I was modeling it. I would then get a developer to code it and build your referral program for you.
It was just the set up costs and time and implementation were too high, and I thought that if we take all of this away, maybe more businesses will do it.
Then COVID hit.
I had a team and an engineer that was working with me on another project, and a few of the customers dropped off and I'd already committed to paying everyone. So, I said, okay, let's do this. We know referral programs work. We know customers are getting value from it, let's try and solve it in a way that if you're a small business in Connecticut or South Africa, you can sign up, you can build your own referral program. You don't need to be able to code, and that's what we did. So, we decided to build Referral Factory, and essentially we built a page builder on top of a referral engine so that people could drag and drop and build their own referral programs.
That process took about three months for us to build our MVP. We launched with one plan. I still remember that you could build a referral program, but then once you started getting referrals, everything fell apart because there were no tools to manage it. But we put it into the market anyway to see if people could build campaigns themselves and validate that they would do it.
Since then, we've been building more and more features to help our customers better manage their referral programs. But actually, there was a great podcast actually. I think it was the founder of Drift and he spoke about his journey as an entrepreneur. We have a tendency as entrepreneurs who think we are smarter than everybody else in the world. So, he said he was inventing problems and then building solutions for them.
And he said, the time when he really started making money was when he said, "I'm going to solve a problem that actually already exists, rather than invent a problem in my own head." And I was following that methodology by going out and running an agency. I wanted to understand what the problems of 12 customers were. I wanted to understand what the solutions were. And then try and see, we can automate this or we can build a product for this. I knew that it would be dangerous if I sat in my apartment and conceptually came up with an idea, because then it would be biased to problems I think exist, more so than problems that actually exist in the world.
When you go from one situation like you've sold a business, what makes sense? Is it go right into founding another company? In your case, this journey of being a consultant or advisor gave you unique access to this population of companies. I've seen that path before, and I think that's something, if you're about to exit either a paid exit or a time to go exit, consulting is a great way. It's not something to be ashamed of, I think it's an opportunity. I think a lot of times we see CMOs leave a company or CEOs leave a company and it's not a bright moment in their career. I think it's really an opportunity to act as consultant and say, "Hey, I'm going to spend a year or a year and a half, I'm going to visit with people, help them solve problems, learn where I might want to go next, instead of just jumping from one thing to the next, to the next." So, an interesting part of your journey.
It also stems to what we were talking about before, which is this pre-constructed idea of what you must do and who you must be as an entrepreneur. Exactly that, like moving from one tech business into growing consulting, I definitely had elements of like, "Oh, this feels like people are going to judge me." But at the end of the day, I think I'm very big on you writing your own story and you execute on that, and you just try really hard not to listen to what other people are saying. And sometimes they have great advice and you should be listening, of course.
I think no one cares, right?
No one cares. You think people care, but they don't care.
The only person who cares is you. Everybody else is not paying that close attention. So, the idea of writing your own journey, writing your own narrative, I think is really important, and being open to what the experiences are that are available to you, right?
Yeah, exactly. And being open to that. And again, it's like they're thinking and phases. So, often I'll think, behave in short term blocks. It doesn't necessarily mean I don't have a long term plan. I do actually have a very long term plan, but I go about it in phases. And part of my plan was to go and consult for two years so that I could truly understand, make sure the problem that we were solving existed in the market. And essentially, de-risk the product I knew I was going to build in the future, by making sure it was a real problem that the world had. But nobody else really understood the journey that I went on, only I did.
Cool. Hey, let's change topics just a little bit. I want to get into the business of referrals. Because like you, I think that it's underappreciated and it's really easy to get caught in the paid channels.
The trap of paid channels.
Yeah, well, it's really addictive. I put a dollar in and I get some fraction of a dollar back, and it's like a slot machine.
And the next month you got to put two, and the month after you got to put four.
Right. It's like the slot machine. You put $100 in, you get $95 back, but you had a good time. But I think the economics of referrals are really important to talk about for other SaaS businesses. I think that my experience, not unlike yours, I don't see a lot of referral programs implemented as a key acquisition methodology. So, let's talk about the economics of referrals, the business problem you're solving, and the outcomes you see. I think it's really worth it here.
Yeah. So, in terms of the problems you're solving is relatively simple in my head, which is the cost of acquisition is going up. Anybody who's a CMO will understand that five years ago they paid less, and then four years they paid a bit more, three years a bit more, and it's going up and up every year. So, as more customers flock to those channels, more people bid, the price goes up. It's all based on demand, and the price is going up, while the quality of the leads is going down.
What's happening is more and more people are online, and more and more people are making content, and more and more things are in your feed, which means the quality of the clicks and the conversions is going down.
But the leads that our customers are generating through their referral programs tend to be very high quality and have very high conversion rates.
Why? Because if I say to my friend, "Hey, I invest with this company, you should too." My friend isn't doing research before they book a demo or register for a free trial. They're just going into that purchase with trust, number one, which is something you cannot buy in a paid ad. Trust is a commodity that you just can't buy. And I find often with AdWords, we see it a lot. We still use AdWords, but the customers who come in are doing a comparison between six platforms.
We tend to get very high quality leads or referral programs, just because of those people have come in from a funnel where somebody's made a personal recommendation and that's extremely powerful.
Well, I mean, we've all experienced this, the power of the personal referral, we've asked for them. Everybody in their private life has asked for referrals. I need a plumber. A friend of mine moved down the street, he needed a plumber, he needed a painter, needed a mover. We needed these things. He didn't ask six people to be his plumber, he called Danielle Plumbing. It's a very simple case, but I think the same thing would be true of expense management software. If I have that problem and I have a friend who's a CFO at a light company, I might call her up and say, "Hey, Mary, what do you guys use for expense management?" And that might be as far as it goes.
