So, I have a confession to make.
A year ago, I had no clue “referral marketing” was anything but a buzzword. I certainly didn’t know referral marketing software existed. Sure, I understood the value of referrals (I’ve been a marketer for many years — it’s hard not to understand the value of organic word-of-mouth). But referral marketing? In my experience, referrals weren’t truly optimizable or scalable — two core characteristics of any modern marketing strategy.
This perspective wasn’t just a flippant, skeptical response, either. At one of my last companies, I spent six months trying to ramp up referrals. Marketing and sales were aligned around generating more of them and the company was committed to giving us the resources to do it. Yet, at the end of those six months, the numbers just weren’t there.
There were a lot of reasons our referral program didn’t work. First and foremost, the process of manually building the internal infrastructure and tools necessary to automate and scale referrals isn’t as easy as companies like Uber and Airbnb have made it look. In fact, it can be incredibly intensive — requiring significant investments of time and development resources.
Is Referral Marketing Worth the Investment and Effort?
Now, let’s fast forward.
I accepted a Marketing role at Ambassador — a referral marketing platform that automates the process of enrolling, tracking, rewarding and managing customers, affiliates, influencers, partners, and fans. I recognize the irony of a referral marketing skeptic now running marketing for a referral marketing technology company, but here’s the most simple reason I wanted the job: The software actually works.
While my previous attempt to build a manual, in-house referral program had flopped, I began to see numerous examples of B2B companies and consumer brands of all sizes that were leveraging referral marketing software to automate the activities that dragged our program down. As a result, their referral programs were actually doing what they were designed to do: Driving high quantities of qualified leads, new customers, and revenue in arguably the most cost-efficient manner possible — through organic word-of-mouth. Best of all, the ROI on those investments were astounding.
From my seat, this was exciting for several reasons:
- Paid advertising is increasingly expensive and ineffective
- Trade shows and events are less appealing — in part because there are more of them and it’s hard to determine if any of them will drive a high enough ROI to justify the cost
- Traditional PR is becoming an inefficient way to spread messages and products to the masses
In summary: Many of the tools in the traditional marketing toolbox are decreasing in effectiveness. And almost all of them require hefty investments with rough roads to ROI. The opposite is true for referral marketing, which makes it a very appealing alternative for driving a high volume of qualified leads and eye-opening ROI numbers.
The Very Simple Value Proposition for Referral Marketing
What makes referral marketing different? I think there are two compelling arguments in favor of investing in referrals:
Word-of-mouth, recommendations, and referrals are organic. Sure, driving and scaling them does require some marketing elbow grease. And best-in-class referral marketing software is more than $100 a month, but if you’re doing the right things — creating products customers love and making it easy for them to share your business — then driving word-of-mouth and referrals requires much less effort than almost any other marketing campaign.
Referral marketing is virtually risk-free. Because most referral marketing incentive structures only pay out rewards when a referred prospect actually becomes a paying customer, the risk and cost associated with referrals is minimal. This allows businesses to make investments in referrals with the confidence that doing so will drive a healthy ROI.
Numerous studies have proven these points to be true.
Earlier this year, my company partnered with Nielsen’s Harris Poll to study how, why, and when referrals happen and found that 82% of customers seek recommendations from friends and family before making a purchase. This speaks to the organic, authentic value of investing in referrals. Monetarily, research suggests referrals make sense, too. One study found that referred customers generate 16% more in profits.
Best of all, when you’re able to drive referrals and word-of-mouth at scale, it creates this cyclical flywheel effect that compounds results. As you gain customers through referrals, you’ll also generate more customers referring your business. Over time, this will make your sales and marketing efforts more predictable, efficient, effective, and profitable.
So, yes — consider me convinced. In less than a year, I’ve gone from thinking referrals were great leads but impossible to scale and manage, to believing that referrals should be one of the primary drivers of new leads for virtually every business in every category. As researchers from the Harvard Business Review put it: If you’re not proactively seeking ways to generate referrals, you’re likely ignoring opportunities to drive “stunning profits.”
The question you need to ask yourself is this: Are you leveraging referrals to their full potential? And if you’re not, is this causing you to leave a significant amount of money on the table?