The Ultimate Guide to Referral Marketing

A blue phone, which you may use to call a friend to engage in referral marketing by calling a friend to tell them about a product or service, set against a red background.
A blue phone, which you may use to call a friend to engage in referral marketing by calling a friend to tell them about a product or service, set against a red background.

Every business likes to think it has something special to offer. And when your customers agree, they’re more likely to refer you to others. That’s the foundation of referral marketing.

Referrals are the highest form of flattery. But more importantly, they’re warm leads that result in 3-5x higher conversions compared to any other channel. Hands down, it’s a highly effective way to get great results with very minimal (or no) effort or marketing spend.

People are going to talk about your business no matter what. But there are ways you can encourage more people to be proactive in referring others to your business. Let’s look at some specifics on referral marketing and how you can put it to work in your business.

Table of Contents:

What is Referral Marketing?

What is referral marketing, exactly? A good definition is this:

A proactive, organized, and strategic marketing tactic that encourages customers to refer others to your business, usually with the promise of a reward for a successful referral.

Many business owners see a referral marketing strategy as being synonymous with word-of-mouth marketing. There is some overlap, but referral marketing goes beyond word-of-mouth marketing in some key respects.

Word-of-mouth marketing is when people are talking about your business to others. Maybe a friend asks about the best Mexican restaurant in town or where to go for bicycle rentals. Their recommendation is based on their own experiences or knowledge. There’s usually no reward involved, other than the self-satisfaction of helping someone find a product or service they need or want.

Referral marketing is a little different.

When companies offer a referral program, they are proactively encouraging their customers (or anyone, in some cases) to refer people to their business. In return, they may offer an incentive for each successful referral. This could be a monetary reward or credit, gift cards, branded swag, or discounts, for example.

Having an official referral network can be a great way to keep your brand top of mind and build stronger relationships with your customers while also earning new customers with little effort.

What are the Benefits of Referral Marketing?

Before we get into the nuts of bolts of how referral marketing works, it’s important to first understand why you should care. What are some of the top referral marketing benefits?

Turn Customers into Advocates

Word-of-mouth marketing is the difference between a customer and an advocate. It’s one thing to have customers contributing to your bottom line. But their recommendations to others can help you grow your bottom line even more.

Advocates can be one of your biggest sources of income simply because they introduce new customers to your company on your behalf.

Every time they refer you to others, they’re helping you grow your customer base. They’re providing “social proof” that you’re a great company to do business with and can help solve a problem or fill a need.

Taking customer advocacy a step further, referred customers are also 18% more loyal than customers acquired by other means. They’re also four times more likely to refer others to your brand, which keeps the referral cycle going strong.

Generate Quality Warm Leads

Research shows that an impressive 92% of consumers trust referrals from people they know. Referrals carry a lot of influence. No one wants to refer someone else to a business that will deliver a poor experience because of how it might reflect on them, the referral source.

Your referring customers also do a lot of heavy lifting in the conversion funnel. They can answer questions and instill confidence in the buying process so that when your referral comes to you, they’re almost ready to pull the trigger.

This can mean a lot of things to a business: a shorter sales cycle, less money spent on advertising and marketing, and a frictionless customer experience, to name a few.

Lower Customer Acquisition Costs

Businesses acquire customers in a number of ways. Sometimes, you’ll need to pay for ads or have multiple touchpoints with the customer before they convert. This can be an expensive process and might not result in a profit after the first sale.

For example, let’s say your average new customer ticket price is $50, and your profit is 20%, or $10. The average pay-per-click ad costs $1-$2. Maybe the customer signs up for your email marketing, which can cost small businesses with small audiences anywhere from $19-$29 per month. If your customer also reaches out to customer service with questions, that’s another added cost before you make a sale.

Having warm leads generated by word-of-mouth marketing and customer referrals can help to lower the acquisition cost. Instead of paying for ads, emails, and lots of salespeople interaction, your referral partner is doing a lot of the work for you.

Expand Your Owned Media

A referral marketing program is owned media, meaning you have complete control over the what, why, and how. It acts as its own channel where you can interact with your customers on your terms and craft a well-branded experience.

What’s more, your referral channel is based solely on the performance of your referring customers. It’s a self-sufficient program that only pays when successful referrals are made. This helps you keep costs under control and makes it easier to calculate the ROI of your efforts.

Referral Marketing Strategies and Best Practices (with Examples)

A successful referral marketing program is built on customer relationships. When you create strong connections with your customers and earn their trust along with their business, referrals become a natural by-product – almost.

The key to any referral marketing program is intention. It’s important to give customers enough value in a program to get them to participate. You can also conduct social listening exercises to figure out what your customers really want in a referral program.

