Referral Marketing: What it is and How to Make it Work for You

Do you have a loyal base of clients or business contacts? With referral marketing, you can turn these relationships into more new clients and grow your business exponentially. Give me a few minutes, and I’ll teach you the mechanics behind successful referral programs, including how to design and launch one from scratch, so you can develop a custom program that works for your audience and industry.

What is Referral Marketing?

A typical consumer mentions 56 brands in conversation each week, according to Deloitte research. While that may sound like a lot, it’s important to consider the figure in context. These are mere mentions. It’s people talking about the shirt they’re wearing, where they went for lunch, which social media network they just posted on, and so forth. Although there’s value to these discussions, it’s not quite the same as someone recommending a brand, and it doesn’t happen nearly enough.

Sometimes referred to as word-of-mouth marketing or earned advertising, referral marketing is a tactic used to help make these conversations more goal-oriented and increase the frequency with which your brand is mentioned.

Understanding Different Types of Referral Marketing

Brands can work with lots of different groups when creating a referral marketing strategy. For example, let’s say you’re an attorney who specializes in business law. You may know attorneys in other fields or perhaps have good relationships with accountants and insurance brokers. You can build a referral marketing campaign to cater to them.

However, the most common form of referral marketing is often referred to as “experiential.” It means the person referring someone else to your business has personal experience with your products or services. They’re either a current or former client.

Sometimes people refer because they have seen your business in action, have been exposed to your marketing messages, or are paid to refer in an influencer capacity too.

Programs also generally fall into one of two broader categories: customer referral programs and referral partner programs.

Customer Referral Program

Up to 80 percent of a typical company’s referrals come from current or past clients, according to McKinsey. A traditional client referral program helps you boost referral volume with this audience.

Referral Partner Program

Based on McKinsey research, 20 percent of referrals come from non-client sources. This is where a referral partner program comes in. Instead of targeting clients, you’ll target other entities that refer to you, such as brands with shared audiences or companies that share the same client base but do not directly compete with you.

Why Referral Programs Are Worth Building

A well-planned and implemented referral marketing strategy can help your business grow exponentially, and the data behind it makes the case clearly.

• Trust: Building trust is essential for client relationships and closing sales. In all, 84 percent of people say recommendations from friends and family are the most trustworthy source of info, per Nielsen.
• Influence: Word-of-mouth drives up to 50 percent of all purchasing decisions, according to McKinsey. Roughly one in three people who come to a brand are referred, per Deloitte.
• Conversion: People who are referred typically come to a business primed with positive information. They’re four times more likely to buy, according to Nielsen research. Additionally, referred clients are three to five times more likely to convert, according to Annex Cloud.
• Retention: Referred clients stick around longer, with referred clients having 16 percent lower churn rates than their counterparts. Moreover, people referred by loyal clients have a 37 percent higher retention rate than their counterparts, keeping churn rates lower, per Deloitte.
• Lifetime Value: Clients who come to your company through word-of-mouth have two times the lifetime value of those acquired through traditional marketing, per research published in the Journal of Marketing. The same study shows referred clients bring in twice as many new clients too.
• Profit: Referred clients are 25 percent more profitable than their counterparts, per Wharton.

Referral Campaign Ideas and Examples

There are lots of ways to run an effective campaign. Below are some of the most common ways brands structure incentives, along with real-world examples of each.

One-Sided Incentive

One-sided incentive referral programs provide only the referring party with a reward. This may be cash, an account credit, product discounts, free products, upgrades, or something else of value to the referrer. Shoeboxed, for example, gives its customers a 10 percent commission, paid out monthly for the first year each referral is active.

One-sided incentive programs may be used for the entire duration a referral program exists. They’re used more often for referral partner programs but can get traction for some customer referral programs with the right incentive.

Social Gifting

Social gifting referral programs work similarly to one-sided incentive programs, though both the referrer and the referred person receive a reward. For example, PayPal uses a point system that gives both parties the equivalent of $10.

Social gifting programs tend to perform better than one-sided incentive programs because people feel like they’re providing their referrals with something of value.

Contests and Giveaways

Sometimes, brands run contests or giveaways for one or two weeks at a time to renew interest in referrals. Brands may continue running their one-sided incentive or social gifting program during the contest or momentarily pause it.

