Between over saturation and hype, it’s not surprising that consumer confidence in advertising is at an all time low. The good news is that brands can leverage their customers to generate new business that is both more effective and cheaper than paid advertising. Interchangeably called “word of mouth marketing,” “crowdsource marketing,” or “referral marketing,” the business case for building brand advocates is staggering:
- 92% of consumers around the world say they trust earned media, such as word-of-mouth or recommendations from friends and family, above all other forms of advertising.
- 77% of consumers are more likely to buy a new product when learning about it from friends or family.
- 65% of new business comes from referrals.
- Referred customers are about 25% more profitable per year for businesses than their non-referred counterparts
- Referred customers are 18% less likely to churn, and they have about a 25% higher lifetime value than non-referred customers.
- Referral programs are extremely efficient, costing only 5% – 15% of the customer acquisition cost for online advertising like PPC.
How It Works
Referral technology is an online system that tracks the referrer and a referrer’s recommendation and the friends’ actions – including purchases. In order for the matching to work, the friend must click a custom link, called a pURL (personal URL), with embedded referrer information.
Referral technology makes it fast and easy (and fun!) for the referrer to share the custom link via integrations with Email, Facebook, and Twitter. Since the goal is to spread the link to as many people as possible, good referral programs allow the referrer to import their email address book to blast all of their friends at once.
Once the friend clicks on the referral link, they receive a promotion code. The code may be located on a dedicated landing page, sent in an email, or both. The friend applies the promotion code during checkout and receives the discount. At the same time the order is completed, the referrer receives an email notification that they have a new credit. Referrers can receive multiple rewards, and friends can continue to earn rewards by becoming referrers too.
Best Practices for Success
There are three types of referral marketing structures; Reciprocal Offer; One-Sided Offer; and No Offer.
The most popular (and successful) program structure is the Reciprocal Offer where both the referrer and the friend get an equal benefit, such as, “You Get $10, Your Friends Get $10.”
In a One-Sided Offer, only the referrer or the friend receives a benefit, such as “Get $10 for every friend you refer’ or the reverse, “Your Friends Get $10 When You Share.” For the former, you can try to motivate the referrer to share by offering the reward to the referrer; for the latter, the referrer is more likely to share an offer that directly benefits the recipient. Without balancing both sides of the equation, this program structure usually results in lower results.
In some cases, simply asking for the referral is enough and No Offer is required for either party. Non-profits, or socially motivated brands, may be able to motivate their brand ambassadors to “save the whales,” or make a donation. But in the commerce world, direct incentives like cash rewards or discounts rule the roost. According to marketing automation technology advisory firm Software Advice, 50% of consumers reported that a direct incentive would make them more likely to give a referral.
Spread the Word
Once you’ve decided on the best offer structure to launch your program, it’s time to promote your referral program to your best advocates: your existing customers.
Anyone who buys from you should get a referral promotion. Referral widgets, links or banners can be appended to the shopping and post checkout experience via auto popups and transaction emails. On brands’ sites, the referral program should be displayed across social media, home pages, store pages, product pages, the checkout complete page and all static pages with consistent creative, messaging, and locations.
Additionally, plan on sending out a dedicated referral email to your entire databases regularly: ideally, once a month bolstered with social media promotion. Many of our clients overlay additional contests to enter for a chance to win a “grand prize” in addition to the usual reward. Once or twice a year, try doubling your referral bonus for a limited time. At Symphony, we’ve seen a double referral bonus more than triple referrals during the promotion time.
Interestingly, there are consumers who have not purchased your products that will also refer you. This is especially true for aspirational brands or brands with a very specific audience, such as baby products, etc. Sometimes the referrer hopes to accrue rewards to use on the site, sometimes the referrer does it to pass along discounts and offers to friends who they know are likely to purchase the product. The key takeaway is to make referring easy for ANYONE who wants to spread the work about your brand. The best referral platforms allow customers to share and earn credit even if they don’t have an account.
Key Performance Metrics to Optimize
Like all marketing campaigns, referral marketing is not a “set it and forget it” tactic. It requires ongoing monitoring, testing, and optimizing.
- Customer Acquisition Cost (CAC). Referral marketing should be your lowest cost of acquisition. Structure your offers to optimize customer acquisition at an acceptable cost to your business: if your average order value (AOV) is $25, a $5 reward may be appropriate. If your AOV is $250, then a $25 reward may be appropriate.
- Sharing Rate. Test different calls to action to increase the number of people who share.
- Referral Visits (calculated as clicks on shared content). Test different offers to increase the friends who visit.
- Referral Conversion Rate. Test different offers, landing pages, and products to increase the number of friends who redeem the promotion.
Once your referral program is underway, your brand can test other referral incentives such as coupons, gift cards, loyalty points, discounts, bonus products, free month (for subscriptions), donations to charity, exclusive merchandise, free shipping, free trials, and more. You can add gamification to referral marketing by creating tiers that unlock additional prizes or discounts when the referrer achieves benchmarks such as 5 friends have redeemed the reward, or 5 referrals in a particular time period. Your imagination and creativity are the limit when motivating your customers to become brand ambassadors.
At Symphony, we have developed a launch sequence that includes the following steps.
- Launch with a “dollars off” promotion that is easy to understand. Since the goal is to attract new customers to your site, “25% off”, or even “50% off”, is meaningless to someone who doesn’t know how much your products cost. However, everyone grasps the value of $5 or $10 off.
- Create a reciprocal offer where both the referrer and the friend benefit equally.
- Do not force referrers to login before they share – extra steps dampen participation rates.
- Do not limit referral rewards, so your best referrers will continue to accrue rewards and spread the word. Most referrers will generate 1 – 2 referrals, however your superstars will generate 5 – 6 referrals or more.
A Symphony brand in the Food and Beverage vertical achieved dramatic results after implementing a referral program. Within the first month, the brand discovered that referrals are 8.5 times more likely to convert than any other channel. Plus, each referral share is worth an additional $5 in revenue.
According to Symphony CEO & Co-Founder, Harish Abbott, “The best and greatest companies actually use their customers to bring in new customers. These brands deliver an amazing experience to their customers across the entire lifecycle, so the customer ends up referring more customers. That is the most powerful way to grow a brand, and it is also why the most cost effective way to grow a brand is to service your existing customers.”
With effective referral marketing, brands can expect to see lower customer acquisition costs, faster growth, higher profits and a reduced reliance on paid advertising. To get there, you need a plan to launch, test, and optimize the way you would any other marketing program. You also need to maintain focus on the core traits that help your brand stand out: great products and a memorable shopping experience. By first delighting your customers and then providing the right incentives to refer, you can turn your customers into a powerful referral engine for growth.