Referral Marketing: What It Is and Why It Works
In this article
Referral marketing (also known as word-of-mouth marketing) is a powerful tactic and one of the best marketing drivers for sales and conversion. Referral marketing is exactly what it sounds like: the process of one person referring a product, and the referee purchasing that product due to that recommendation.
Referral marketing works because consumers trust the opinions of “real people” more than they trust traditional advertising. In fact, Nielsen says that people are four times more likely to buy a product or service when it’s referred by a friend. While referrals usually come from friends and acquaintances, they don’t have to. In fact, influencer marketing is considered a form of referral marketing, as influencers often share their favorite products with followers via organic sharing and sponsored posts. Referral marketing can come from friends, influencers, celebrities, and even online reviews (TripAdvisor and Yelp are good examples of this); again, people trust “real reviews” more than traditional advertising.
A recent Nielsen study shows that referrals are the most trusted form of advertising, with 92 percent of consumers reporting that they completely or somewhat trust referrals from people they know.
Referral marketing leads have been shown to convert 30 percent higher than leads generated from other marketing channels. And referred customers have a 16 percent higher lifetime value than their counterparts.
Why Does Referral Marketing Work?
Referral marketing is a powerful tool for three primary reasons: laser targeting, the element of trust, and reach.
If your best friend, who has similar taste to you, recommends a product, you’re likely to try it and like it as well. Otherwise, he or she wouldn’t have recommended it in the first place. Thus, as a marketer, once you identify your most successful demographic, you’ll want to find others similar to them—like their friends. The same thing works with influencers: if you respect an influencer’s style and feel connected to them, chances are you’ll try a product they recommend (if you’re in the market for said product), and you’ll probably like it.
Referral and word-of-mouth marketing solicit niche, targeted audiences, as like-minded people tend to hang out together. As a marketer, this allows your brand message to penetrate a target market more effectively than it would using most other marketing channels and tactics.
Trust is a second critical factor for referral marketing. Studies show that customers almost always trust “real people’s” opinions over generic ads and branded sales pitches. If you know and like a person, you’re likely to trust their opinions—especially when compared to a salesperson working on commission. Take TripAdvisor as an example. Even if you don’t know the person reviewing a hotel or restaurant, you’re more likely to trust their review than you would the business’s website or a billboard promoting the company.
Twenty years ago, the reach of an average person was relatively small; for the most part, referrals were made face to face or over the phone. Today, with social media and review websites, the average person’s audience is enormous. They can reach hundreds if not thousands of friends and acquaintances in a matter of minutes with a simple Facebook post, Yelp review, or other public-facing review.
Related Read: What is Digital Marketing?
How to Launch a Successful Referral Campaign
In order to run a successful referral campaign, businesses have to tell their customers about it, entice their customers to spread the word, ensure the process is as easy to use as possible, and make sure team members can adequately address any customer questions or concerns.
Companies with formalized referral programs experience 86 percent more revenue growth over a two-year period when compared to the rest, thus it’s imperative for companies to at least consider developing referral marketing strategies.
1. Provide Worthwhile Incentives
While 83 percent of consumers are willing to refer after a positive experience, only 29 percent actually do. So it’s important to give your satisfied customers an incentive to refer their friends to your business.
Incentives can range from discounts to cash incentives to store credits. It all depends on your product and what your customer is looking for. Your incentive should be appealing enough to make your customers want to share it with their friends. To get an idea of what you should offer, scope out your competition. If they’re offering $25 in credits, ensure you’re either matching the offer or providing a bit more. Remember that previously mentioned stat: companies with referral programs experience 86 percent more revenue growth when compared with the rest! So, provide as much as your budget allows.
2. Tell Your Customers About Your Referral Program
If you have a referral program, it’s imperative to tell your customers about it. This is Marketing 101. Make sure to promote it as much as possible across all of your marketing channels: email, social, paid posts, and all other outlets you traditionally use. Treat your referral program like a new product launch.
3. Make Your Referral Program Easy to Use
When creating a referral marketing program, make it as simple to use as possible. Think about your mom, your grandfather, even the average fifth grader: would they be able to figure out how to refer their friends? Would it be quick and easy? If the answer is no, go back to the drawing board.
One of the most important aspects of a referral campaign is that it’s easy for existing customers to send new ones your way. If they have to fill out too many forms, they’re likely to bounce.
4. Ensure Your Team Members Are Versed on Your Referral Program
Employee education needs to be a priority when launching a new product, and a new referral campaign is no different.
RewardStream’s Neil Parker says that one of the most common reasons referral programs fail is because of poorly trained team members. “Your referral marketing programs experience the greatest success when your employees are aware of the program, and can explain it to customers,” Parker says. “Everyone in your organization should understand the referral program, and your customer-facing team members should be able to explain it clearly to customers.”
In particular, make sure your customer service teams are fully updated on the details of your program, as they’re typically the ones speaking with customers first. In fact, before launching your referral program, make sure to run it by your customer support teams to see if they foresee any customer challenges based on previous complaints. Once the program launches, stay in close communication with your customer support teams to monitor any issues and update your program as needed.
