Guide to Referral Marketing for Small Businesses

Referral marketing is simple. You should know the basics.

What’s the first thing you do when you have to make a decision about anything?

You head to your family and friends for guidance, recommendation, or discussion. This is because you trust your social circle and you know they won’t let you make a wrong decision.

This same phenomenon works in marketing too.

Up to 88% of people trust recommendations from people they know such as their friends, family, and acquaintances.

That’s how referral marketing works.

Keep reading to find out all about referral marketing and how to set up a dedicated referral program for your business.

What is Referral Marketing?

Referral marketing is a marketing technique used to encourage existing customers to recommend your brand or product to others in exchange for an incentive. It is a formal program that businesses create to motivate their customers to bring more customers on board (which, otherwise, they might not have).

Generally, people recommend products they like to their friends and family. Word-of-mouth marketing has always been there and it works great. Organic referral marketing takes a lot of time and people aren’t interested in referring to your product.

Your customers are least likely to take the pain to recommend your product to someone else.

Referral marketing makes it easy for them by offering incentives.

Here’s an example of a referral marketing program in action:

The reason why it works is that you offer solid incentives to your customers and often to new customers. Up to 88% of people say explicitly that they like to get an incentive to share a product on social media and the best incentive, according to respondents, is cash.

This makes referral marketing a win-win strategy.

You get new customers. Your customers get incentives.

How Does Referral Marketing Work?

Here’s how a referral marketing program works:

1. A customer refers someone to your brand or product through a unique code or URL
2. The referred user takes the necessary action (e.g., sign up for a product, upgrade a subscription plan, purchase a product, etc.)
3. You track and attribute conversions through the unique URL or code
4. You send the promised incentive(s) to either one or both parties.

The exact steps vary from brand to brand.

Here’s an example of a referral program by PayPal where it gives incentives to both the referrer and referred (known as a two-tier referral program):

See how the exact steps are described so customers know what they and their friends will receive and when they’ll get the incentives.

Here’s another referral marketing example by Google Workspace. It has a single-tier referral program where only customers get incentives (that too based on certain criteria as set by Google):

You need to define the exact steps a user must take to get an incentive. The basic rule remains the same: Refer your product to others.

Referral Marketing Benefits

So, what makes referral marketing an important part of your business and marketing strategy?

Let’s find out…

Lower CAC

Referrals are free (mostly). This significantly reduces customer acquisition cost and increases customer lifetime value.

Research shows that the CAC for referred customers is $23.12 less than customers acquired from other channels. They also spend 200% more than the average customer acquired through channels:

Low CAC positively impacts overall marketing spend. This has a huge impact on the marketing budget because you spend way too less to acquire new customers with referral marketing.

It only costs you the incentive – that’s it.

The best part: You can control the cost to acquire a new customer through a referral program by tweaking incentives.

For instance, if your business’s CAC is $19, you can use a single-tier referral program and set the incentive to $10. This immediately lowers your CAC by $9.

Great, right?

High ROI

Referral marketing has a high return on investment.

This is due to low initial cost, low CAC, high CLV, and repeat purchases. But most importantly, a referral program doesn’t cost you a lot of money to set up. Once it goes live, you don’t have to spend money on its promotion.

It’ll gain popularity on its own because consumers are always on the hunt and looking for brands that have referral programs.

It’s kind of a set-and-forget marketing strategy that delivers big time.

High Retention Rate

Referred customers are loyal customers. They have a 37% higher retention rate than other customers.

Why?

Because people trust recommendations from people they know. They trust you before becoming your customers. This makes them stick to your brand.

All this is based on word of mouth and positive branding generated by your existing customers.

Cost-Effective

Referral marketing is a highly low-cost marketing strategy.

You can get started for less than $100 per month by signing up with a referral marketing app (more on this below).

It doesn’t require infrastructural changes or high setup fees.

Yes, referral marketing has a maintenance fee that’s other than the platform you are using. You need to monitor and tweak your referral program to ensure it’s working flawlessly.

This doesn’t cost you a lot when compared with other forms of marketing such as PPC or SEO.

Brand Awareness

Word of mouth generates brand awareness.

Even if you don’t get a lot of new customers via a referral program, you’ll reach a lot of potential customers.

You might not see this impact right away.

When your customers talk about your brand and share the benefits of being with you with their social circle, a lot of people get to know your product. They might not become customers now, but they can be with you in the future.

Brand awareness never fails.

How to Build a Successful Referral Marketing Program

Follow this step-by-step guide to develop a referral program for your business:

1. Set goal
2. Understand your customers
3. Choose incentive
4. Select a tool
5. Promote your program
6. Tweak and refine.

1. Set Goal

The first step is setting a measurable and challenging goal for your referral program.

