In almost every industry, referrals are the gold standard of customer acquisition. Research has repeatedly shown that referred leads close faster, buy more, and stay longer — all with significantly less effort and at a much lower CPA than non-referred prospects. A University of Pennsylvania study found that referred customers are more loyal and profitable — by a 16% margin — than their non-referred counterparts.
What's not to like about that?
Truth is, most of us inherently understand the value of referrals. When we make a big purchase, we seek out reviews or ping our networks for recommendations. In fact, a 2016 Nielsen poll conducted on behalf of Ambassador revealed that, across industries, 82% of Americans seek recommendations from friends and family when considering a purchase. When we see the same people talk about a purchase they made? Nielsen's survey for Ambassador suggests two-thirds of us are at least a little more likely to make the same purchase.
All of this has never been more true than in the age of the internet — a chaotic, noisy place where we're constantly bombarded with blatant marketing messages, thinly-veiled “native advertising,” and unapologetic branded soapboxing. In this environment, a referral from a trusted source is a welcome respite from the subjectivity of typical brand communications.
So, why isn't there more talk about referral marketing? It's simple: More often than not, people expect referrals to just happen organically.
Here's the problem with that assumption: While referrals do happen organically, they're never a given — even if a customer loves your products and services. In fact, a Texas Tech University study found that while 83% of customers say they're willing to provide referrals after a positive brand experience, only 29% actually do. That chasm exists for many reasons, but it's often exacerbated by a failure to prioritize and manage a truly scalable referral marketing program.
How can your company close that gap?
Let's start by exploring the basics of referral marketing, the techniques you can use to transform happy customers into revenue-driving brand ambassadors, and the simple steps you can take to ensure your referral program is easy to manage, measure, and scale.
DEFINING AND DEMYSTIFYING REFERRAL MARKETING
Ultimately, the goal of referral marketing is simple: To harness the power of authentic word-of-mouth to drive a steady stream of high-quality referrals to your business (and grow revenue as a result). Executing against that goal, however, is a bit more complicated.
For referral marketing to work, you need to have a few core building blocks in place:
A quality product that customers love: While referral marketing can generate dramatic results, it all starts with your product. If your customers are continually telling you how much they love it, they'll probably be willing to do the same thing with their network.
A captive, engaged audience: If your relationship with customers is mostly transactional (think: buying milk at a convenience store) and your social following is disengaged, referral marketing might not be for you. If, on the other hand, you've built up a captive audience of loyal customers, fans, and followers, referral marketing can be incredibly powerful. Engage and incentivize them correctly, and you'll see a big ROI.
A process to track, manage, and reward referrals: In order to move away from the traditional ad-hoc approach to referrals, you'll need to implement processes that automate the repetitive nature of creating, tracking, and rewarding referral campaigns. This is the only way to make referrals a truly scalable source of revenue.
Beyond those building blocks, the core strategies that drive referral marketing aren't rocket science. In fact, the approaches deployed by brands like Airbnb, Uber, and Google to drive incredible user growth are, for the most part, replicable.
The Do's and Don'ts of Successful Referral Marketing
That said, referral marketing isn't something to treat lackadaisically. In order to build a program that your customers, fans, and followers want to participate in, there are some key best practices you'll want to keep in mind :
DON'T make customers do all the work
For referral marketing to be effective, you can't expect existing customers to do all of the legwork for you. While the vast majority of happy customers say they're willing to provide referrals, the truth is they'll only follow through if the referral process is extremely simple.
DO consider how (and when) you ask
The best referral programs operate with a deep understanding of who they're targeting, where those people are active, and which incentives will drive actions. Studying your referral candidates' motivations and preferences before you reach out is critical to success. If you offer the wrong incentive to the wrong customer in the wrong environment, your program will fail.
DON'T “set it and forget it”
Like all strategic marketing initiatives, referral programs thrive in an environment of perpetual optimization. This is where referral marketing software becomes enormously valuable. With the right technology, you can create (and automate) much-needed process around monitoring, tracking, and incentivizing referrals. Over time, that will generate insight to help optimize results.
DO make referrals part of your broader strategy
The highest performing referral programs share a common thread: referrals are fully baked into every customer's sales, marketing, and support experience. Referral CTAs are included throughout the company's website. Employee email signatures feature referral messaging. And the referral program is fully integrated with other critical systems (CRM, marketing automation, eCommerce technology, point-of-sale systems, optimization tools, etc.).
One Key Takeaway
At its core, referral marketing isn't overly complex. In fact, getting started is as simple as putting yourself in your customer's shoes. Objectively, would you recommend your company's products to others? Where and how would you do it? What incentives would motivate you to increase your referral activity? What barriers would keep you from doing it? Answer those questions and you'll be well on your way to building an effective referral marketing strategy.