The most popular method is to count each referral as an entry into a giveaway, though other methods, such as rewarding the top referrer, are also common. Genesis, for example, provided one entry per referral into a contest with three prizes, including a grand prize valued at $500.

Fundraisers

Fundraiser referral programs can perform well if the brand and customer base feel strongly about a cause. These also tend to be short-term campaigns to rejuvenate a standard referral program, though some brands run them consistently.

There are two main approaches to referral fundraiser campaigns. With the first, your brand partners with the cause and taps into their audience to request referrals while pledging to their cause. With the second, your brand selects a cause and pledges a donation for each referral. Upserve took this approach and offered a $200 donation for each referral that became a customer.

Referral Tiers

Referral tiers can be used in conjunction with a one-sided incentive program or a social gifting program, though in this case, the referring party’s rewards grow as they refer more people. Pinto uses referral tiers for its referral program, giving patients a $25 gift card for referring one patient, a $50 gift card for referring two patients, and so forth.

How to Create a Referral Program That Works

Now that you’ve seen some examples and have more background, let’s explore the mechanics of building and launching your own referral program.

Step 1: Set the Stage for Success

I typically consider referral programs as “distant fruit” on the digital marketing tree. They’re a very effective way to accelerate growth, but they draw on all digital marketing channels, from your website to email and social media. You must be strong across these areas before deploying a referral program.

Take Care of Your Customers

Before you begin any referral marketing campaigns, make sure your current clients are happy. First, it costs anywhere from 5 to 25 times more to acquire a new client than retain an existing one, per Harvard Business Review. If you’re constantly trying to attract new clients as your current ones flee, your business is going to suffer. Second, only happy customers refer. Always start by addressing any customer service or product issues to ensure your referral marketing program starts on solid ground.

Have a Strong Brand

Good branding is essential to all your marketing efforts. Many people think of it in terms of logos and color schemes, but it’s more about the essence of your company. It’s your voice and what your business stands for. If you haven’t set this foundation before kicking off a referral marketing program, those promoting you won’t know what message to convey. Make sure it’s clear what you stand for so your promoters can relay your mantras as if it’s second nature to them.

Step 2: Define Clear Objectives for Your Referral Program

Decide who you want to reach. While some brands may be able to create a referral program that works for all their customers, most will need to at least tailor the creative assets around specific personas, if not create completely unique referral programs for groups of customers.

Then, consider your goals and the best way to measure your results. For instance, you might be more interested in generating brand awareness. Likes or tags on social media may be ideal to track in this case. Most brands focus on leads or sales. Narrowing it down between the two can help you refine other campaign details.

Step 3: Choose Your Referral Program Rewards

It’s essential to provide an incentive that reflects the value of each referral. This differs by business. A new client referred to an attorney may generate $10,000 or more, while a new client for an apparel company may only generate $400.

Your customer lifetime value (CLV) sheds light on how much you earn from each customer, so it’s easier to determine how much you can afford to acquire a customer and invest in your referral rewards program.

Nine in ten referral programs offer double-sided rewards, per SaaSquatch research. That means both the promoter and the referred client receive something from the referral relationship.

Top Referral Program Rewards for Promoters and Referred Clients

Step 4: Select Tools and Develop Workflows

If your industry generates few referrals, you may be able to manage your program with tools your marketing team already has, such as UTM tracking codes, CRM, and email marketing platforms. Most brands, however, will benefit from a dedicated referral platform that automates the process end to end, including delivering rewards, tracking, and reporting.

Whatever you use, your tracking should be built to scale. You don’t want to be tallying results manually once the program gets off the ground, and you’ll need a reliable way to tie performance back to the bigger picture, whether that’s through website analytics, form submissions, or a CRM field.

With your tools in place, define workflows for requesting referrals, thanking clients who refer, and nurturing the relationships that come from it.

Treat it as a Sales Funnel

A traditional customer-focused sales funnel goes something like this: Awareness > Interest and Evaluation > Desire > Action. The concept is used in marketing all the time. You must introduce a prospect to your brand, pique their interest, show them why they need your solution, and then inspire them to action. The messages the prospect receives need to be tailored to their situation and where they’re at in the funnel.

The same is true for your referral marketing program. You’ll need to build out touchpoints at each stage to walk your promoters through the program and why they should participate.

