Referral Marketing: A whistle-stop dive into free marketing.
A Nielson study in 2015 found that the majority of consumers (83%) trust recommendations from friends and family members over advertising. This is why the best businesses in the world are now focussing on creating word of mouth marketing, the powerful art of influencing recommendations and referrals from trusted sources. is why more businesses are starting to leverage referral marketing programs.
In this brief tour, we’re going to cover the following:
- What referral marketing is
- What a referral programme is
- How a referral programme works
- How businesses benefit from a referral program
- Referral marketing ideas and strategies
- Tips for launching a successful referral marketing programme
- How to create a referral program
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What is referral marketing?
At its core, referral marketing is about enabling and incentivising your existing customer base to encourage their friends to come and try your product for the first time.
Referral marketing is a word-of-mouth (WOM) marketing strategy that grows reach by creating a network of advocates from your existing customer networks. Tactically, it is something as simple as offering your customer an incentive for referring them to friends, family and other people in their social network.
Yes, referrals can and do happen organically (such as when someone tells you about a greeat experience at ‘Suchandsuch Company’ or a fabulous meal at ‘TastyDinners Restaurant’) However, the smart business owner creates the opportunity for these conversations to happy. This is known as referral marketing, the activity that marketeers tactically deploy to intentionally solicitit manufactured referrals.
What is a referral marketing program?
A referral program is a systematic method of getting customers to refer your business in exchange for a referral incentive. The incentives are typically discounts off future purchases, BOGOF etc that a business offers and these can vary depending upon the business type and the products or services offered.
Yes, there is always a cost associated when launching a referral program, so the best business maths ensures that the net new business receives more in exchange for that incentive than the up-front cost. When you get that up-front cost cover though depends on your strategy, more about ROI and lifetime customers later.
How does a referral marketing programme work?
Software has made referral marketing much easier. Now tracking numbers, referral and discount codes etc can track each purchase back to the orginator. Hence with good systems and processes, you can track which media and method generate the best ROI. Understanding the data is key, and this is where a great business can start to Scale, simply by ampliying what is workgin well.
Sky TV offers are great to study, both for existing and new customers. What Sky do best though is ask you to introduce a friend and offer both a gift. The clever part though, is that the deal is to get a free, prepaid credit card, loaded with £75. And you can bet your last £1 that Alan Sugar didnt pay £75 for that card and in fact it will be affiliate marketing by the credit card company. Smart.
That last part is important, referall marketing programmes, in fact all marketing programmes should never be a cost to a business. Each and every £1 spent on marketing needs to generate sales. It’s just that some marketing is more effective than others and hence creates a better ROI.
For Sky, even if the cost of getting a new customer was 2 * £75, ie £150, the cost of the service gains them 18 months at £25 pcm, hence £450 in revenue. So as long as that £450 generates at least £151 in margin, then the business profit will grow. Remember though, the smart marketing wil have reduced that £150 a lot lower through affiliate marketing.
Similairy, Dropbox run a very successul referal marketing scheme, that costs them close to nothing, yet beneifts those taking up the offer lots. 
There are lots of examples
How do businesses benefit from a referral program?
Referral marketing is a cost-effective way for businesses to grow their reach, customer base and profits. The reason they work so well is that referrals from friends and family send a powerful trust signal to the person being referred, which increases the likelihood that they make a purchase.
As mentioned above, according to research from Nielson, 83% trust recommendations from friends and family. Extole conducted research on their data along with independant academic research, concluding that referred customers are also more profitable than non-referred ones. Here are some notable statistics they uncovered on referral customers:
- 25% more profitable than non-referred customers.
- 25% higher lifetime value (LTV) than non-referred customers.
- 20% higher average order value (AOV) than non-referred customers.
- 18% less likely to churn than non-referred customers.
- 4-5 times more likely to refer new customer than non-referred customers.
Hence it is clear, that, referred customers are happier, more profitable, more loyal and more likely to refer your business to others, if you deliver against your promise.
4 Referral marketing ideas and tactics.
We know the benefits of a referral marketing program, but what type of program should you launch? Let’s look at four common types of referral marketing programs.
1. Refer and earn
One of the most common types of referral programs is the refer and earn system, where for each person a customer successfully refers, they get a discount, loyalty points or a mix of both.
2. Personal referral codes
A personal referral code is one of the most popular types of referral programs, particularly for eCommerce businesses with online checkout.
A personal referral code program is often used when businesses partner with influencers. The business associates a unique referral code to the influencer, which the influencer then encourages their networks to use when purchasing that product or service.
3. Affiliate program
The most known example of an affiliate program comes from Amazon, where participants get a commission on any orders placed using their personal product link within 24 hours.
4. Tiered rewards program
If you want to encourage consistent referrals, you should consider including a “refer and earn” as part of your tiered rewards program. The more people a customer successfully refers, the more points and progressively better rewards they can exchange their points for.
Tesla’s referral program offers exclusive products (like special car add-ons) and VIP experiences (like tickets to attend an official unveiling event) depending on how many customers someone successfully refers.
Tips for launching a successful referral program
1. ACV – Average Customer Value.
Work out your Average Customer Value (ACV). Everyone has an average, even in your sell 10,000 sku times to 1,000,000 customers, you have an average.
2. CLV – Customer Lifetime Value.
Workout your Customer Lifetime Value (CLV), ie how long is a customer a customer for, eg, if a person spends £50 a month with you for 4 months their CLV is £200.
3. Work out your Margin.
This will give you an idea of how much you can spend to acquire a new customer, or rather, what margin you can sacrifice to gain a new customer. For example, if you made 60% margin on the £200 CLV, that’s £120 margin, per customer. If you can get another customer for less than this, you will be more profitable overall.
4. Make it easy for a customer to refer.
Set up a landing page with the minium number of clicks or if using Direct Mail, include a form pre-filled and postage paid.
5. Plan and implement
New referrals should be treated like royalty, they didnt find you, so your job is convince them to buy from you. In fact, this should be how you treat every prospect and is critical to scaling your business. It’s never about what you do, and always about how you do it.
Referral Marketing and Customer Retention
If your customers love you, then they’ll refer you, if you ask. By implementing a Referral Marketing programme you’ll see directly who you advocates are. When you know who your advocates are, then you can find out why they love you. Then when you know why they love you, you can roll out the same to everyone. This is how to increase Customer Rentention through simple, effective marketing and all this starts with data.
We love data so if you would like some help to understand yours, then contact one of our partners today.