How Effective Are Referral Programs?

Referral programs have a direct and authentic way of connecting with customers and spreading the word about your venture. Unlike conventional marketing forms, referral marketing programs motivate existing customers to carry the brand’s offering to their network.

This works because both, the business and the customer, get a good deal. The business gets more exposure and sales, while the customer receives a reward incentive as a token of thanks for the referral. A formal referral program is a streamlined process that scales the brand’s status and is a significant part of most businesses marketing strategies.

Just like that, referrals have proven to be one of the most effective marketing tools of all time. But exactly how effective? Let’s explore some key factors that make a referral program actually effective, along with examples and tips to launch a referral program.

How Does a Referral Program Work?

Referral marketing programs, otherwise known as word-of-mouth marketing, convert people’s trust into purchasing power. In other words, referral programs help businesses to recruit an army of satisfied customers who will refer friends or family to try their product or service.

How is this done? By offering an interesting reward for each referral. Happy customers help grow your business by referring it to their network in exchange for compensation. The reward ranges from cash prizes, gift cards, and discount codes to eCommerce cash-in points or branded products and is awarded when the referred customer makes their first purchase.

Typically customers will sign up for a company’s referral program and will spread the word by sharing referral codes or referral links in their network. A referral marketing software tool tracks each customer’s shared referral link or code and when a new buyer uses it to make a purchase, the customer earns an incentive.

The customer is further encouraged to repeat this process with other people from the network. This repetition generated a sustainable flow of new business, all from a single, satisfied customer.

How Effective Are Referral Programs – Analyzing Real-life Examples

An effective referral program combines the right product, messaging, technology, and – perhaps most importantly – the right referral reward. Just like a business preps for its pre-launch and final product launch campaigns, referral programs also require the same in-depth planning.

According to a report shared in 2015, 83% of online respondents prefer a friend, family, or colleague’s recommendation to an ad or online review. For the same reason, the conversion rate for customer referral programs is three times higher than the industry average of 3.64%.

Let’s take a look at the effectiveness of some noteworthy referral campaigns in the industry and what made them a success.

Tesla’s Two-sided Referral Rewards

One of the biggest names in the referral marketing success stories is Tesla. This company is primarily known for its electric cars but is also a pioneer in solar roofing technology and solar panels. Being one of the world’s twenty most valuable companies in 2021, Tesla has a market value of $20 billion but a marketing budget of $0.

This remarkable company bets on referrals and word-of-mouth marketing instead of traditional marketing.

This was a two-sided referral program. Such programs give rewards to the referrer, the current customer, and the person who receives the referral. It’s a powerful marketing tactic adopted by big brands and almost always spikes sales. SaaSquatch reports that more than 90% of referral programs are two-sided.

Reward for current customer (referrer): $300 per referral for solar panels or solar roof

Reward for new customer (referee): $300 for solar panel or solar roof purchase

Reward model: The referral process was fairly simple. Customers, above 18 years of age, had to download the Tesla app to get and be able to share their custom referral link. Tesla states “Solar referral awards are granted to eligible customers after solar panel or Solar Roof system activation (Permission to Operate).”

Hence, the solar roof or solar panels must be operational before the referrer or the referee is eligible to receive a reward.

What made it a success:

• This campaign is a prime example of a customer-centric referral program.
• The program and terms of winning a reward were simple.
• The two-sided referral model was a win-win, both parties had something to gain.
• Tesla’s popularity made sure everyone who shares a passion for the environment and responsible living was able to participate in the program. The eligibility criteria simply was an age above 18 years.

Harry’s “Free Product” Referral Idea

Harry’s is a hip men’s grooming and shave supplies brand. This brand launched a stellar pre-launch campaign and turned into a billion-dollar subscription service in just five years. The remarkable referral strategy brought 100,000 email sign-ups in the first weeks of its pre-launch campaign.

Instead of gift cards or discounts on future purchases, Harry’s offered tangible rewards in return for referrals.

Reward for current customer (referrer): Refer 5 friends and earn a free shave cream. Refer 10 friends and earn a free razor blade. Refer 25 friends and get a free Winston shave set. Or, refer 50 friends and earn one year of free blade supply.

Reward for new customer (referee): 10% off their first purchase from Harry’s

Reward model: This was a two-sided and tiered referral model that let current customers earn free products from the brand in return for referrals. Due to a stellar launch campaign, users had already submitted their email addresses. Later the customers were directed to a second page where they got shareable links and social media buttons that made it easy to share the referral link with a single click.

