Now that we have established why referral marketing is worth paying serious attention to, let us look at the types of referral marketing programs you can run, how they differ and what mays suit your business model best.

The following are the main type of referral programs you may run:

Incentivized Referrals

Incentivized referrals simply mean rewarding customers for referring their contacts  and friends.  For Incentivized referrals, you could either:

• Reward the customers for a successful referral
• Reward both customers and their contacts for a successful referral
• Reward the customer's friends only for a successful referral

Non Incentivized Referrals

Non incentivized referrals are simply when you ask your customers for referrals, without offering a reward.

Before you dismiss this as ineffective, they may actually be ideal for you business model. Many professional services companies rely on referrals for new business. They do not provide any incentives for it other than the fact that a happy client will feel that they wold want to help you by referring you to others.

This is how I ran our services businesses for years. Happy clients referred us to others.

The science behind non-incentivized referrals if pretty clear too.

Intrinsic Motivation is referred to the type of motivation  that is based on internal rewards, as oppose to external rewards (like money or coupons).

In fact, when you customer is already motivated to refer you their friends and then you offer a customer an Extrinsic Motivator, like a coupon code for referring others; this may actually hinder the process.

This is known as the Over Justification effect. You are diluting the effect of an already present intrinsic motivator by offering a reward.

Ok, now before you conclude: 'great I don't need to provide costly rewards for my customers to refer their friends', you should know that this type of non-incentivized referrals seem to come to with lower conversion rates.

It works well when you have a deep relationship with your existing customer, beyond the simple transaction. This is why these type of non-incentivized referral programs work great for professional services, and not so much on scale.

For businesses that operate on scale, like ecommerce, you will see a little later on how you can both extrinsically  reward customers for referrals to increase conversion rates and intrinsically motivate them to refer their friends at the same! Is is so that Over Justification is not a problem.

What Constitutes a Successful Referral?

There is more than one way you can define what a successful referral is:

• A successful referral when your customer's friend makes a successful purchase.
• A successful referral when your customer's friend becomes a subscriber.
• A successful referral when your customer simply shares your business.

Let's take a look at each one.

When your customer's friend makes a successful purchase.

This is where a referral is deemed successful when your customer's friend makes a purchase. You would track when this event happens and release the referral rewards accordingly.

Don't worry, you don't have to do the tracking manually, there are tools for this as you'll see further in this guide.

The advantages of this type of referrals, is that it guarantees that your customer has indeed contributed to a monetary increase in your revenue. They haven't simply got you a lead, they got you a sale.

The disadvantages of this approach, is that it normally take sometime for a customer's friend to make a purchase. The time taken for a customer to send out a referral email or a share on Facebook till a purchase happen could be as long as weeks and months.

Your customer's friends may be interested in your brand, but not quite ready to buy.  This may demotivate you customer to refer more of their friends, since they do not see the results of their efforts soon enough.

When your Customer's friend  becomes a subscriber

This is when you deem a referral as successful when your customer's friends simply subscribe to receive updates from your brand. You would track when a successful subscription happens, and release your rewards accordingly.

The advantages to this approach is that, it is much much easier for your customer's friend to become a subscriber than it is to become a customer. With tools like Gather, your customer's friends subscribes with just one click.

The other advantage is that, where in a purchase based referral, a customer's friends may not be ready to buy yet, it's more likely that they are ready to subscribe. When they subscribe, you have the opportunity to communicate with them till they make a purchase.

The third advantage is that, because the invitation-to-referral loop is much faster for subscriber based referrals, your customer will be more motivated to refer others, as they are seeing the fruits of their labour in a relatively short time.

Subscriber based referrals come with disadvantages too.  Subscriber based referral that your customer makes guarantee you leads but doesn't guarantee that they will generate you revenue.

That means, you will often not want to invest too much into rewards, as the Return on Investment may not be easily realised.

You may find your self giving rewards to your customers for referring you a lead, where the lead never makes a purchase, or it takes the lead a long time to do so.

To counteract this problem, business owners normally reward their customers with a coupon they would use on their next purchase.  For most business, a new sale contributes to profit.

Many businesses focus solely on sending frequent newsletters to their subscribers. For them, this format of referral campaigns is a no brainer.

When your customer simply shares your business

You can choose to deem a referral as successful when a customer simply shares your brand with their friends or on social media. You can choose to provide reward to a customer for as soon as they share.

This format of referral could have the  same  growth effect on your business as any of other two formats: A customers shares your offering to their friends, some of their friends join and make a purchase and gain new customers.

Like the subscription based referrals, you could choose to simply provide a reward as coupon your customer could use on a next purchase. This is in the same way many business reward customers for simply liking their Facebook pages.