Step 5: Identify Your “Influentials”

When you’re marketing at scale and leveraging automation, it’s easy to reach lots of people at once. This is good practice, but some of your promoters will be more impactful than others.

Roughly 8 to 10 percent of promoters are what McKinsey refers to as “influential.” These are people who are competent and trusted by those around them, giving them four times more impact on purchasing decisions and helping them generate three times more word-of-mouth messages than their counterparts.

If your tracking is solid, it should become apparent who your influentials are based on the numbers. Consider giving these promoters extra attention or developing a dedicated program just for them.

Step 6: Promote Your Referral Program Effectively

With your technical setup established, develop and launch creative assets for each stage of the referral process. Make sure your marketing team has access to persona documentation and understands the full flow so messaging stays consistent across channels.

If clients are sharing assets rather than handing you referral contact information directly, equip each one with a unique UTM code so their referrals can be tracked, and make sure they know how to use it.

Website

Create a clear, simple landing page that outlines the benefits of your program and makes it easy to take action. If it makes sense to do so, consider linking to it throughout your website on key pages, such as a customer login page or thank you page that’s displayed after a purchase.

Social Media

Referral programs that are rooted in giving, such as social gifting and fundraisers, as well as time-bound programs like giveaways, may perform well on social media.

Email

Plan to reach out to your clients regularly with a dedicated email campaign. Be sure to segment your lists for greater personalization. For instance, those who have not referred should be given reasons to start. Those who have referred can be reminded of what they’ve earned so far and encouraged to refer more.

It’s also a good idea to automate thank-you messages each time a customer refers someone. Bear in mind, however, that a personal thanks via phone may mean more to your client and could result in even more referrals. This approach should be leveraged in industries where it’s challenging to obtain referrals and those with high-dollar CLVs.

Customer Service

Provide your internal team with information and assets they can use, too. For instance, account managers and customer service agents who regularly connect with clients are often the first to know a customer is thrilled with your company. As these opportunities emerge, they can verbally encourage the client to refer others and follow up the discussion with an email drafted via a CRM template.

Step 7: Ask, Equip, and Thank

Some businesses do well with contests. For example, it’s somewhat common for retailers to give people entries into a gift card raffle for each referral. If you run a B2B company, however, you’re more likely to find success through one-on-one relationship building and a formal request for referrals.

Make the Ask

When making the ask:

• Consider the Language You’re Using: For example, you may get better results by asking for an introduction rather than a referral.
• Ask for Help: Let your prospective promoter know that you appreciate their help and tell them how their referrals are essential to the health of your company.
• Make it Clear Who You Help: People won’t always know who they should send your way or what you’ll do for that person. Fill in the blanks to give them more confidence when referring.
• Reach Out in Multiple Ways: Use a mix of calls and emails to get the ball rolling. Adapt your strategy based on interest and what’s working best.

Equip Them

The easier you make it for people to refer, the more they’ll do it. A few things that may work include:

• Special Codes or Links: If you’re building a large-scale program, you may want to invest in referral marketing software that automatically generates special codes or links each promoter can share.
• Automated Imports: If possible, save your promoters time and allow them to select from their contact lists directly.
• Promotion Kits: Design a welcome package for your promoters that includes everything they need to help spread the word. For example, you may want to give them email templates they can send out to their contacts, landing page content, or social media posts.

Thank Them

Depending on your industry, an automated thank you note may be enough. However, it’s best practice in most professional industries to pick up the phone and properly thank someone each time they refer. This personal touch doesn’t happen nearly enough, so it’s sure to have a big impact on your promoter and encourage them to continue sending people your way.

Step 8: Test, Expand, and Monitor Your Referral Activities and Incentives

Track the results of your referral program just as you would any other digital marketing initiative. Experiment with different rewards and approaches to see what works best to improve your results over time.

Just as you would with any other aspect of your digital marketing, your referral campaigns should leverage A/B testing too. Everything from your subject lines to rewards and images should be tested against another variant to ensure you’re getting the best results possible.

Get Help With Your Referral Program

Referral marketing is one of the strategies I routinely leverage as a digital marketing consultant, and I’ve personally seen it help businesses scale time and time again. However, it’s important to have the right things, such as branding, automation, and service, in place before you start. If you’re ready to build or strengthen a referral program, contact me for a complimentary consultation.

Referral Marketing and Referral Program FAQs