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The Science Behind Why Referrals Matter

Is your mix just right?

There are two kinds of people in this world: cooks and bakers.

I’m a cook. I like to have the ability to toss in a little extra garlic, or cook the bacon extra crispy. If I have kale in my fridge, I like a recipe that will allow me to toss some in before it goes bad. Bakers, on the other hand, have to be precise. If they add too much baking powder, the cupcakes might rise well over the pan, not to mention the bitter taste. If a baker beats the butter just moments too long, their cookies may just collapse into pancakes. Neither of these is perfectionism, mind you. I get just as frustrated when my stirfry is a tad over-salted because I dashed in too much fish sauce as a baker might when their flour scale fails them. Instead, it’s a different conception of how distinct a mix is.

I started thinking about this difference reading Absolute Value: What Really Influences Customers in the Age of (Nearly) Perfect Information, by Ithamar Simonson and Emanuel Rosen. The book revolves around the theory that each customer is influenced by three factors: their own feelings, the advice of others, and marketing. The key is finding out what mix of these three factors your industry or product is beholden to.

So let’s concentrate on that middle factor: the advice of others. Simonson and Rosen’s instructions for how to determine your industry’s mix really explains why referrals are so important in real estate in particular, without even mentioning the industry by name. Here are some of the factors they say make consumers more likely to consult others when shopping for a particular product or service:

  • The more important the decision, the more likely customers are to consult others. I think it’s fair to say buying a home is pretty darn high on the importance scale.
  • How big is the difference between good and bad? If there are really bad real estate agents and really good real estate professionals, consumers are more likely to research so they don’t end up with a really bad one.
  • Risk, uncertainty, and complexity: These items are all pretty high for property purchases, which means people are more likely to depend upon advice from others.
  • How fast are things changing? Customers want the best product today, not last year’s best. This item may not correlate with real estate as strongly as say, smartphones, but with the ever-changing economy you can bet that they’re going to want someone who has bought a home relatively recently to hand them referrals. So check out your testimonials: Do you have any from your most recent transactions?

Of course, the authors caution that many of these items depend on the type of consumer we’re looking at, and also note that these factors shift over time. But it’s a nice reminder of what we all know to be true: Referrals are particularly important in real estate.

Meg White

Meg White is the multimedia web producer for REALTOR® Magazine and administrator of the magazine's Weekly Book Scan blog. Contact her at mwhite[at]realtors.org.

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