What's The Best Referral Program Incentive Structure?

We've written a lot about the effectiveness of referral marketing programs and the power of referrals to drive sustainable, scalable growth over time. And one of the most commonly asked questions we receive is "what's the best referral program incentive structure?"

In this blog post, we will explore exactly that.

Specifically, the right time to offer a referral incentive based on the event or action you want to reward; the right types of incentives to offer based on your product and goals; and the right tools to scale this customer acquisition strategy.

Let's dive in.

The Best Referral Program Incentive Structure: Why Timing and Type of Offer Matter

Timing is everything when it comes to asking for a referral. From the consideration phase to the shopping cart to post-purchase, there are multiple times to incentivize your referral program members during the customer journey. 

But referrals don't just happen organically. According to the Wharton School of Business, 83% of satisfied customers are willing to refer products and services, but only 29% actually do. Every component of your marketing plan provides an opportunity to ask for referrals. Whether you’re talking to existing customers, new leads, or fans, invite members to your program to share your brand.

According to our research, 82% of Americans say they seek recommendations from friends and family when considering a purchase. So the key is figuring out what matters to your audience. Review your path to purchase and discover which activity matters the most to your business and pinpoint how users can be incentivized to perform this action. Understanding when your customer is happiest with or most excited about your product, service, or brand is the perfect opportunity to present them with the prompt to refer your brand. 

For example, every time a user signs up for a newsletter, passes along a lead to your CRM, purchases a product, or does a specific sequence of preferred actions, you can reward them for their behavior.

While it's important to have your referral program prominently displayed when your customers are relishing in their "moment of delight", it's also just as important to incorporate your referral program into your overall marketing strategy. 

That means giving your program members the tools they need to share your brand and engage with their networks to attract more referrals. Especially since 67% of consumers say they’re more likely to purchase a product after a friend or family member shares it via social media or email. There’s no telling how many brand ambassadors and revenue builders are waiting to share for your business and bring in new customers.

What's the best referral incentive type for your brand?

Choosing the best referral incentive structure for your brand is dependent on understanding your brand ambassadors. The most successful incentive structures are easy to explain and simple to payout. The last thing you want for your referral program is a convoluted structure with hard-to-obtain rewards.

While there’s no one-size-fits-all approach to developing an incentive structure, here is the 3-step framework to planning what and how to reward your best customers for referring your brand.

Step 1: Determine What Activity to Reward
Start by selecting the specific action that members in your referral program, will be rewarded for. In other words, what is the ideal activity that should occur after a referral link is shared? Whether it’s product purchases, completed demos, or newsletter signups — aim for the outcome that will help you achieve your desired objective.

Step 2: Choose Between Non-Monetary or Monetary Rewards
After you pinpoint activity that will be rewarded, choose between these two types of rewards:

Non-Monetary Rewards: Loyalty points, early access, swag or any other reward without direct monetary value.

Non-monetary rewards are enticing for companies that want to spice up their customer outreach and give away branded merchandise or exclusive perks. While it’s always great to shake up the traditional customer experience, the problem arises when determining the one-to-one value of these interactions. How many company t-shirts would rightfully reward customers for new business they’ve driven your way? Non-monetary rewards are great add-ons when you want to thank your customers, but they aren't typically motivating enough to encourage advocates to drive more referrals.

Monetary Rewards: Incentives with a monetary value like cash, rebates or discounts, gift cards, and commissions.

Nothing is more straightforward than a cash reward. Cash referrals create a direct link between brand ambassadors and new revenue. Plus, it’s much easier to calculate your customer acquisition cost when cold hard cash is involved.

And not every incentive has to be directly linked to referrals. For example, are there ways that you can reward customers who make X or more purchases within a given timeframe? Offering free shipping, doubling rewards points, or providing additional discounts for your most loyal and enthusiastic customers is a great way to energize true word-of-mouth referrals.

Step 3: Decide How to Reward
A critical aspect of developing an incentive structure is determining how much it will cost you. It’s important to consider the customer lifetime value and customer acquisition cost as you determine how much, and what to reward. Consider these two types of rewards:

Single incentive: the original referrer is rewarded for the new sale generated as a result of their activity.

Dual incentive: both the referrer and the new customer are rewarded.

A study conducted by the University of Pittsburgh and Korea University revealed that the referral benefits and costs of single and dual incentive structures are largely dependent upon the strength of a brand. Strong brands, defined as well-established brands with a high level of brand awareness, found success with dual incentives. Weak brands defined as less-established, low-awareness brands found success with single incentive structures.

Based on our experience, many of our clients have found success with dual incentive structures because both parties feel like they're being rewarded and valued. Instead of looking for a textbook answer to your incentive structure questions, build a program that suits your company and what you want to reward.

Why is having an automated referral program solution crucial for marketing teams?

It’s a smart idea to view referral marketing as an investment, and a program that is an enjoyable experience for existing and future customers. You don't want your team to get bogged down in the manual intricacies of running a referral program. From enrolling program members to providing referral links to managing incentive structures to automating payouts, a referral marketing solutions simplifies manual tasks so your team can scale this strategy.

I'll say it again: from an operational standpoint, the last thing you need is managing a referral program to sap staff resources. For this reason, many brands leverage an automated referral program solution to streamline processes.

Leveraging referrals as a customer acquisition strategy is dependent on having a process and platform in place to collect data in order to continuously optimize your program. Marketers that want to generate referrals at scale need to actively analyze campaign data and new leads.

While technology isn’t technically a requirement for referral marketing, for your program to be successful, it needs structure and commitment. This means more than just the basic functionality of rewarding referrals using manual entry and spreadsheet management.

Your team might be able to build a referral program with basic tracking and reporting capabilities, but what happens when the referral program matures beyond entry-level functionality? If the in-house program wasn’t designed around flexibility and extensibility, it can create very large barriers to scale.

By enabling your customers to share your brand with others, you can also gain a better understanding of consumer behavior for your products and services. The more you understand your customer base and the leads they generate, the more efficiently you can hone marketing strategies, gain customer insight, and grow revenue.

Planning your referral program incentive structure can be overwhelming, but it doesn’t have to be! The best place to start is with your customers. Determine what motivates your customers and create incentives around those factors. Once you figure out what motivates people to buy your brand in the first place, you can design a program that speaks to what customers really want.

For more ways to transform your happy customers into an extension of your sales team, check out our eBook below.