Generally, most referral programs aim to get new leads or sales. You can, however, achieve much more with your referral marketing program such as:

• Reduce customer acquisition cost
• Acquire new customers
• Increase revenue
• Boost repeat orders
• Lower marketing cost
• Increase average order value.

The best way to set a goal for your referral program is by using the SMART goal approach which focuses on creating specific, measurable, achievable, relevant, and time-based goal:

Here’s an example of a SMART goal for a referral program:

“To acquire 1,000 new paying customers in 3 months through a two-tier referral marketing program.”

You can choose to keep your goal specific (like above) or detailed (where you add specific steps and plan of action).

Setting a goal helps you in measuring the performance of your referral program. It helps you identify the right metric and KPI to determine ROI and analyze overall success.

Additionally, the SMART objective helps you keep it organized. Your team knows what it has to do, when it is to be done, and what results they should expect.

2. Understand Your Customers

Select the right target audience for your referral program.

The idea is to select an existing buyer persona so that you can craft a referral program based on their specific needs and likes. This will help you bring in similar customers through referrals.

Use behavioral analytics to understand the type of incentives they like, their needs and challenges, and how they interact with your brand and product(s).

The purpose is to create a referral program and incentives that your customers crave.

Follow these best practices to understand your customers and create a compelling referral program:

• Analyze buyer personas
• Get insights from your analytics tool (e.g., Google Analytics and Search Console)
• Collect primary data through surveys or interviews. Ask your existing customers about the type of incentives they value the most and what type of referral program they’d like to participate in
• Use behavioral data to understand what products they buy, what features they value the most, and what type of incentives will work best.

3. Choose Incentive

This is the most important phase of the referral marketing program.

The success of your program largely depends on the incentives.

Incentives should be perceived as high value by your customers. It should be something they need. If you have done your homework, you’ll know the type of incentives to offer.

You need to make a few major decisions at this stage:

1. The type of incentive. You can choose between a single-sided and a double-sided. A two-sided incentive works best in most cases as it encourages new customers to opt in. Research shows that 57% of consumers stick with brands that offer them incentives such as discounts and coupons. And these are equally important for new and existing customers.

2. The form of incentive. Cash works best and has the highest conversion rate (as high as 66%). Other forms of incentives include gift cards, discounts, and charity donations. It’s best to start with cash incentives.

3. When the reward is disbursed. You can give rewards right away or link them to an action or milestone (micro or macro conversion). The best approach is to link it with a milestone such as your company’s north star metric (a single metric that is used to measure the success of a business). It should be an action that all the loyal customers complete.

The reward should be of value to the customers.

If it isn’t perceived as “valuable”, your program won’t work. This is a reason cash works best because it’s always, under all circumstances, considered highly valuable.

4. Select a Tool

A referral marketing platform is an essential part of your referral marketing strategy. It helps you implement and monitor your program effortlessly.

If you need more control and flexibility, you can develop a dedicated referral program in-house. It should have the following features:

• Landing page
• Dashboard for customers
• Admin dashboard
• URL tracking
• Integration with other tools and apps.

Advanced URL tracking is the primary feature that you need. It helps you create unique referral codes or URLs and then attribute new customers accordingly.

In-house, customized referral program is costly but it gives you full control.

A referral marketing tool, on the other hand, is a quick and effortless way to create and run a referral program. You can get started almost immediately.

If you are getting started with a referral marketing program for the first time, it’s recommended to use a tool. It costs, on average, $100+/- per month – which is quite reasonable.

Here’s a list of the top referral marketing tools you can pick from:

1. ReferralCandy: Best, cost-effective option for most businesses. Starting price is $59/month
2. ReferralRock: Enterprise-level, advanced referral program having a starting price of $175/month
3. Referral Factory: Simple and effective program with a starting price of $95/month.

There are many others out there. You can find a tool that suits your needs and budget.

5. Promote Your Program

Once your referral program goes live, it needs to be marketed.

The best way to promote a referral marketing program is via an email marketing campaign. Invite existing customers to join your referral program with a quick email. Here’s an example:

Instead of sending a one-time email, create a campaign with a series of auto-triggered emails that remind customers of what they are missing.

At the same time, create a dedicated referral program page on your website. Optimize it for search to attract organic visitors. This helps you attract non-customers who are looking to switch brands.

Here’s an example of a referral program page:

Other ways to promote your referral marketing program include:

• Social media marketing
• Website popup, banner, and blog posts
• Customer support services and live chat.

Promoting your referral program is essential to drive engagement and sign-ups. Make every possible move to reach out to existing customers across multiple touchpoints.

The more customers see your referral program, the better.

