The Ultimate Guide to Referral Marketing
Dropbox, Uber, Airbnb.... They all grew with referral marketing. Though these are recent businesses in the grand scheme of things, acquiring new business through referrals has been around for a long time.
Referrals happen naturally, many times without any extra effort on your part. You provide a great product or service, your customers feel that their contacts or friends would benefit from your offering, so they refer you to others.
This is a great way if acquiring new business, but what is even better... what Dropbox, Uber, Airbnb and thousands of ecommerce businesses do is deliberately install a referral system in place, where referrals are made everyday, on scale, growing their businesses predictably.
This ultimate guide will show you:
- How to think about referrals as a way to grow your business
- Why you should take referrals, very very seriously
- The types of referral campaigns you can build to grow your business. Your business will better suit referral campaigns than others.
- Examples of successful referral programs, and how you can learn from them.
- The best tools for your type of referral program.
- How you can start your ecommerce store's referral program in no time.
- Advanced referral marketing tactics
- Avoiding referral marketing mistakes and pitfalls.
Why Referral Marketing is Hot Today
Types of Referral Marketing
Setting up a DIY Referral Program
Referral Marketing Tools
Referral Marketing Definition
The simplest way to understand referral marketing is to think of it as advertising. This is in fact what it, a form of advertising... the best form of advertising in fact.
Why is it the best?
Well simply because it is the form of advertising where your customers become the advertisers. When your customer is the advertiser, they become the most trusted source of advertising there is.
Your customer's contacts and friends trust and respect them. When your customers recommend your product of service to their friends, this act becomes the type of advertising that has the highest ROI for you business.
This isn' just theory talk, this is backed by data:
In 2015, a Nielson survey found that a whopping 83% of respondents, from 60 countries, said they trusted the recommendations of friends and family (1).
This survey is consistent with science of social behaviour; we understand what this impressive statistic is so.
Ok so now we know that referral marketing is the most effective form of advertising, and the fact that it has always been one of the most natural form advertising there is, why is it that now thousands of businesses rely on referral programs for growth?
What has changed in the last few years?
Why Referral Marketing is Hot Today
Where as in the past, customer referrals took place in the form of word of mouth, in a one-to-one fashion, today the dynamics has changed.
The internet, email, social media and mobile technology have made it super easy for your customer's recommendations to spread globally, in such a short amount of time. Now imagine you have thousands of customers recommending your brand across the globe.
This scale is equivalent to the type of scale you would expect from TV or online PPC advertising.
Where in the past, customer referrals were effective at brining in new business, this only happened at a small scale. This now happens at a larger scale.
Today, referral marketing is both effective and scalable.
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 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.
Types of Referral Campaigns
Referral Marketing Tools
Selecting your referral marketing tool will depend on the type of referral program that bests suits your business model.
Let's consider the tools based on the referral type:
Purchase Based Referrals
If you run an ecommerce business, tools like Talkable and Ambassador offer purchase based referral programs.
On the other hand if you have a software or SaaS product, consider ReferralSaaSSquatch. They use API end points so that you can integrate them within your apps.
Subscription Based Referrals
If a subscription based referral program is better suited for you, Gather's tools is focused on growing your subscriber's list through referrals.
With Gather, your customer's friends ca subscribe to your list with one click, reducing any referral friction as much as possible.
Gather also allows you to run one-off viral competitions, by rewarding your customer's friends only, allowing you to enter your customers in to enter a prize draw or competition.
DIY referral programs
You may choose to set up your referral program. This is especially if you have certain requirements that an off-the-shelve system.
Though at Gather, we offer a concierge service where we build custom solutions for customers with special requirements, if you have the know-how and time to do it set up a referral program yourself, this could be an option that is better suited for you.
The following is are the ingredients for referral workflow that will help you set up your DIY referral program.
Set up Customer Unique Share Links
The simplest way to understand 'who has referred who' is to set up a unique, trackable link per customer. When their friends clicks on the link, your system can then register the correct referral.
One way to do this is to setup a link that includes your customer's email address in it, making it identifiable.
This would be the link you give to your customers to share with their friends. The "yourwebsite" could be your domain, e.g. your ecommere store. Or it could be a landing page for a newsletter signup if, for example, your campaign is a subscription based referral program.
You'll see further down, how appending your customer's email address will tie in to the rest of the referral workflow.
Setup a way to register a referred visit
Setup a way to link a successful referral to the original referrer
Set up a way to send a reward
Referral Email Form
Social Media Share
Lead Signup page