Kevin DeMeritt set up a system to get customer referrals for his online gold-trading company in 2004. He wanted his clients to recommend him to their friends, so he gave them e-mail coupons they could send on to people they knew.

But he knew he had to offer an incentive. So he would give points to his customers when their friends clicked on his Web site and made a purchase or asked for information about his products. If they got enough points, he would give them a small gold coin.

The promotion proved so effective that DeMeritt turned it into a separate business, a West Los Angeles marketing company called ReferNow.com.

In six months, about 300,000 people clicked on to the Web page. Of those, 26,000 made a purchase or asked for more information.

“The whole program cost us $27,000; so it worked out to about $1 per new customer or lead,” DeMeritt said.

Two years later, DeMeritt decided to market his system to other companies. He founded ReferNow.com in 2006.

About 300 businesses pay $99 a month for the program, which they run themselves. Most of the businesses are restaurants, spas and hair salons, but the list also includes plumbers, landscapers, insurance brokers and convenience stores. ReferNow contracts with sales people across the U.S. who sell the service in their cities.

While this sort of promotion could seem common, what ReferNow offers has some unusual elements. It does not send out the promotions, the businesses do. That way, every client business maintains its own list of customer e-mails, so they don’t have to share their customer bases with anyone. That eases concerns about spammers or competitors getting access to the information. Also, the referrals are made from friend to friend, so no one has to disclose acquaintances’ e-mails.

“No one wants to put the e-mail addresses of their friends into my system,” DeMeritt explained. “So we send the coupons back to the person, who forwards them to their friends.”‘

Asking for information

The ReferNow system depends on businesses compiling e-mail databases of their customers. Sometimes, the workers at these stores aren’t used to asking for that information.

“When we first started talking to them, we talked about leveraging their customer base. They’d give us this blank stare,” said Dave Engstrom, an independent marketing consultant in Minnesota who sells the program to retailers there. “Then the pitch got as simple as: If postage were free, how often would you communicate with your customers? They got that right away.”

One restaurant in Minnesota offered a $50 bonus to the waiter or waitress who gathered the most e-mails every night. That yielded more than 230 addresses the first night.

Another time Engstrom pitched ReferNow to a BP gas station owner who quipped: “People aren’t going to give me their e-mail address.” Engstrom’s partner approached a customer in the convenience store and offered to send him coupons redeemable at the store. The man immediately provided his e-mail.

That BP station joined the program and sent out its first group of coupons to 98 customers. They sent out 454 referrals, which led to 138 sales through coupon redemptions. “You’re looking at a 130 percent conversion rate from those original 98 customers,” Engstrom said.

ReferNow arrives on the marketing scene at a time when traditional advertising in newspapers is becoming less effective due to falling circulation, and direct mail is becoming more expensive due to higher postage and printing costs.

“Companies want a bigger return on investment from their existing marketing,” DeMeritt said. “The idea with ReferNow is that for $99 month you take your existing customers and use them to get more business.”

DeMeritt said the concept might not have worked five years ago. “The sociality of the Internet really helps this type of marketing.”

Shel Horowitz, author of seven books on marketing, questions whether technology really helps, however.

“The whole idea of good referral marketing is that you grow your business based on the personal recommendations of others,” said Horowitz. “By automating the process and removing the level of personal trust, it could backfire, especially once people realize it’s a paid service.”

So far ReferNow has targeted small businesses because large franchise operations and chain stores often have their own e-mail referral programs. Starbucks, for example, has assembled a database of e-mails for promotional purposes.

But gaining clients one at a time might make it tough to grow the business quickly enough. So DeMeritt has made deals with online restaurant networks such as Lunchclub.com and Dinesmart.com. Restaurants in their networks will be able to access the program on their sites.

DeMeritt sees another opportunity for growth as communication moves away from the desktop computer to mobile phones. In the next year, he hopes to unveil a system for the coupons to be transmitted by cell phone.

“Once it’s sent, they’re carrying that coupon with them as opposed to having to print it out,” DeMeritt said. “We’re excited about the growth to capture those cell phone numbers and getting the coupons out there so easily.”

ReferNow.com

Headquarters: West Los Angeles

Founded: 2006

Core Business: “Word of mouth” e-mail

recommendations for small businesses

Employees in 2008: 7 (up from 3 in 2007)

Goal: To sign up 30,000 businesses for the program in the next four years

Driving Force: Rise of social networking

as replacement for traditional advertising methods