What is Referral Marketing?
Referral marketing is a promotional strategy that encourages current customers to refer new customers, usually with an incentive. Although referrals can happen organically, businesses can also use dedicated referral programs. Referral marketing helps spread the review or appreciation about a product or service through business existing customers, rather than traditional advertising. There’s usually some form of incentive or reward offered for customers to refer other people. Referral marketing can be highly effective for online businesses because of the popularity of social media and sharing sites. Internet referral marketing can potentially spread faster and to a wider audience than most offline marketing strategies.
How does Referral Marketing Work?
The general effectiveness of referral marketing programs is based on the premise that customers want to share their reviews and stories about the products they buy and the brands they choose. This becomes magnified when the buying experience and products are exceptional.
Word-of-mouth marketing or referral marketing occurs when people tell each other about a business, it is also considered a form of referral marketing. Referral programs such as refer-a-friend are designed to generate word-of-mouth publicity and incentivize users to tell more and more people about the business. When combined with social media, referral programs can generate more leads and sales than any other marketing program.
Example of Referral Marketing
For example, Dropbox, an online file storage company that offers both free and paid services, implemented a referral program in 2009 asking users to tell their friends about the service. The program offered rewards for both sides of the referral coin—those who signed up for a referral link would get additional free space, and the person who referred them would also get more space. By 2010, referrals accounted for around 35% of their daily signups, and Dropbox signups had permanently increased by 60% overall. The company estimated that within a 30-day period (April 2010), its users had sent more than 2.8 million direct referral invitations.
Benefits of Referral Program
There’s no better advocate for a company than a satisfied customer. That’s why referral programs work. When existing customers refer their friends and colleagues, they tell them how valuable the brand truly is. According to research, referred customers have 16 percent higher LTV and 18 percent less churn than those acquired by other methods. Customers with high LTV and low churn are the backbone of any strong, fast-growth eCommerce business. The first step for your business is to find out what motivates your existing customers to refer your business to their friends. You can then use the information to build a referral program.
How to Start Referral Program
A simple monetary referral program is one of the easiest ways to generate referral traffic. The business can start by offering customers cash rewards to promote the brand. Project management software Basecamp took this approach by providing their customers and referrals $50 each for signing up. This 50/50 split gave the current customer and the new referral an equal incentive to start.
Referral Marketing Strategies
Market Research is Critical before Begining
Market Research is the first step to developing a referral marketing strategy. With referral marketing, initial research will often include discovering what customers want. If the incentives are worthless or undesirable to the company’s existing customer base, the customers won’t be interested enough to participate in the referral program.
Plan Sustainable Incentives for Referral Marketing Program
You must plan the procedures for crediting referrals, the number of referrals needed to claim the reward, and any other tools for proving that the referrals happened. To track which customers should receive referral credits, you should provide a separate signup link for the Refer-A-Friend program. New customers can enter the code or use the link from the person who referred them using the referral program.
Market your Referral Program
A referral program needs to be heavily marketed to the audience. A common referral program promotion strategy is e-mail marketing campaigns, banner advertising, or even e-mail signatures with links to a referral program sign-up page.