Related Read: What Does a Digital Marketer Really Do?
Successful Referral Program Examples
Startup unicorns including Uber, Airbnb, and Dropbox relied heavily on referral campaigns to grow their initial customer bases and continue to run successful referral programs today.
Ride-sharing app Uber transformed the transportation industry when it launched in 2009 by allowing users to request drivers with a few taps of the phone. Not only was this more convenient than waiting on a street corner for a cab, but the rides were (and still are) typically cheaper than normal cab fares.
Uber owes much of its success to its referral programs for passengers and drivers. Uber offers a mix of free rides and discounts to people who refer the app to their friends, both for riding and for driving. At one time, Uber offered $30 in credits to those who referred new riders. Today the referral is $5, but is subject to change. Referring drivers can be a bit more lucrative, and varies depending on whether or not the driver signs up with his own car or a rental car. The referral bonuses vary by country, but can be as high as $1,750!
Today, Uber is valued at more than $70 billion and is the No. 1 car service in more than 60 countries and approximately 400 cities worldwide.
While Uber transformed the transportation industry, Airbnb revolutionized the lodging industry. The apartment-sharing website enables people to rent their homes, or rooms within their homes, to others looking for lodging; today it’s valued at more than $20 billion.
Similar to Uber, Airbnb owes much of its success to its robust referral program. Airbnb’s program works both for people looking for lodging as well as those wanting to list their homes. Airbnb’s referral program varies from time to time (particularly during the holiday season), but at present they’ll give you $25 in travel credit for every new member referred, and they’ll give those new members $40 in travel credit.
Cloud-based file storage and sharing company Dropbox is perhaps one of the best examples of a successful referral program.
Just before launching in 2007, Dropbox created a virtual build: a 90-second video describing its services (and why people should pay for them) and asking for feedback. In doing so, they attracted 5,000 subscribers. After implementing customers’ feedback, they revised their product and released another 90-second video asking for feedback, generating 75,000 more subscribers in just one day. Once the product was finalized, Dropbox embarked upon an expensive marketing plan that resulted in unprofitable customer-acquisition costs.
The team went back to the drawing board and decided to build upon the enthusiasm of the initial users. If the company could get 75,000 to sign up and provide feedback in just one day, it figured that by giving these people an incentive to refer their friends, they would. Thus, they unveiled a two-sided incentive-referral program.
Dropbox offered free storage to both new subscribers and those who had referred new users. In 15 months, Dropbox grew from 100,000 registered users to 4 million, with 2.8 million referral invites. The company went public in 2018 and today is valued at over $12 billion. Its referral program—which gives 16 GB of free Dropbox space to both referrer and referee—continues to be successful, with 35 percent of new users coming from referrals.
New Trends in Referral Marketing
As referral marketing continues to be a key driver for acquiring new customers, brands are looking for more ways to incentivize existing customers to invite their friends. While traditional online referral marketing programs continue to be fruitful, brands are starting to think outside the box to develop new ways to prompt their customers to refer friends.
As brands are looking for unique referral program ideas, some are turning to their packaging. Unboxing has become a trend over the past few years, and there are even YouTube channels dedicated to influencers opening packages from brands.
If you want to take your referral program a step further, consider revamping your boxes and packaging in order to wow your customers and make them want to share the experience across their social channels. It’s also becoming common to incentivize them to do so by running social sweepstakes backed by a particular hashtag.
Everlane is a brand that uses boxing as a marketing tactic. Items arrive wrapped in environmentally friendly craft paper with a thank you note that encourages people to share a photo of their purchase on social media.
(Source: Referral Candy)
Capitalize on Micro-Influencers
If you can afford to partner with a major influencer, go for it. You can ask the influencer either to promote your product via a slight nod or a more overt push. However, if budget is limited, don’t neglect the reach of micro-influencers. An influencer with 6,000 followers can be more beneficial (and much more affordable) than one with 100,000 if she’s a better fit with your target market.
Ask Your Customers to Provide Reviews
People trust what other customers say about your company more than what you say, so make sure you encourage customers to leave reviews after their purchase.
Take a look at the product page for BeardBrand Tree Ranger Beard Oil. The company has over 400 reviews, and an average rating of 4.7 stars. While this type of review may not drive new customers, it can certainly help with conversion.
Referral marketing is a powerful conversion tactic, as people value “realness” and are more apt to try a product or service that’s recommended by a friend or some other trusted source than something they come across via traditional advertising. Referrals can come from friends, influencers, product reviews, news articles, and testimonials. In order to launch a successful referral campaign, brands must offer compelling incentives so customers want to refer others. They must also make the referral process as easy to use as possible. Additionally, brands must treat their referral program as they would a new product launch and educate both customers and employees on how the program works.
Since you’re here…
Want to bring your marketing skills into the 21st century? Our Digital Marketing Certificate Program is designed for experienced marketers and newbies alike. You’ll learn key industry tools and work 1-on-1 with a digital marketing mentor. Check our reviews to get inspired, and spend some time with our free digital marketing curriculum for new ideas and insights.