The Ultimate Guide to Business Referral Programs

From social media ads to websites, there are plenty of channels where your customers can find your business. Technology made it possible to narrow your target audience based on their demographics, behavior, and interests.

But the most powerful marketing strategy is one that doesn’t need elaborate customer profiles or targeting—this is referral marketing. 

Referral marketing makes use of word-of-mouth recommendations that can turn your customers into brand ambassadors. It’s a powerful tool that relies on tapping on your customer’s network to reach an audience you may have not considered before.

Its foundation is surprisingly simple—it’s only natural to trust the word people you know. Studies show that 92% of customers trust referrals from friends and family over other forms of advertising.

Tired of chasing customers? Grow your business the organic way through referral programs. In this guide, learn the secrets to successful referral programs. Discover its benefits, learn from real-world examples, and build your referral program that fuels your business growth.

What is referral marketing? 

Referral marketing is an advertising strategy that relies on incentivising existing customers to recommend your product or service to their friends, family, or network. This marketing strategy makes use of incentives like rewards or discounts whenever your customer makes a successful referral.

This turns loyal customers into brand ambassadors involved in your marketing process. Since people are more likely to trust recommendations from those they know, you can get higher conversion rates with a referral marketing program. 

Referral marketing is a win for both you and your customers. They get rewarded for sharing a product or service they love and you gain new customers thanks to a trusted recommendation.

Why referral marketing works

Before we dive into the hows of creating a referral program, it’s important to talk about why you need one. Here are the various benefits of a referral marketing program for your business. 

Increase customer acquisition

A well-oiled referral program is like having a sales team that works for free. Bring in new customers organically by getting your happy customers to be your brand advocates and spread the word about your products and services. 

Boost brand reputation and credibility

With so many businesses nowadays, it’s hard to get the trust of a new customer. Referral marketing lets you tap into your customer’s network of friends and family and gain new customers through their recommendations.

Referrals act as social proof that your products and services are good quality and are truthfully advertised. This helps validate your brand and build better credibility. 

Drive revenue growth 

The numbers don’t lie. Referrals contribute to 20-50% of purchase decisions according to McKinsey & Co. Word-of-mouth referrals are estimated to drive three to five times more results than any paid advertisement.

Businesses looking for growth strategies can look into referral campaigns in their marketing arsenal. 

Cost-effective marketing strategy

Traditional marketing costs require upfront payment when it comes to placing ads in magazines or billboards. Digital marketing channels such as paid ads offer flexibility but would still cost you for every click, without a guarantee that they would be customers.

Referral marketing programs in comparison are a steal. You would only pay the rewards when you acquire a new customer, making it a more cost-effective marketing strategy. 

Higher customer lifetime value 

Referral marketing relies a lot on trust and social validation, customers acquired through referrals are more valuable. Customers gained through referrals are more likely to spend on their first order and make repeat purchases since they already trust your brand before making a purchase.

They are also more likely to fit your customer profile, lessening the chances that they are one-off customers or bargain hunters. Since someone did them a favor by introducing the brand, referred customers are more likely to pay it forward and recommend your brand to someone else.

Exploring referral programs

You can utilise referral marketing programs in different ways as they serve different purposes depending on your business goals. Here are some of the most common types of referral programs. 

Customer referral program

Businesses typically launch referral programs for their customers. Sometimes it can be integrated seamlessly with their existing loyalty programs where they can earn points or rewards for making purchases and referring new customers. 

Referral programs can either be single or double-sided. Single-sided referral programs mean that the referrer is the only one who receives a reward for every referral whether it’s an incentive or discount. Typically businesses that offer high-value products or services would consider this type of referral program. 

Double-sided programs are the most common, where both the referrer and the referred customer benefit and receive a reward. This incentivises both parties and can be an effective strategy for new customer acquisition.

Partner referral program

A B2B or partner referral program is different from a typical referral program. It involves a strategic alliance between two businesses where they leverage each other’s audience to generate qualified leads.

The incentives that can work on customers would not make a difference to businesses which is why this focuses more on building relationships that can be mutually beneficial. 

A partner referral program can help expand your reach to the audiences of your partner, which are also higher in quality. The incentives depend on the agreement and can be anything from revenue sharing, commission on sales, or reciprocal referral agreements.

Compared to customer referrals, partner referrals involve written contracts and agreements that outline the agreed-upon conditions for the rewards and referrals.

Affiliate Program

Affiliate programs can be similar to referral programs but instead of incentivising customers, you incentivise external partners. These partners can be businesses, bloggers, or social media influencers.

The ideal affiliate partner is someone whose target audience aligns with yours—their audience’s loyalty is something you want to capture with the help of the affiliate partner. Instead of discounts, the affiliate partners usually get a commission for every lead or sale generated.

For a quick guide on how to leverage referral programs as a business strategy, download our guide here.

