Referral Marketing: How It Works and How You Can Use It to Grow Your Business

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The concept of referral marketing, or word-of-mouth marketing, involves your customers using their positive perception of the brand to spread brand influence on their social circles. When done well this is an incredibly powerful tool for conversions and purchases. Referral marketing at its core is a person referring a brand to another person, who then buys from that brand.

The big reason for the success of referral marketing is that people trust the views of actual people who highlight a product or service. Studies say that if a person refers another person to a product, they are four times more likely to make the purchase. It is important to note that referral marketing does not have to come from friends, family or coworkers. Online influencers and thought-leaders are considered a form of referral marketing too. Similarly online reviews from websites like Yelp or TripAdvisor also fall into the category of referral marketing. People trust real people. 

Most of the data collected on referral marketing demonstrates its effectiveness. More consumers trust referral marketing and referral marketing has shown to better lead generation and customers who are introduced to a brand through referrals offer high lifetime value to a company.

What makes referral marketing so successful?

There are four aspects that make referral marketing valuable: Trust, Focused Targeting, Return on Investment, and Spread.

Trust

Almost all of marketing is based around trust. Even the initial purchase is based around the idea of a customer trusting a company to deliver a product. It makes sense then that people have more trust between people with faces than faceless companies. You are more likely to trust someone who writes a positive review online of something, even if you don’t know that person, over a sales person trying to earn a commission. 

Focused Targeting

If you have a best friend who you share similar interests, you are likely to try what they recommend and probably like it. Once you figure out a key demographic you’ll want to find as many customers as you can who fit into that demographic, customers who are likely friends with each other already. A similar thought can be applied to influencers. If an influencer is a good match for your products, their followers are likely to buy the product if the influencer recommends it.

These strategies, hearing about a product second hand, solidify a specific customer base as similar people are likely to be around each other. From a marketing perspective, this leads to a brand’s message spreading much more easily and effectively than through other marketing campaigns.

Return on Investment

One of the great aspects about referral marketing is that it can be very low cost. For starters, as your customers are your marketers, it can keep support costs down. Additionally, since some referral programs are based around one customer making a transaction for the program to work, brands don’t have to pre-spend on things like ads or paid SEO that don’t guarantee a transaction. Throw in the inherent amount of data that can be collected by your referral program and the improved customer interaction, and it becomes even more clear why referral programs are so highly valued.

Spread

Prior to the advent of the internet, the influence of a person was pretty small, with only so many ways to get in touch with other people. That is not the case now. Social media and the internet make it possible for someone or something to reach potentially billions of people in a matter of seconds.

Steps To Launch Your Own Referral Campaign

For a successful referral campaign, companies have to tell their customers about it and convince those customers to spread the word. This means ensuring the process is as easy as possible and to make sure company personnel can quickly address any customer issues.

We know that a well structured referral program will outperform more traditional forms of marketing, so it is critical for companies to think about how they can implement a referral marketing plan.

Make it worth it

Although many consumers are open to referring products to friends, a much smaller percent follow through. Thus, it is important to make sure your current customers, who will be sending out the referrals, are incentivized to send the referral for your business.

The incentives here can include straight cash to store credit. Or it can be something like future discounts. This simply depends on what your goal is. The best way to get a sense of what you could offer is to look at your competitors to see the referral offers they have. While competitors might have referral offers that are steep for your margins, consider that these programs are so effective it might be worth it to spend the extra money. 

Also be considerate of what incentive you are offering to the customer being referred to use your service. This doesn’t have to necessarily be a totally new offer like for your referral marketing, but you want to still think of ways to encourage your potential new customers to make that purchase. 

Spread the Word

Once you have the offers in place make sure that you tell your customers about it. For this step, you can just use your regular marketing channels and share your program like you are launching a new product or service. This is most commonly done via email.

Ensure the program is easy

We talked about how you need to offer proper incentives, but one of those incentives should always be time. You want the person sending the referral to have as easy time as possible to figure out what they are doing. If your program is too complex and time consuming, then your program is in trouble.

Get internal buy in

Having everyone in your group on the same page about your referral program is critical. Especially when it is a new program.

One of the most common issues that prevent new programs or products from succeeding is that internal groups do not grasp what is going on. Everyone needs to be on the same page with all the workings of your referral program.

This is particularly important for your teams that have direct communication with the customers. It might be a smart idea to consult with your customer support unit to get any input on if the referral program has any potential roadblocks and how they might be alleviated. Once you are live, make sure to stay in regular communication with your customer service team to figure out if any issues are occurring and correct them as they occur.

