When implemented correctly, a referral marketing system has been increasingly utilized by numerous companies to acquire new customers. Prior to establishing a referral program, it is important for companies to consider their objectives and establish smaller milestones to measure success incrementally.
Referral programs provide rewards to customers who suggest your business to their acquaintances. When a customer makes a recommendation, and the friend they refer makes their initial purchase, the referring customer gets a bonus. These programs serve as a potent marketing channel by transforming existing customers into advocates and continuously attracting new customers.
Are you ready to increase your referrals and grow your business? This is your complete guide to launching an effective referral program, which includes:
- Why you need a referral program
- Essentials you must have in place before starting a referral program
- Tips and best practices for implementing a referral program, from our referral program experts
- The top referral program examples (and secrets to why they work)
Why start a referral program?
By implementing a customer referral program (also known as a refer-a-friend program), businesses are able to identify their most loyal customers and accurately determine where their new customers are coming from.
By having a formalized program, it becomes convenient for customers to recommend your brand through a dedicated referral page and messaging. Therefore, referral programs transform content customers into dependable supporters. Additionally, the customers who make referrals don’t simply share with anyone; they bring in potential customers who are more likely to make a purchase from you.
How does a referral program work?
Referrals are considered one of the most valuable methods of marketing due to the fact that we often rely on others’ opinions for recommendations on products and services, which we trust greatly.
According to research findings, if customers are referred by their friends, there is a higher likelihood of them making a purchase, with 75% of them showing this inclination.
The friends were previously in the same situation as your current customers, searching for a comparable solution. When an existing customer praises a product, they are more inclined to test it out.
Referral programs possess the ability to generate an ongoing cycle of word-of-mouth marketing, often referred to as a viral loop. A single customer’s referral results in subsequent referrals, escalating in number with each step.
In today’s shopping landscape, it is evident that recommendations have significantly influenced consumer behavior. Therefore, for your business to keep up with these changes, it is imperative to implement a robust customer referral program strategy.
Top 4 benefits of referral programs
1. Standardizes the sharing process
If your business provides outstanding products and services, customers will gladly recommend you to others. Nevertheless, even your most satisfied customers may sometimes forget to promote your business. Unless they come across a friend or family member who requires your product or service, the thought of referring others may not occur to them.
The use of referral program software can be beneficial in this situation. By implementing a referral program, you establish a consistent method for inviting and incentivizing customers to promote your brand to others. By creating a formal referral program that includes appealing rewards, you can enhance the likelihood of your business receiving positive word-of-mouth recommendations.
2. Attracts new customers at a very low cost
Referral programs motivate your existing customers to promote your business by offering a reward, but their cost is typically lower than anticipated.
The referral rewards expense remains constant for each referral, and these incentives are exclusively paid based on performance. As a result, the customer acquisition cost (CAC) is significantly lower in comparison to many advertising methods.
3. Brings in high-quality customers
Customers who have been referred have a greater likelihood of being retained compared to other customers and are known to contribute more to the success of your business. These customers have been shown to spend 25% more and have a 37% higher likelihood of making repeat purchases. Additionally, they possess a customer lifetime value that is 16% higher than customers who were not referred.
In addition, it is worth noting that referred customers are significantly more inclined to refer others, increasing the likelihood that they will continue the cycle of referrals and attract even more high-quality customers for you.
4. Has a proven track record of success
A strong customer referral program has contributed to the success of many popular businesses.
- PayPal’s famous referral program literally gave away money. The company started out by offering $20 to start an account, and another $20 to refer their friends (this number decreased through the years). As one of the first notable referral programs, it helped PayPal achieve 7–10% daily growth and a user base of over 100 million.
- Dropbox also offered a referral program that was greatly inspired by PayPal. It led to a 60% increase in user signups, with over 2.8 million referrals taking place in the first 18 months. Even today, 35% of all signups come from the company’s referral program.
- A leading German bank offered €25 ($28) for every successful referral. The results? Its referred customers generated 16% greater profits and were 18% more likely to stay with the bank.
Regrettably, despite the numerous advantages, a lack of companies are utilizing referral programs. According to a study, 71% of startups do not have a referral marketing program implemented.
10 Important Things To Consider When Building A Referral Marketing System
1. Make sure that everyone benefits from it.
2. Develop the system to be easily understandable and usable by the user.
The ease of use is crucial in any referral program, focusing on how easily people can refer others. It is important to understand the benefits for both the referrer and the prospect, as well as ensuring that making introductions requires minimal effort.
First, it is important to have a clear understanding of engagement metrics.
Before developing a referral marketing system, it is crucial to have knowledge about your customer stickiness and net promoter score. The effectiveness of your system relies on customer satisfaction and their inclination to endorse your brand. If you do not possess this level of trust, it is not advisable to implement such a system; instead, concentrate on obtaining five-star reviews to cultivate a stronger customer loyalty. – George Negron, Timilon Corporation
4. Utilize the responses from customers to your advantage.
Receiving referrals can be greatly influenced by waiting for an emotional trigger moment from the customer. It is important to structure your system around the timing when customers typically experience emotional benefits from your product or service. If it takes around 30 days to see results or if your service requires five months to show its effectiveness, it is advisable to wait until the customer’s emotions are heightened before making the referral request.
5. Place emphasis on authentic connections.
The most effective way to generate new business is through partners, networks, and referrals. It is important to not overly focus on the process and incentives when creating a system. Genuine relationships are key to successful referrals. Creating advocates is achieved by delivering exceptional service, enhancing your clients’ reputation, and making their lives easier. – Harpreet Bushell, LAB Group.
A referral program, like any business relationship, should be treated with the same level of attention. Ultimately, there should be a shared understanding of why individuals such as suppliers or existing customers should participate, as well as what benefits everyone will gain. The success of the program is dependent on the strength of your relationships. – Sameer Ahluwalia, HCL Technologies
6. Avoid applying excessive force.
A referral program should not give the impression that clients are doing you a favor; it should make them feel like they are doing themselves or the person they refer a favor. In fact, paying them for a referral might have a negative impact. Instead, provide them with useful tools such as a complimentary booklet packed with valuable insights or tips that they can share, perhaps including a free session or sample. The aim should be to avoid giving the impression of referral marketing. – Daniel Berger, Intersection Capital
7. Adopt a mentality that focuses on the benefits I can gain from it.
Throughout my life, I have been instructed to think with a “what’s in it for me” mindset, commonly referred to as “WIFM.” This principle holds particularly true when it comes to referral marketing systems. It is crucial to offer a WIFM that captures the interest of individuals or businesses and motivates them to collaborate with you. The WIFM can be non-monetary in nature, such as offering a solution to a problem. In the absence of clear benefits for providing referrals, they are unlikely to generate leads. – David Strausser, Vision33
8. Possess excellent customer service.
Ensure that your customer service is close to perfect before you direct your attention towards a referral marketing system. When it comes to referrals, they are highly personal, and customers will only refer others if they have complete trust in your business and the quality of service you offer. – Lauren Mieli, Prudent Pet Insurance
Close The Loop
To effectively increase conversion rates, companies must clearly communicate the specific referrals they desire and the actions they request customers to take. Simplifying the process of forwarding emails or company information will greatly contribute to this success. It is also important for companies to express gratitude and close the loop by thanking the sources of referrals and reciprocating with their own referrals.
Step 10: Ensure clarity of brand values.
To ensure consistency with your brand and values, it is important to establish clear vetting and onboarding processes for your referral partners. This will help streamline the process of bringing them on board and managing referrals effectively. The aim is to avoid overwhelming these partners with excessive burdens that may overshadow the benefits they bring to your business.
