A business based on referrals is highly-coveted and most would give anything for a business based on good recommendations. I see a number of issues emerging in the area of referrals that probably would make great dissertation topics for some business graduate student. But, until they get at it, let me outline a few observations and implications.

First, social media and the internet have fuelled a mania of referrals and recommendations. It has almost become obligatory to comment on what you like or dislike about a product or service, to vote, to forward, to recommend.

Now part of this is that social media has just provided an outlet to express some basic known consumer behaviours.  Consumers have always liked to pat themselves on the back when they feel cool, smart or satisfied about a purchase, and they do it by telling everyone. On the flip side, dissatisfied consumers experiencing cognitive dissonance often share their dissatisfaction. With social media, sharing recommendations and referrals has hit almost manic levels and we know what happens with all manias —  something has to give.

With social media taking over as a mainstream mode of human connection, it’s unlikely that the amount of recommendation and referral activity is likely to let up anytime soon.  As with all excessive activity in history, something gives and it’s usually associated with the value. And, what seems to be giving is the very fundamental value of a referral or recommendation — credibility and whether or not people trust it.

In a recent survey by Vision Critical, just 12% of people say they fully trust social networking sites (e.g., Facebook, LinkedIn, Twitter, MySpace, Flickr) and only 8% trust online forums, blogs, reviews or chat rooms.  However, 39% of respondents felt that online news was trustworthy.

Compare this to traditional media:

• TV at 38%

• AM/FM radio at 45%.

• Friends and family personal endorsements still rank the highest at 70% and 80% respectively.

So what does this mean for marketing and PR professionals?

Social networking sites may offer endless opportunities for people to recommend, rate or rank your product or service, but few seem to trust social media as a sole source.  No doubt this lack of trust in social networking sites is related to anonymity and the lack of social screening. After all, it’s word of finger, not word of mouth. It seems we feel the need to know someone before we trust their recommendations.

Fortunately, there are numerous ways for businesses to increase their credibility and trust:

• Target industry-specific analysts

• Target industry-specific journalists/publications

• Target industry-specific bloggers

• Use known industry or audited ranking systems

• Seek out opinion leaders

What this research is really telling us is that to build a business by referrals, you need a broader approach that includes social media, but goes beyond.

In my next post, I’ll address what happens when word of mouth referrals backfire.