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Imagine a marketing program that costs relatively little, yet generates warm, promising leads. It sounds like every marketer’s dream, right? Well, it is. Customer referral programs are one of the most powerful ways to acquire new, high-quality customers. Referred customers have, on average, a 16% higher customer lifetime value (CLV), and marketers say that referral marketing is the second-highest source of quality leads. Despite all this, only 30% of companies actually use a formalized referral program.
What exactly is this powerful but underused marketing tactic? Let’s take a look.
Referrals are just another name for “recommendations.” Recommendations, or word-of-mouth marketing, remains one of the most effective ways to promote a brand. According to Neilsen, 92% of people trust recommendations from family and friends over advertising. Even so, only 33% of brands actively collect reviews. This presents a considerable opportunity for direct-to-consumer (D2C) brands to tap into referrals to boost customer acquisition and conversions.
A referral program provides a structured framework that makes it easy and compelling for customers to refer a brand to people they know. When done correctly, this generates a steady flow of referrals and sales to the company.
For example, an online book club offers a $5 discount on a future purchase in exchange for every referral. The reward is valid only when the person referred signs up for the book club.
This is just one example of the way a referral program can operate, but there are endless ways to do it. Some programs give the reward in exchange for the referral alone, meaning that even if the friend doesn’t sign up, the customer gets their reward. Other programs only give the reward once an actual conversion takes place. It can vary per company.
While referral rewards are often monetary in nature, as in the example above, they don’t have to be. Depending on the industry, niche, and customer audience, there are different ways to create a referral program that brings in the best results. Plus, they don’t require a large slice of the budget — a high impact referral program can be devised at relatively low cost, which makes it even more appealing.
Let’s get down to the basics with a simple these easy-to-follow steps:
Before creating the structure of a referral program, consider the two types of customers who need to be targeted: current customers who refer the business and potential customers who are referred to the company. A solid referral program will take both of these groups into account while also considering their differences.
Customers who are willing to refer a business already know and trust the company. While potential customers don't have prior experience with the brand, they’re still more likely to trust it because it was given a stamp of approval by someone they know. This is the reason why referrals produce such quality customers. They have a 37% higher retention rate, and customers who were referred are 4x more likely to refer their friends.
Creating an effective referral strategy requires considering both types of customers. For current customers, think about what they like about the brand, what makes them want to recommend it, what they get from the referral, and what their values and pain points are.
For the referred customers, how can their interest be harnessed to take them over the purchase line? What are they looking for in the brand? What do they need to hear in order to become a customer and to refer others?
The answers to these questions will form the strategy and messaging of the referral program.
Referral programs can be structured in many different ways, and the beauty is that every brand or company can tailor a program that best suits its market and audience.
Who gets the rewards? Referral programs may offer single or double incentives. The single incentive program gives a reward only to the referring party, while in a double incentive program, both parties receive rewards. The decision of who gets the rewards will depend on the ROI of your referral campaign. Will the cost of providing double rewards justify the spend required?
Will the rewards be monetary? The most common referral reward is usually cash equivalent or coupons. However, there are other ways to incentivize referrals that are not monetary. Some companies offer charity donations for every referral, or the reward could be in the form of swag, loyalty points, or other non-cash benefits. For example, the gaming company Blizzard offers players who refer friends to play World of Warcraft unique in-game content, such as a camel to mount or a special tabard.
How complex should the program be? A referral program can be relatively simple (e.g., refer a friend, receive $5), or more complex, with a tiered structure. A tiered program typically includes various levels of referrals and rewards. For instance, in the first tier, one referral is worth $5. In the second tier, when the referring party has provided five referrals, they receive $20. In the third, they receive $40 for ten referrals. While a tiered program is more complicated to set up, it can deliver exponential ROI. When creating a referral program, marketers must consider whether the investment in a tiered program is worth the extra referrals likely to result. One company with a successful tiered referral program is Harry’s Shave Club; the more people their subscribers referred, the more credit they would get toward their own purchases.
Once the audience and structure are defined, it’s time to create assets for the referral program. While a company may have many happy customers, persuading them to recommend friends and families can be a challenge. The key is to make it as easy and convenient as possible for customers.
Here are several key elements that can be used to make a stand-out referral platform:
Apart from the company website and customer distribution lists, there are two effective channels to promote a referral program: social media and among employees.
Like all digital marketing activities, there are many software tools available to automate and optimize customer referral programs. The choice of software will depend on the size of the company and how much is invested in the referral program. A good referral marketing software enables the fast creation of visually pleasing assets for referral programs, such as landing pages, ads, and forms.
Many referral platforms come with built-in program creation tools to develop the program structure, rewards system, and rewards fulfillment. And like all good digital marketing software, referral program software enables measurement, tracking, and A/B testing to help achieve maximum ROI. Here’s a comprehensive list of referral marketing software tools.
No referral program can have a real impact if it's not tracked, measured, and stacked up against pre-defined KPIs. Although referral programs don’t typically require a substantial investment, there are still costs involving manpower, time, and software — not to mention the costs of the referral rewards themselves. Calculate how much it will cost the company to win a referral, and then work from there to define the KPIs. What conversion rate will achieve the optimal ROI? Once these benchmarks are set, the program can be monitored and optimized in real-time to ensure the messaging is reaching the right audience and bringing the desired results.
Bottom line: a referral program incentivizes customers to recommend a brand by giving some form of gift or benefit for every referral they generate. A high-impact referral program is a positive feedback loop that not only brings in new customers but also strengthens the existing customer’s trust and connection with the company. This can be especially powerful for D2C brands that need to rely a bit more on their current customers to help spread the word. No matter how established the brand is, the quality and CLV of referred customers is higher than others that find out about a company via traditional methods (e.g., social post and digital display ads). This makes referral programs a potent marketing tactic that — when done correctly — is all but guaranteed to bring results.
Originally published on January 7th, 2020, last updated on June 16th, 2022.