IDENTIFYING, ENGAGING, AND RECRUITING THE RIGHT BRAND AMBASSADORS
Think about the last time word-of-mouth influenced one of your purchasing decisions. Maybe a friend shared a free month of Hulu after bingeing your favorite show together, a co-worker sent you a referral code for free Uber credits, or a neighbor recommended their favorite contractor. Or maybe it was as simple as a friendly suggestion on where to go to dinner. Regardless, you probably acted on the referral, in part, because it came from someone you trusted.
Now, think about the last time you received a referral and ignored it. What led you to discredit the recommendation? A lack of trust in the person delivering it? The way in which the referral was shared? Generally, when referrals are directionless, or look and feel like an advertisement, we tend to tune them out — and rightfully so. In those circumstances, the “referral” feels interruptive and confusing, instead of helpful, beneficial, and authentic.
Why is that distinction important?
For referral marketing to work, you need to ensure experiences that align with the first description above, not the latter. So, before you start getting your marketing and sales teams excited, and engaging customers for referrals, let’s review how to ensure amazing experiences for your brand ambassadors, their referrals, and your team. There's a process to engaging ambassadors, and if you manage it properly you'll reap the rewards for years to come. If you don't, it could come back to haunt you.
The Core Characteristics of Successful Brand Ambassadors
So, what does an effective brand ambassador look like? How should they act? What should they know? If you're in the process of assembling an army of passionate brand advocates, here are the key characteristics you should be looking for:
1. They already know and love you
Quality brands already have existing relationships with raving fans - usually loyal customers. This doesn’t mean you should avoid reaching out to target advocates, but these are the people who are already telling their friends and/or colleagues about you and proudly promoting you whenever the opportunity arises. Failing to engage these people first could actually alienate them, making them feel passed over should they see other brand ambassadors promoting you, who may be - in their minds - less authentic in their motives.
What this looks like in practice: Make sharing your brand and products incredibly easy for your customers by making the “ask” when they are highly engaged. Including your referral program on a post-purchase or account login page is a simple and effective way to engage your loyal customers. The “ask” needs to be organic, taking into consideration how your customers already engage with your products and services. Try promoting your referral program on your social platforms by highlighting a brand ambassador who benefited from referring friends.
2. A High Net Promoter Score
The most effective starting point in assembling an army of passionate brand advocates is to pay attention to the customers who are already telling you they are willing to recommend your brand. Those 9’s, 10’s, and even 8’s are all but guaranteeing you positive word-of-mouth and countless referrals, you simply have to make it easy for them. It’s important to note that often times your biggest fans are not the ones spending the most money on your product or services, so be sure to leverage the voice of those customers who may not be your biggest spenders.
What this looks like in practice: Send an NPS survey to your entire customer database, this will allow you to gather feedback from both promoters and detractors, enabling you to not only consider detractors feedback and improve their future experiences, but also identify your promoters, whom you’ll want to immediately direct to your referral experience, giving them an opportunity to act on their good intention.
3. A Voice and an Audience
Whether on Facebook, Twitter, Instagram, YouTube, email, blogs, or other offline or online communities, fortunately many people have both the means to communicate and a network willing to listen. The important element here is allowing that person to individualize and tailor their promotion to their peer group - it has to be their voice and the message needs to resonate with their audience.
What this looks like in practice: Allow your ambassadors to promote your brand on whichever social media platforms they are most active on, or even offer printed materials for those who engage offline with potential referrals. Provide templated messaging that makes it effortless for an ambassador to share, but also easy for them to personalize with their own voice. You can provide the images, links, and codes to share, but let your ambassadors add their own language about why their network should use your products/services.
4. They Trust You
Winning customers’ trust to make purchases or become a user is a major accomplishment. If you’ve done enough to earn their promotion to friends, family, or colleagues, they really trust you. Now your ambassadors are trusting you to deliver an equally great experience to their referrals, and you’ve given them one more thing to care about, your referral program.
What this looks like in practice: Communication is the cornerstone of trust. If you clearly and accurately communicate with your ambassadors on how to engage, what their incentive is, and when they will receive it, you’re off to a great start. Set up email triggers based key events throughout the referral program to notify your ambassadors of referrals and rewards.
One Key Takeaway
Before you dive in, take some time to think about the ultimate goals of your program. Every aspect of who you engage first, how you engage, and when you communicate with them, depends on the goals of the referral program. Is your goal new customers, shares, traffic, app downloads, specific product purchases or usage metrics, leads, or revenue thresholds? Once you know that, you can start to build your program.