The referral marketing industry is very early and I'm really excited to see what it looks like five years from now, because we're all going to get better at this every single year. But in the B2B space, you're not Googling, "top results, credit card, go."
No, you're not making a massive purchase. Often, it's actually more important to you that the thing's going to work, than the price you're going to pay in many cases. But also, you were talking about referrals happens and you use the plumbers, there's an interesting statistic floating around online, which is, I can't remember the exact numbers, it's 82 or 83% of your customers are actually willing to provide a referral, yet only 29% of those do. And I mean, for me, I'm as business as we're just leaving money on the table here, which is again, why, if we could just say that instead of 29% of your customers referring to their friends organically or 50% does, we've done our job at Referral Factory.
So, I think it's weird, we've gone in the cycle. In the '60s and '70s, there wasn't all these digital feed and it was word of mouth. People were just talking about it. They would go buy bread, they would tell their friend. And as the rise of digital happened, we found conversations moved away from being one to one and they moved more to being one to many. So, I'd spend my time on Instagram and I'd spend my time on Facebook, on content someone would publish, but it wasn't like a one to one conversation. And if you look at the rise of messaging apps, you will see that the growth in dark social, the growth in private chats is far outpacing the growth of any social media. And why is it moving? We also are humans and we move in cycles, but I think we ruined it.
We went to having all these one to one conversations, then we got the shiny internet and feeds, and then we actually found that's not quite personal and we maybe just want to have relationships with people again. I feel like we're going back towards that, but maybe it'll be in a more digital way. Now, you're spending a lot of your time in group chats and chatting to people on tools like WhatsApp and telegram, more so than you're spending your time scrolling through Instagram. So, if I find now, like if I saw something that I wanted to share with you, I would share it with you on a private channel. But people are often defaulting to sharing on Instagram, DM, then publishing something to their feed. And I think the market's going that way.
Ultimately, we’re trying to help companies encourage those one-to-one conversations at scale. So, give them the tools to ask their customers to refer their friends and reward them for doing so.
But yeah, we're young, almost 16 months into our journey and I think we have a long way to go, but I'm excited about the problems that we're solving, because companies that offer a good service and have a good product, often you'll find your customers want to refer you. They want to. They want to help you out. They often will do it without a reward.
Most of the time, we encourage putting incentives and rewards in your programs. But as you say, if you have a plumber at your house and he's a really great guy and he does an amazing job and he gives you a good price, you're a good person, and if you could help him out and refer him to someone else, that would make you feel really good.
Yeah. I think that's a really important point. It does often feel good to make a referral, especially if you have some kind of relationship with a company that you're referring. So, even in a B2B construct. So, there's something that I've always felt and I think it's worth discussing here is that marketing business certainly is something of a fashion business. And so, we've had the Facebook and Instagram feed fashion. And now my feeds are so full of advertising that they're less relevant, but those private channels remain highly relevant, and I look at them all the time. I'm sure my individual experience isn't that important, but I think it's fair to say that we feel closer to our friends and loved ones on WhatsApp or iMessage than we do the stuff that flies at us on Facebook. So, as marketers, this is a great thing to have in our portfolio. We're not going to give up outbound marketing. We're not going to give up SDRs. We're not going to give up AdWords. We're not going to give up email marketing, but we're leaving money on the table if we're not managing our referrals.
It blows my mind that every single SaaS business doesn't do this because it's virtually risk free to a degree. But your worst case is that you're going to set it up, you're going to get a few referrals, compared with with paid ads, you got to forecast a lot of money and you got to hope for the best. You got to really just hope I get an ROI on this.
With a referral program, you can put it into your platform, and everybody who logs in can refer a friend to get a reward. The simplest mechanic is just refer a friend. If they sign up, you'll get one month free. Because if that friend pays for their first month, you're just taking the revenue from that customer and paying for this. So, it's not actually costing you anything. As a business, you should be responsible to retain those customers by providing value. It's risk free in the sense that you can have an automated marketing channel running in the background, without a human essentially managing it, and you only pay on success.
That's the headline, risk free customer acquisition channel. So, I think that's awesome. What a great place to land our podcast. That's wonderful. Hey, Kristy, if people want to learn more about your company, what should they do?
The best bet is just to go to referral-factory.com. That's our website. You can find out everything there. You also get a 15-day free trial, so if you want to explore, check it out. Otherwise, I'm also Kirsty Sharman on LinkedIn. I post a lot of content.. Referral Factory is really big on educating the market about this. Some customers then come and use our platform, other customers build their own referral software. At the end of the day, we're pushing this channel because we really believe that it works. And we know that the industry growing is good for everyone. So, we really post a lot of content that's not gated, you don't have to pay for it. On Twitter, I recently posted that in the last month we analyzed over 2,000 referral campaigns and that generated over 100,000 referrals from 2,000 campaigns.
We looked at what worked in the good ones and what didn't work in the bad ones, and we published those results.
Thanks for listening to the SaaS Backwards podcast brought to you by Austin Lawrence Group. We are a growth marketing agency that helps SaaS firms reduce churn, accelerate sales, and generate demand. Learn more about us at www.austinlawrence.com. You can email Ken Lempit at firstname.lastname@example.org about any SaaS marketing or customer retention subject. We hope you'll subscribe, and thanks again for listening.