The more people who signed up, the greater the prize.

What made it a success:

• This non-purchase-based reward program encouraged response from an audience segment that otherwise wouldn’t be interested in buying from a start-up brand.
• Free products helped build a connection with the customers.
• A straightforward sign-up and referral process, combined with a great reward, made participation hard to resist.

Revolut’s Referral Program Leveraging FOMO

Revolut is a fintech brand that introduced an all-in-one financial super app. They boast around 15 million customers and 500K business customers around the globe. The platform supports more than 28 currencies and works in over 35 countries, offering services ranging from debit card and bank accounts to cryptocurrency exchange and stock trading.

The key to their continued growth and remarkable customer acquisition rates is their limited-time referral programs.

Reward for current customer (referrer): $10 cash reward for every time a referred-in friend orders a physical card using their link and makes 3 card payments.

Reward for new customer (referee): $10 cash reward after ordering a physical card and making 3 payments.

Reward model: Customers participating in this two-sided referral program were sent emails stating that the referrals will expire within a few months. This triggered a FOMO or Fear Of Missing Out response and urgency that lead to an impressive increase in participants.

What made it a success:

• Limited-time offer and regular email messaging with catchy subject lines kept customers in a loop. A short window of opportunity to collect a reward brought encouraged better responses.
• The company reported a 700% increase in customer acquisitions through the 2018 to 2019 referral campaign.
• To reinforce the short-lived, sporadic effect of the campaign, the referral offer was removed from the app and a pop-up showed visitors to wait for the next offer. Again, leaving something for the audiences to look forward to.

Tips to Execute An Effective Referral Marketing Program

Referral marketing can be tough since the success or failure of the business relies on how audiences respond to it. Here are a few tips and techniques to conduct an effective referral program that will turn your customers into referral machines.

Reach out at the right time

Asking for a referral after your first interaction with a customer is not likely to get the results you’re looking for. Which is why timing is everything. The ideal brand advocate for a company is closely familiar with what your brand and its product or service have to offer, which comes from experience.

Make sure you tap into your clientele at the right time. This is typically after they have had a chance to get to know your offering and feel comfortable developing a relationship.

Offer Shareable Content

To make your referral program get noticed and have an impact, go beyond just offering the perfect discount or reward. Your program should also have content that is convenient to share.

This includes simple yet explanatory blog posts, interesting video clips, and helpful guides that the potential customer can see your brand through. Add sharing links in the form of buttons and social media sharing links or buttons, such as the “Share on Facebook” button to your blog posts, website, and email marketing campaigns.

Offer the Right Reward

Discounts, branded merchandise, and points programs may sound interesting, but they might not be the right reward for your audiences. With extensive market research, understand what speaks most to your customers and potential buyers and design your reward system based on the knowledge.

One incentive that never fails is money. A study revealed that 88% of Americans voted that they’re more likely to participate in a program that has some sort of incentive, be it money, access, loyalty points, product, or service. Additionally, around 77% of Americans state money as a reward of choice.

Track the Progress

Referral programs require a well-thought-out and carefully planned backend to ensure progress. Some of the most effective programs generate dynamically-generated links and codes unique to each customer that track the referrer’s action and referee’s redemptions.

FAQs

Why do referrals work?

Here are three main reasons that make referral programs work for most businesses:

• Customer referrals are more intimate and lead to a lifetime value customer base
• They are inexpensive if you execute them right.
• Every single satisfied customer can start a virtuous circle of hundreds that can, in turn, bring in more referrals.
• People are more likely to make repeat purchases for a product referred by a friend or acquaintance.

What are the benefits of referral programs?

Referral programs bring in loyal, and valuable customers. These programs are cost-effective and risk-free not only for established entities but for start-ups as well. Referrals are also a great source of user-generated content and high-quality leads.

Final Word

Referrals are all about recruiting your clients as mini walking and talking billboards for your brand. Customers can do much of your marketing for you as long as they receive impressionable service and amazing products from the company.

Most fruitful referral campaigns work because people instinctively trust recommendations from someone they know rather than a mass ad message. Make sure you’re planning your content, messaging, and timeline according to your audiences. Experts at Prefinery.com can help you set up a great referral program tailored to your business.