CHOOSING THE RIGHT INCENTIVE STRUCTURE
FOR YOUR BUSINESS
Even if you build up a roster of passionate customers, they may not be inclined to tell their friends about your brand without some sort of reward. That's where referral marketing incentive structures come into play.
Running an incentive program to reward your ambassadors for referrals is a time-tested method of dramatically increasing referral marketing success. If you've used Uber, you're probably familiar with the company's incentive structure: Referred new users get $20 in free Uber rides, while the referrer gets $10 in credits for every friend who signs-up for an account.
This dual-sided incentive structure taps into customers' innate desire to help others — and get rewarded for it. This approach also opens the door to a lot of creativity, because incentives can cover a broad spectrum of rewards — cash, gift cards, exclusive offers, access to premium features, etc.
Determining Your Optimal Incentive Cost
The first step in setting up your incentive structure is determining how much you can afford to pay for each referral. Before you perform that calculation, there are two things to keep in mind:
1. The incentive should be enough to interest your customers to participate.
There's no “right” answer here, because it largely depends on the type of products or services you sell and what exactly motivates your ambassadors.
2. The incentive should not erase the profit generated by new customers.
Like any marketing channel, referrals should drive a healthy ROI. Rewarding ambassadors with an Apple Watch when the average new customer is worth $50 isn't good for business.
To determine the optimal cost of your referral incentive structure, you'll need to calculate two key metrics: Customer lifetime value (LTV) and Customer Acquisition Cost (CAC). Most marketers are familiar with these metrics already, but it's worth reviewing them here. So, to recap:
LTV is the amount of economic value (marginal profit) a customer brings in over their lifetime of sales with your company
CAC is the total costs associated with acquiring a new customer
To illustrate this concept, let's imagine what the referral incentive calculation might look like for the average neighborhood coffee shop. If the average customer spends $25 in their “lifetime” and the profit margin on those purchases is 30% (after all hard costs and overhead are built in), then we can assume LTV is $7.50.
Knowing that number makes it really easy to determine how much you can pay in referral rewards to acquire your “average” customer. Using the coffee shop example, if you offer ambassadors $2 in shop credit for every new customer they refer, that leaves you $5.50 in profit margin for each referred customer. Win-win.
Three Distinct Types of Referral Incentives
While there are many ways to reward referrals, incentive structures can be boiled down into three distinct formats:
This structure only rewards the original referrer. Because your business is only responsible for rewarding one part of the transaction, expenses are limited to only those existing customers who are doing the referring.
When and why this makes sense: If your brand awareness is low and margins are tight, single incentive referral rewards might make sense. In this scenario, you can offer a larger reward to just one party, which increases the likelihood of purchase. The single incentive also protects CAC.
This structure only rewards one party, typically the Ambassador, but it rewards them twice. Most often, a smaller incentive for a less impactful conversion and a larger reward for a more impactful conversion.
When and why this makes sense: If you have a longer sales cycle it can be hard to keep ambassadors engaged from point of referral to reward. That’s where it makes sense to offer a double incentive. A double incentive typically offers a smaller incentive for a lower value conversion (i.e. a demo request) and a larger incentive for a higher value conversion (i.e. a purchase). This model is a great way to keep ambassadors engaged and referring.
Very simply, dual incentive structures give both the referrer and person being referred a reward, discount, or deal when a transaction is complete. Dual incentive systems tend to be more compelling since both sides of the transaction benefit from the referral. This also helps the referrer avoid feeling like they are taking advantage of (or profiting from) their network.
When and why this makes sense: While dual incentive programs are more expensive, they tend to yield a much larger volume of referrals and new customers.
Monetary or Non-Monetary?
“In a Nielsen Harris Poll conducted on behalf of Ambassador, more than three quarters (77%) of Americans said they prefered to be rewarded for referrals with cash.”
After deciding on the right incentive structure, you'll need to consider what type of reward to offer your ambassadors. These rewards generally fall into two categories.
1. Monetary incentives
Essentially a finders fee, monetary rewards are easily quantifiable and tend to be successful at generating large volumes of referrals. These incentives include cash, rebates, discounts, gift cards, and commissions.
» Benefits: Monetary incentives make it extremely easy to calculate CAC and simplify things when analyzing the effectiveness of your program.
» Things to consider: If you offer $10 for every referral (regardless of whether they convert) and you get 10,000 of them, then you need to be prepared to pay out $100,000 without being assured of ROI. By contrast, if you offer a rebate or store credit, you can at least ensure that investment is used to drive sales down the road.
These are less transparent rewards that can still be used to excite new brand ambassadors. They may include exclusive access to new products, public recognition (i.e., a video shout-out, tweet, etc.), or insider benefits not available to the general public.