What does a good referral program look like?

You don’t have to spend too much time trying to figure out an example of a good referral program. Big name companies have already launched referral programs and continue to operate till this day.

Tesla

Referrals can be used to suggest a low-cost item but they can also be used to recommend a big ticket item. Tesla is one of the best at using referrals to sell its cars.

The original program offered $1,000 to anyone who referred a friend, but the strategy has changed over time. Now some of the rewards for referrals include better batteries and sometimes an entirely new car. The Tesla example is another great case of showing why it is important to constantly be adjusting your referral program to find ways that bring value to your current customers.

PayPal

The referral program for the online payment company PayPal is a great example of using channels effectively to reach your customers. Knowing that many of its potential customers were tech savvy, PayPal’s original referral marketing program involved using instant messaging, blogs and emails to encourage customers to spread the word. This worked so well that PayPal was seeing daily growth by a staggering 7-10% every day. At one point PayPal was even paying current users to invite their friends. 

Casper

Recent years have seen a huge spike in e-commerce-based mattress companies, with Casper being one of the most recognized names. At one point Casper sold $1.8 million worth of mattresses in two months.

One program Casper ran was offering a $75 Amazon Gift Card for the person making the referral, and 20% off a mattress for the person using the referral. Casper faces a unique challenge. Unlike a clothing company, where a returning customer might make a new purchase every month, most people only buy mattresses once every few years. If Casper really wants its current customers to refer friends, it would not make sense to offer discounts on a new mattress that the current customer might not be making for several years. However, offering an Amazon gift card is a much more practical way to incentivize current customers to promote Casper to their friends. This is a great way of showing that a strong referral program does not need to be so narrowly tailored to just cash, a discount, or a credit from the brand hosting the program.  

Latest tricks for Successful Referral Marketing

With referral marketing continuing to be a backbone for customer acquisition, companies are continuing to look for ways to have customers also serve as marketers. The fundamental online referral programs will always matter, but companies still must find compelling ways to drive customers towards making a referral. 

Improved packaging

The same sensation you felt as a kid unwrapping Christmas presents still holds true today. People love watching other people open gifts. As a company, you do not need to be Santa Clause to capitalize on this sensation.

Your brand should consider going above and beyond to make even the packaging of the product part of the experience. If it looks nice, people are likely more willing to share it. Go a step further and include hashtags and other calls to action in your packaging that make the recipient want to share their purchase.  

Small doesn’t mean less

Influencers with high amounts of followers are great to hire if you can afford them. That said, don’t ignore your micro-influencers, who are usually defined as influencers with under 10k followers. They are likely more affordable and can offer potentially better ROI especially if their followers are a strong match for your ideal demographic.

Encourage public reviews

As mentioned, people trust people. Be proactive in asking customers to post feedback. This is especially critical for new companies, where product reviews from current customers add legitimacy to your company, which in turn makes you more appealing to new customers.

Think Beyond Dollars

Don’t feel that your incentives have to be directly cash or store credit related.  Having a point system, where customers can gain points for referring friends and then redeem those points for an item from your company could be an effective model. Likewise, do not be afraid to bring in partners to help the program. Looking to use referral marketing to raise awareness for your gym? Why not offer gift cards to a local workout clothing store to incentivize customers. The more creative you are willing to be to make the referral worth it to your current customer, the more successful your program is likely to be. 

Referral marketing is one of the best ways to market your company, as the influence of a real person is more valuable in turning new customers towards your product or service. A referral can be from a friend, family member, journalist, influencer, or others. To successfully capitalize on this trend brands have to create strong incentives to encourage current customers to share their positive experience with the brand. Part of this is making sure the customer has an easy time sharing the product and cashing in on their reward. Doing this involves treating your referral program like a new product and backing the program with an educational aspect to explain its workings both to customers and company employees.

 

Referral marketing is one of many forms of marketing that are being used today to grow companies. If you’re looking to enter the marketing profession, you want to make sure you’re gaining work experience just like this as having the right work experience is the #1 thing hiring managers look at when deciding who to hire. If you’d like to launch your career quickly and with much more ease, consider taking JobPrepped as we not only train you in digital marketing but we are also the only program to give you the exact work experience hiring managers want immediately and this is a big reason why 94.3% of JobPrepped students get marketing interviews or job offers within 3 weeks.

Good luck out there!

By Guest Writer,
Eric Saltzman

Launch Your Digital Marketing Career Quickly

Get the results you deserve! 94.3% of JobPrepped Students get marketing interviews or job offers within 3 weeks.

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