Referral Marketing: Pros and Cons

Referral marketing, also known as word of mouth marketing, has been one of the oldest sources of new business for companies. It’s a tried-and-true method of expanding a customer base of quality, long-lasting patrons. And, word-of-mouth marketing is one of the most inexpensive customer acquisition methods compared to other channels.

A key component of referral advertising is to decipher the best motivators of the consumer and utilize them for successful referrals. This helps decide the right fuel – referral incentive – to run your referral campaign. With a structured program including a solid measurement mechanism to monitor leads and the right marketing strategy, you can set your organization for success.

It’s important to note that referral marketing campaigns come with good and bad. In that, there are a few advantages and disadvantages of referral marketing that a company must weigh before launching a referral program. We’ve gathered everything you should carefully consider if you’re contemplating referral marketing for your business.

What is Referral Marketing

Referral marketing is a type of advertising where businesses encourage their current customers to refer and recommend their product or service to others. The strategy is to reward the most loyal customers for successfully bringing in a new client for the company. Big names like Tesla, Amazon Prime, Airbnb, Dropbox, and Uber are perfect examples of successful referral marketing schemes.

The best part of any referral program is that not just the company gets to reap the rewards, instead customers also get a share for their marketing efforts. It’s a win-win! This is also why referral marketing programs are an excellent way to build loyalty and expand clientele for any type of business.

Pros of Referral Marketing

Creates Loyal Customers

Customers love to feel appreciated, so much so that they may even decide to leave the brand if they feel they’re not cared for. Referral advertising brings in higher quality leads because potential customers referred in are already from the pool of people who are interested in what you offer.

Referral marketing campaigns allow businesses to identify and reward the most valuable customers for what they do besides purchasing their products. Happy referrers and referees are more likely to become trustworthy customers.

Allows Marketing On Multiple Channels

The essence of referral advertising is word of mouth, and the best and most convenient way of doing so today is through social networks. Brands can leverage the ease of social engagement to enhance customer relationships. Customers should engage with your brand beyond transactions to form a lasting chain of give and take.

Referrals are not just limited to word of mouth and social sites, you can tap into email marketing, blogs, websites, webinars, and more to create a strong online presence.

Customers who take part in your referral campaigns visit your website more frequently than others. It’s a golden opportunity to give them something to stay on-site and spark more interest in the brand and other offerings.

Improves Retention Rate

Several studies show that customers referred by someone are more likely to stay with your brand than others. They have a 37% higher customer retention rate. This is perhaps the most compelling benefit of referral marketing.

Nielsen reports that 84% of consumers prefer and trust a recommendation from a friend or family member over any other source. This means people are four times more likely to make a purchase when they are referred to it by a friend than by a conventional ad.

Highly Cost-Effective

The top benefit of referral marketing is that it doesn’t require much spending, whether it’s for the setup or execution. It’s the least expensive marketing option because instead of spending money on expensive advertising and other marketing resources, the marketing results depend on existing clients. More the satisfied customers, the more they will spread the word about your business.

Increases ROI

As discussed earlier, referral marketing is a cost-effective method of advertisement compared to every other traditional channel. You get to reap more benefits than you invest in such a project. Plus, with the help of efficient tools to manage points and referral rewards, you can make better use of the resources at hand.

Boosts Brand Awareness

Referral marketing inadvertently spreads information about your business. This means people get to know about your brand story and customer service through their friends and family who already have had a pleasant experience with you.

Such awareness is not only beneficial for business owners but is in fact a necessity today. Because audiences like to connect with and buy from brands that have a powerful stance, positive influence, and a strong voice. Allowing your customers to tell your story to others through referrals makes it more authentic and

Cons of Referral Marketing

Not Feasible If Budget is Low

Referral rewards can be expensive. Incentives are a major attraction for any referral campaign. It’s what encourages people to participate. These incentives typically include discounts, free products or subscriptions, cash rewards, and more. Depending on the industry and nature of your business, these incentives may be costly and can possibly cut into your profit margin.

Difficult Quality Control

With referral marketing, you basically rely on your customers to refer your business to others. This way, you may not have as much control over the quality of leads that come in from these referrals as you’d like. If you’re a startup or small business, you may only get a handful of referred prospects. This may not be good for business and will require effort, time, and resources to filter out the unqualified leads.

Might Be Slow

Referral advertising is often slow to spread. It can take considerable time to get the word out about what you do and how your product or service can make a consumer’s life better. And it can take even longer to build a rapport with customers and get the desired response from them.

However, this issue is rather manageable with the increasing popularity of social media and digital awareness among the masses.

Audience is Limited

While referral marketing is effective for inducing new leads, it also relies just on existing customers to refer your business to others. This simply means that if your customer base is small, you won’t get much out of a neatly planned referral program. Similarly, if the customer base is not active on social platforms, you’ll be stuck.

Tracking Problems

Word-of-mouth marketing can sometimes be a big challenge to track. Although analytics and tracking tools help, it can still be hard to keep check of the number and kind of customers coming in from referrals.

Data about incoming customers only informs you of the people who liked your offering and responded positively to the referral request. This may leave gaps when tracking and using referral analytics in the future.

Risk of Negative Feedback

There’s always a risk of a customer not liking your offering. They may share their negative experience with the referrer and it can damage your reputation greatly. This can make it harder to generate future referrals from that referrer.

The worst part is: you cannot know about a customer’s bad experience with your offering unless the unhappy customer, or their referrer, informs you. The organization essentially does not get an opportunity to mend and satisfy that client.

Wrap Up

Referral marketing is great, but it shouldn’t be relied upon completely as an end-all and be-all when you are developing a dream client base for your brand. We went over several advantages and potential downsides of referral marketing in today's market but overall, it’s safe to say that the benefits overweigh the drawbacks.

This form of marketing is an effective and rewarding way to grow a business and deepen that customer-company relationship. You can connect with experts at prefinery.com to explore the best way to recognize and reward your customers for referrals and utilize the right tools for profitable results.

FAQs About Referral Marketing

Is referral marketing effective?

Yes. Referral marketing has proven to generate three to five times higher conversion rates than any other form of marketing. Referred new customers increase the profit margin and are relatively more loyal than a customer acquired by other means. Plus, referred-in customers are four times more likely to refer your brand to others too.

What is the main objective of referral marketing?

Referral marketing campaigns are designed to attract new leads that are a good fit for your brand.

What are the different types of referrals?

There are four different types of referrals, namely:

• Direct or Customer referrals
• Tangible referrals
• Community referrals
• Implied referrals