» Benefits: Non-monetary rewards allow you to “shield your hand,” so to speak. Because there's no tangible value attached to the incentive, you can dramatically limit the cost of your program and still reap the benefits of referrals.
» Things to consider: It typically takes a very strong level of brand engagement or an extremely exciting product for these types of incentives to work. Companies like Spotify or T-Mobile have the brand awareness and loyalty to use non-monetary rewards. But if you're still building your brand reputation or don't have a mass following, sticking to monetary incentives might be your best bet.
As a general rule of thumb: Incentives should always be profitable, tailored to your target audience, and compelling enough to encourage engagement with your brand.
One Key Takeaway
An economically sound incentive structure is one of the most important components of an effective referral marketing strategy. That said, there's no one-size-fits-all approach to incentives. Two companies in the same industry might offer completely different incentives depending on their economic model, customer target, brand awareness, and referral goals. As you're building out your program, it's critical to factor in your unique goals.
EFFICIENTLY TRACKING, MEASURING, AND
OPTIMIZING YOUR REFERRAL PROGRAM AT SCALE
After you've built an incentive structure and launched your referral program, you might start to see a steady stream of referrals pour in. And that's awesome. Unless, of course, you're not prepared to track and manage referral activity, measure results in real-time, and actually deliver the incentives you promised.
Quite frankly, this is where many referral programs fall apart or have difficulty scaling. Without the right systems in place, tracking and rewarding referrals can be a nightmare. Without a clear approach to measurement and optimization, you'll fail to gather critical insight about customers and prospects that could improve your broader marketing strategy.
To avoid that fate, you need to implement processes that allow you to:
1. Attribute new customer activity to the correct referrer. If you're generating new customers from brand ambassadors, you need a way to accurately connect which new customers came from which referrer. If you can't do this, managing your referral program will be a nightmare.
2. Automate rewards in a timely fashion. If you're generating hundreds (or thousands) of referrals a month and don't have a way to automate conversion payments, your referral marketing strategy will become a drain on your marketing resources. You'll spend more time managing reward payouts to existing customers than investing in activities that acquire new ones.
3. Learn, observe, and iterate. At scale, an effective referral program should generate incredible insight into customer behavior, prospect motivations, and channel preferences. It's absolutely critical to have systems in place that can process and leverage that insight from Day 1.
Ultimately, referral marketing is most valuable when you're able to easily amplify results without also proportionately amplifying internal resources. Without the right tools, capabilities, and systems in place, achieving that efficiency at scale is virtually impossible.
The Argument for Referral Marketing Automation
Developing referral measurement, management, and analytics functionality in-house is certainly possible, but it requires a herculean effort that typically involves (and distracts) internal technical talent. Luckily, there's a simpler way to absolve yourself of those logistical and analytical headaches.
With a referral marketing platform, you can easily attribute new customer activity to the appropriate ambassadors, fully automate campaign logistics (i.e., issuing rewards, re-engaging disengaged ambassadors, creating/sending emails, etc.), and quickly integrate other third-party systems to seamlessly sync data between platforms.
Why is this so important?
By automating the referral marketing process, you remove much of the complexity, tedium, and guesswork from running campaigns. Ultimately, this frees you up to focus on the things that really matter — executing efficient, measurable, and profitable referral marketing campaigns that, over time, positively influence every aspect of your marketing strategy.
One Key Takeaway
While companies like Uber, Airbnb, and Dropbox built incredibly productive referral programs in-house, that DIY approach doesn't come cheap. To do it right, those companies sunk a significant amount of time, money, resources, and technical expertise into building their programs, and they still require continuous maintenance and updating to remain modern. All of that can be avoided by investing in an all-in-one referral marketing platform that does the dirty work for you.
How Are You Making Referrals Work?
In a 2016 Nielsen Harris Poll conducted on behalf of Ambassador, 67% of Americans said they're at least a little more likely to purchase a product after a friend or family member shared it via social media, email, or text message. Further, across a variety of industries, 92% of 18-to-34 year-olds say they seek recommendations from friends and family when considering a product purchase.
For marketers, those are pretty compelling numbers.
That said, for referrals to consistently deliver bottom-line results, they must be woven into who you are and how you operate. Without structure and commitment, you're largely hoping that good things happen and that customers inherently know to refer their friends and colleagues to your business.
That might happen. Or it might not. As we know from the statistic1 we cited earlier in this eBook (83% of customers are willing to give a referral, but only 29% do), banking on customers to refer without any clear incentive to do so is a risky proposition. The far better option is to approach referral marketing just as you would any other high-value customer acquisition channel — investing in process and technology, and incorporating it into every aspect of your marketing strategy.
When you take that approach, you'll see the referral floodgates open up.