6. Tweak and Refine

You need to carefully monitor your referral marketing program.

Is it working as expected?

Are customers signing up for the program?

Are you getting enough new referrals?

These are some of the questions you should ask and evaluate regularly.

You have to tweak your program several times to improve its performance and get the desired results. Don’t expect it to work right away.

What’s important is that you are ready to make necessary tweaks based on data and insights.

Regularly monitor goal progress. If it’s not working as expected, fix it. And repeat.

Referral Marketing Techniques and Best Practices

Follow these best practices to significantly improve the performance of your referral marketing program:

Choose the Right Reward Model

A reward model refers to the way how your customers receive rewards. There are 4 major ways you can share incentives with your customers:

Standard reward: It’s the most used type of reward model where all the customers get the same incentive irrespective of how many customers they bring in.

This is the type of reward model used by Fiverr:

It’s the simplest and most used reward model that is easier for both customers and businesses.

Tiered reward: It’s a reward model where customers are rewarded differently based on their activity, spending, or any other criterion. The tiers are normally linked with the number of new referrals a customer brings in.

For instance, for the first 5 referrals, you pay them $5 per customer. For 5-20 referrals, they get paid $10 per customer. And so on.

Here’s an example of a tiered reward model:

Multi-step reward: The referrals need to complete a series of steps (two or more) to get the reward for themselves and the referred. This might include signing up and then completing a few tasks.

Here’s an example of a multi-step referral reward model:

The customer, in this case, gets the reward when their referral completes a series of tasks as described. You need to set a criterion and define each step that the referrals need to complete to qualify for the reward.

Gamified reward: It’s a form of reward that’s distributed in the form of a game. You need to convert the reward into a fun and exciting activity.

Here’s an example of a gamified reward model:

You need to identify the right reward model that aligns with your business and customer interests.

There’s no right or wrong reward model for referral programs. It comes down to what works for your customers.

2. Keep It Dead Simple

Your referral program must be simple and easy to use.

It should have:

• Simple reward model
• A dedicated landing page with clear instructions, eligibility, process, and other details
• Everything that customers need to invite their friends.

Here’s an example of a simple and clean referral program:

The customers need to grab their unique referral link and that’s it.

If they have to share a link or code on social media, allow them to post it directly to a social network of their choice.

You need to make it as easy as possible for customers to invite friends. This calls for removing distractions, getting rid of unnecessary steps, and keeping it all plain and simple.

The sign-up process for the referral program also needs to have minimal requirements. TurboTax only asks for an email address for the creation of a unique referral link:

It doesn’t ask for the name, phone number, or anything else.

That’s how simple and tidy your referral program page, incentives, and process should be.

Promote it via Influencers

Influencer marketing is one of the best marketing strategies to promote your referral program. In this case, you need to get the word out through influencers in your niche.

You can use influencers in two ways:

1. Ask them to promote your referral program to boost sign-ups
2. Acquire new customers to the referral program through influencers.

Both work equally well.

Here’s an example of how an influencer is sharing his referral code with his followers. The catch here is that new customers get valuable rewards and incentives:

The downside in this case is that you might not get loyal, long-term customers which you do when an existing customer brings in new customers.

Expect one-time buyers in this case with fewer reorders.

Despite possible downside, it’s a great way to promote your referral program.

Follow up Religiously

You need to follow up with your customers when promoting your referral marketing program. It is an absolute must.

When you send an email to your customers informing them of your referral program, you might not see a lot of traction right away.

That’s where most businesses lose hope and abandon the referral program.

You need to follow up as much as you can.

A single email or a website banner won’t do anything.

Research shows that 60% of customers decline an offer at least 4 times before saying yes to it. It requires at least 5 follow-ups to convert a potential customer:

You need to set up a series of follow-up emails to ensure the majority of your customers register for the referral program.

Use Data Smartly

The referral marketing program is a source of heaps of data. You should use it across your business to boost sales and revenue.

For instance, you can use data from referral program to filter loyal customers and convert them into brand advocates and ambassadors. Similarly, you can identify products that newly referred customers purchase.

Even if your referral program fails and doesn’t deliver the expected results, you’ll get lots of insights that can be used by your product, sales, finance, and marketing teams.

It’s never a failure. It’s always learning.

In this case, it’s data.

Final Words

Referral marketing is a highly effective way to acquire new customers and engage with existing customers.

You can acquire tons of customers at a fairly low cost and these customers are more likely to become loyal customers.

What’s better?

The referral program is a must-have for your brand irrespective of your industry.

Get started with it today.

The step-by-step guide covered in this article will help you create a functional referral program. Use a tool of your choice and you will be ready immediately.

Give it a try and see how it turns the table for your brand.

Featured Image: Unsplash