What we're talking about

Referral marketing occurs when a new customer buys or signs up for a product or service based on someone else’s opinion or influence. Sometimes this happens for free (which is great) but plenty of the time it doesn’t – a study by Texas Tech University found that while 83% of satisfied customers say they’d be willing to provide referrals, only 29% actually do. That’s why businesses introduce structured and systematic referral programs that they can continuously manage, control and track. These programs range from the simple (basic spreadsheets built in-house) to the sophisticated (automated all-in-one software platforms from third parties).

Often referral marketing programs incentivise customers to refer. That might be through offering discounts, cash, credits for future purchases, priority service or free access to something; these can be tweaked and altered as the programme is rolled out. In basic terms you’re telling a customer: get someone you know to sign up or make a purchase, and we’ll reward you – and sometimes the person you’re referring too.

Why it’s important

Trust

With customers increasingly untrusting of mainstream advertising channels, hearing about a business from someone you know immediately builds in a level of confidence hard to replicate. 

Better matching

Customers who come from referrals are naturally a better fit than non-referrals as they’re likely to have similar attitudes, interests and buying habits as the customers already using – and seemingly enjoying – the brand.

Engagement

Referred customers often know the product or service better, having discussed it with the person referring them. They’re therefore more likely to use the product or service more extensively than novices.

Social enrichment

The relationship between the referred customer and your business is stronger due to the friend who referred them – being a customer of your business is now something the two have in common.

Things to note

Not all businesses are suited to referral marketing – one aspect occasionally underestimated is the importance of social capital: your brand has to be something customers feel comfortable sharing and advocating to their friends. It’s really not all about the incentive.

Managing a referral program is a complex thing. You’ll need the right systems and processes set up from day one to track, measure and optimise the program – particularly if it’s something you want to scale. There are several key metrics to track including reach, participation rate, share rate, conversion rate and return on investment. To observe, learn and iterate – and reach a high level of insight into customer behaviour – many businesses opt for automated software programs.

Crucial to building an effective referral marketing program is the ability to assess the value of the customers who are brought in. Something to watch out for is the abuse that incentives – particularly monetary ones – can provoke, with customers not hanging around very long, or engaging with the product or service simply to claim their reward.

Who’s gotten this right

A couple of common examples come up at this point, and with good reason:

Dropbox, the file storage service, went from 100,000 sign-ups to 4m in 15 months due to its dual-sided rewards program – giving 16GB free storage space to both referrer and the referral recipient. 

Evernote, the digital note-taking app, used a point system incentive program where doing specific actions, like referring friends, would build up points that could then be exchanged for upgrades to their own Evernote account. 

Harry’s, the shaving brand, used a pre-launch referral system to collect 100,000 email addresses of potential customers. The more friends you referred to sign up, the greater your reward would be.

How to develop a referral marketing program

1. Evaluate your product or service from root to branch. You need a product that’s suitable for word of mouth, with happy customers and a certain level of monthly transactions. Referral marketing is normally a growth accelerator rather than a growth starter. You’ll also need an appropriate level of customer service to launch – ask yourself whether you could cope with a big increase in enquiries, and how you’ll train your team to be fully versed on all the details.

2. Decide on your goals for the program. Do you want more email addresses, bigger purchases by existing customers, a higher conversion rate, higher sales or simply more customers? The overarching aim of the program will dictate what type of program is suitable for your business.

3. Determine whether you’ll manage it in house, either with developers or spreadsheets, or enroll on an automated all-in-one referral platform. Shop around here – each platform will have different nuances for different businesses, so you’ll need to have conversations. Things to consider include cost (naturally), scalability, platform and compatibility with your other software.

4. Land on the incentive you’ll offer, if you’ll offer one. This is an area of trial and error – it can be changed over time, but it needs to make economic sense to the business and be actionable. Scope out the competition to see if they have anything similar set up, and consider A/B testing. You’ll need to set the terms and lay them out clearly – eg, who’s eligible and if there’s a limit on the number of people customers can refer. You’ll likely need to involve a lawyer to ensure everything is legit.

5. Consider and refine the user experience – the program has to be straightforward and something anyone can do. The key to successful programs is that they’re quick, actionable and easily shareable.

6. Devise a plan for how you’ll tell your customers about the program, and when. That could be whichever communication channels you use: be it social channels, newsletters, website, banner ads, SMS, post purchase pop ups or email sign-offs. You also need to consider at which point the customer will see the information. Ideally that would be at the high points of your relationship: after a new product launch, after they leave a positive review, or after they’ve just made a purchase.

7. Set the key KPIs you want to track and your targets: that could be the number of customers who become referrers, the response rate, participation rate or the conversion rate. Having metrics to track and monitor is essential to launching – and improving – any successful referral program.

Key takeaways

• Deciding on the incentive might seem like the crucial factor, but social capital is more important – a customer must feel comfortable sharing your business with their friends without any social risk. 

• Though creating a simple in-house program is possible, to reach the level of insight needed to optimise and scale the program, enrolling in an all-in-one automated software platform is the way to go.

• Developing a good referral program is all about testing and experimenting: with incentives, the language you use, and how and when you communicate with your customers.

Learn more

Find templates for setting up a basic referral program in this super comprehensive guide to the subject.

Get inspired by how companies like Dropbox, Uber and AirBnb bring referrals to life, with this detailed walkthrough of 77 different – and successful – programs .

Compare potential tech platforms with this analysis of 35 referral marketing software tools.

Experiment with your program, with this guide to A/B testing referrals programs.

Consider what growth hacks you can use, in this short video from Neil Patel.

Follow the story of how shaving company Harry’s got 100,000 email signs up in one week, via this step by step blog from founder Jeff Raider.

Learn from the mistakes of a referral program gone wrong, from this honest blog post by Worldwide101 founder Sandra Lewis.

Now listen to our podcast on referral marketing to hear more useful tips.