How to create an effective referral program

Define your Goals 

Before you turn customers into brand advocates, it’s important to start from the very start. Define your goals and target audience.

Understanding your goals helps narrow down the strategies that you can use to get there.

This will serve as your backbone and the reason why you’re doing referral programs in the first place. 

Here are some of the questions to ask yourself when setting goals: 

• What is it that you want to achieve? 
• How many referrals are you hoping to generate? 
• Who are your ideal referrers? 
• What are their demographics? 

Planning the referral program

Now that you have your goals, you can build your program structure and the execution plan. This would be your campaign’s main foundation and will determine how smoothly your campaign would launch.

This is the stage where you decide which platforms you will use for rolling out the campaign and what analytics and tracking tools you will need to track the success of your program. 

In this stage here are some of the common considerations: 

• What is the referral program duration? 
• Will I go for a single-sided or double-sided referral structure? Will you reward the referrers only, or both the referrer and the customer? 
• When will customers be rewarded? 
• How will customers track their referrals? 
• How will customers collect their rewards?
• Are there any restrictions on the referral? 
• Will you leverage social media sharing for a wider reach? 
• What will be your metric of success? How will you track ROI? 

Designing referral incentives

With your goals in mind and your program machinery all set up, it’s time to find enticing incentives that are tailored to your target audience and aligned with program goals.

The most common options are discounts, free products, or credits which are all tried and tested by many other businesses running referral programs.

Don’t be scared to go outside the box and try one-of-a-kind incentives such as early access to new features and exclusive experiences. If you’re stuck between two ideas, try A/B testing to see which one resonates more. 

Promoting your referral program

Once your referral program is good to go, the only thing left to do is to make sure that you promote it. Generate buzz on your program and blast it through different channels such as email newsletters, website pop-ups, and social media posts.

If possible, go the extra mile and personalise the messaging for your existing customers to make them feel special and valued. 

Tracking and analysing performance 

Once the program period ends or your set reporting period, monitor key metrics from conversion rates, customer acquisition costs, and referral rates.

If you did A/B testing with incentives, track which incentive performed better with your target audience. Track which channels are the most effective if you do multi-channel campaigns. 

Refine and optimise 

The work is never one and done. Based on the data that you tracked as well as customer feedback, refine your program to achieve your desired results.

Stay on top of new industry and marketing trends to gain insight into what could capture the interests of your target audience.

Don’t be scared to scrap old ideas in favor of new ones if they have the potential to resonate more with your customers.

Best practices for a successful referral program 

No two referral programs are the same. Your referral program is unique to you because of your target audience and business goals.

Learn how you can apply a successful referral strategy to your business by downloading our quick guide.

 

 

Here are some best practices for creating a successful referral marketing program. 

• Tailor incentives — Rewards aren’t a one-size-fits-all. Understand your audience and what motivates them to craft the ideal reward. 
• Make it frictionless — Provide clear instructions, sharable links, and codes, and make the experience as seamless as possible for your customer. Integrate your referral program across different channels from email, website, and social media to make it easier for customers to discover and participate. 
• Target the messaging — Generic announcements today wouldn’t cut it. Tailor your message to different customer segments based on their interests or purchasing habits. 
• Show appreciation — An incentive can only do so much if your core product or service isn’t something worth believing in. Those who do participate in your referral prove that they believe and trust in your brand. Show them thanks through surprise gifts and personalised emails. A happy customer is a loyal customer! 
• Gather feedback — It’s rare to get it right on the first try. A good program often undergoes many iterations and optimisations based on customer feedback. Gather feedback through email, surveys, or other customer touchpoints to continuously improve your program. 

Real-world success stories 

One popular example of a successful referral program is from the file hosting giant DropBox. They identified that storage space is a major need of their customers so they offered user-centric incentives like getting an extra 500 MB of free storage up to 16 GB for both referrer and referee.

The success of this program doubled their user growth every three months and catapulted DropBox to the industry leader status where they are today.  

Another company that utilised effective referral marketing is AirBnB. They wanted their customers to share the love of travel with their friends and family.

When an Airbnb user refers a friend, they would receive a $25 travel credit while their referee would receive $25 off their first stay. Airbnb’s referral program led to 300% more bookings and signups than before.

These are just two stories of companies who found their success with referral programs and you can too. Discover the secret behind these strategies that DropBox and AirBnB used to double their growth—download our quick guide today! 

Start referring, start growing 

Word-of-mouth is a powerful tool in marketing that you can leverage with a well-built referral marketing program. Make your customers your biggest brand advocates and unlock new growth opportunities. 

Get started with everything you need to know about referral programs with our essential quick guide. Download today for valuable insights on your business strategy. 

Ready to unlock growth with a business referral program? Contact Red Tomato today to learn how we can help you create and implement an effective referral strategy for your business.