Using some clever referral marketing strategies can help you make your program more appealing to your customers and increase participation.

Let’s look at some referral marketing examples from companies that are doing it right:

Tesla

An example of a referral marketing program. This image explains Tesla's referral incentives by each car model in a chart that details the reward the referred customer and referrer will recieve..

About the Program

Earth-friendly automaker Tesla (and one of the most popular referral program examples) credits much of its success to a standout referral program. It earned Tesla a stunning 40x ROI with a zero-dollar ad budget.

Using a unique refer-a-friend link, customers receive 1,000 free miles of supercharging. The customer buying their new Tesla will also receive a reward. The program follows one of the basics of referral marketing incentives: make the reward highly valuable and useful to the recipient.

The referral campaign has been tweaked in recent years but maintains the customer-centric rewards that fuel the program’s success.

Referral Best Practice: Everyone Wins

Tesla sweetens the deal by making the reward available to both the referrer and the referred customer. It incentivizes the customer to take advantage of the referral channel rather than proceed directly.

Dropbox

Dropbox reward program.

About the Program

Popular storage app Dropbox offers a similar approach to Tesla in that it rewards both the referrer and the new customer. For individual users, Dropbox offers 2 GB of free storage with the option to purchase more.

Customers can increase their storage without paying out of pocket, though. For every referral that signs up for a paid Dropbox Plus or Professional account, the referrer gets an extra 1 GB of storage (up to 32 free GB).

The program also rewards users that refer others to the free Dropbox option. For every new non-paying customer they refer, they can receive an extra 500 MB of storage and the potential to earn up to 16 GB total.

Referral Best Practice: Think Outside Monetary Benefits

Dropbox’s referral program proves that money isn’t the only driver behind customer referrals. It costs very little for Dropbox to increase a user’s storage and allows the company to quickly grow its user base.

In fact, referrals increased Dropbox’s customer base by 60%, helping it on its journey to becoming a $4 billion company.

Girlfriend Collective

Girlfriend Collective reward program.

About the Program

Taking a chance on an unknown brand can be a bit of a risk, especially when similar products are available at a much lower price. But Girlfriend Collective decided that one of the best ways to stand out in a fairly saturated market was to give its product away for free.

The company made its recycled plastic leggings available for the cost of shipping. The goal was to have its customers who felt strongly about savings and environmentally friendly products tell a friend or family member to go claim their free leggings, too.

The other caveat: the program was only available for a few months.

The strategy paid off in spades. The company earned 10,000 orders on the first day and racked up thousands of social shares and coverage from top online blogs and publications that they could keep track of through social listening and media monitoring.

The free offer removed the barrier of spending a lot of money on an unknown brand and also helped the brand build trust with a growing audience.

The company now offers a different referral program. Anyone can send a friend a $10 off coupon via email, then receive a free pair of leggings when their friend purchases.

Referral Best Practice: Look at the Big Picture

Giving away a premium product sounds risky, especially if it doesn’t result in immediate sales. But Girlfriend Collective considered the overall value of doing so.

It allowed the company to build trust and confidence in its brand, get attention on social media, and see real user feedback on its social channels.

Also, the strategy arguably costs the same or less per customer than what it would have cost to use a professional advertising agency.

How to Create a Referral Program

Answering, “What is a referral program?” is the first step. Now that you know more about its definition and value, it’s time to put your knowledge into action.

Let’s look at some best practices for building your own referral program that works:

Choose an Attractive Incentive

Some referrals will happen organically. But you can drive more referrals when there’s something in it for your customers.

Incentives span a wide range, from points-based systems to monetary rewards. Also, consider whether there needs to be a limit on the rewards a person can claim.

Make the Referral Process Easy

No one wants to jump through hoops to get rewarded from their favorite companies, even if the reward is highly valuable. Too many steps can discourage participation, which means you won’t get all the benefits of referral network marketing.

Invite Your Customers to Participate

Once you’ve got a refer-a-friend program in place, it’s time to let your customers know!

Send out an email invite to show them how they can take advantage of your new way to earn rewards. Add a separate landing page on your website, share it on social media, and include it in all of your post-purchase communications.

Expand your program by connecting with an influencer or long-time client to help you promote it. 

Track Your Referral Program’s Progress

Once your referral network marketing program is underway, make sure you track its performance. Dedicated cloud-based referral marketing software can be a helpful tool in tracking every referral email, referral code or link, and conversion rate at scale.

The goal of any referral program should be to grow your business. If your program isn’t getting engagement or otherwise increasing sales, you might need to point it in a different direction.

Using an experienced agency can help you make the most of your referral program to drive real growth and boost loyalty. To learn how Meltwater can help, get in touch today.

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