Referral programs take your best customers and turn them into salespeople.

Why it’s a good idea Word of mouth remains one of the strongest sales channels for many products and services.

Many millions of dollars (and research hours) have been spent understanding how customers talk about a particular product or service to incorporate that natural, market-generated language into marketing copy.

Having a referral program allows you to directly tap into this conversation and incentivize customers to talk, share, and sell for you in their language, driving the conversation in ways that a brand never could.

The context of a recommendation on social media is very different than a one-on-one personal recommendation through a text message or face to face conversation.

Many marketing campaigns are broadcast only, but one-to-one referrals can be question and answer, and benefit from the real-time back and forth.

Referral programs allow you to benefit from a handful of forces:

  • Social proof
  • Social pressure
  • Personal recommendation

Typically, customers who engage with a referral program are highly satisfied with the product or service. This makes them ideal “influencers” for the audience they have access to.

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Strategy Analysis

Most referral programs’ primary goal is to increase sales and awareness (which may later generate sales).

The referral program accomplishes this in a few key ways:

  • Generating net new audience.
  • Directly generating new sales.
  • Improving retention among referrers.

It is generally accepted that referral programs can be powerful assets for improving brand loyalty and retention. The mechanism by which this happens is well understood.

Once a referrer makes a recommendation, they’ll often want to appear congruent and confident in their decision by remaining a customer. Once they receive a payment, they also feel personally connected and appreciated by the brand.

Once an invited user signs up, they may face social pressure (and onboarding assistance) from the referrer.

Creating more valuable customers

If we accept these reasons, we can further posit that it could be possible that customers generated through referral programs are more valuable than the average customer due to lower churn rates. They also make the referrer more valuable.

For this reason, we suggest the creation of new segments, one for active referrers, one for active referrals. This allows you to isolate these individuals, measure their performance, create different messaging/offers/opportunities, and further grow the program.

Messaging

You’ll need to communicate:

  • That you have a referral program
  • Why customers should join
  • Who is eligible for joining
  • How customers refer others
  • How and when customers get paid
  • What information is required, how it is going to be used
  • How customers can track their performance

What you say is just as important as when you say it. Best practice dictates that you should ask existing customers to refer others once they are at an emotional high-point with the product, e.g., the aha moment.

The time-lag between signing up and getting to the aha moment should be short enough to keep the product top of mind.

The problem/pain the customer was feeling (the reason they signed up in the first place) is recent enough to be directly tied to the solution. Presumably, the longer you use the product, the less pain you feel from external factors that the product solves, making each subsequent step less emotionally resonant.

Additionally, many companies have created ambassador programs that provide firm guidelines for talking about the brand. Governance is essential, and you should give a small list of pre-written tweets, emails, and/or marketing messages. This helps reduce friction to share and also helps keep messaging on-brand.

Incentives

To get referrals, you must give something valuable in return.

Best practice says:

  • 77% prefer cash, especially for products that are not frequent purchases. Free product would be an incentive too far in the future.
  • Dual incentives, where customer and friend both receive a reward, is very powerful. A great starting place is the 20 & 20 rule.

Give your friends 20% off of their order and earn $20 cash.

Tech and Tools

The program should be opt-in so that you can identify/segment users who have joined and send them distinct messaging. This also enables you to remove nags to join the service if they are already active members, or include it if they are not.

The program should be tracked via a unique link so that the referrer can share on virtually any channel. The link should not change over time. There is a slight risk of having user-generated spam — users might become aggressive, drop the links in off-topic Reddit threads, etc. Program governance (terms and conditions) can solve some of this.

You could have an easy to use “quick refer” feature that allows the referrer to enter email addresses to send referrals. This feature should provide a preview with boilerplate text (editable) of the email content. You could also include preformatted links for tweets, Facebook shares, etc. (these do not require integrations, and can be straight HTML links). There is some risk in users sending unsolicited emails to cold contacts (i.e., spam) through the system. You might limit the number of emails that can be sent by any user, or provide a mailto: link for them to send the email themselves.

In terms of front-end marketing site assets, you’ll need a page for general information (and opt-in), and a page that referrals land on that explains what happened and sells them on the product or service.

Additional pages/functionality required will be:

  • Program dashboard – to allow referrers to send referrals, grab their link, see program performance metrics, FAQs.

Payout

Most programs of this type payout after a minimum threshold (say, $50) is reached. In our experience, this is likely to perform worse than if you paid out at intervals, regardless of threshold. Paypal seems to be the simplest but may exclude many potential customers from joining the program. An alternative to consider could be providing Amazon (or other) gift cards.

Also of note are the implications for 1099/etc if referrers earn more than $x per year (check with your local tax expert).