What is a customer referral program?
A customer referral program is a structured process, enshrined by organizations, that enables their existing customers to help them acquire new customers. It is based on the willingness of these existing customers to positively influence other people they know about your brand, with the specific intention of getting them to subscribe or purchase. Customer referral programs typically provide a reward to customers each time they refer someone, in exchange for their effort.
Customer referral programs are an important marketing tactic that can directly increase sales revenue and support customer acquisition at relatively low marginal cost. At their most sophisticated, they fully extend the brand experience and complement digital marketing initiatives. At their simplest, they facilitate the appetite of your happiest and most loyal customers to recommend you in ways that make it as easy as possible for all parties.
How do you create a customer referral program?
Creating a customer referral program demands a rigorous assessment of what you want to achieve and the best ways of accomplishing it. Some areas to consider include:
- Which kinds of customers are recommending you at the moment?
- Why do they recommend you?
- What do they have in common?
- When are referring customers most likely to want to refer others to you?
- What kinds of potential customers do you ideally want referred to you?
- How are you going to communicate and market your referral program to customers?
- What rewards and incentives will you provide?
- How will you technically support the customer referral process and ensure that rewards are distributed appropriately?
- How will you track referrals to measure the success of the customer referral program?
Not all customer referral programs share the same objectives. It’s true that the fundamental aim is clear: to acquire more new customers. However, there are nuances to this that should ideally tie to other business goals.
For example, is customer acquisition an “at all costs” goal or is it tied to achieving a profitable return? It’s a serious question, particularly to those fast-growth companies who acknowledge loss-making in their immediate business plan so long as they can acquire a critical mass of customers. This can influence just how much you’re prepared to give away to get a new customer on board.
This links directly to the question of customer lifetime value (LTV). Some customer referral programs offered by banks, for example, can appear ‘over-generous’ in the scale of rewards being offered (more than $100 cash for taking out a zero-fee, practically zero-interest current account). Clearly the banks surmise that the LTV of a customer hooked on a current account is significantly higher, bearing in mind future opportunities to upsell loans, mortgages, credit cards, savings products and insurance.
And what about customer retention? If this is a key goal, you might wish to consider structuring your program differently compared to if it’s purely revenue and growth you’re after.
Lastly, what about the kinds of customers you’d ideally like to acquire? It stands to reason that all this effort could be misplaced if you don’t end up with customers who are a good fit for your business.
Assessing your referral sources
Among your existing customer base will be many that you acquired through an informal process of referral. Someone put them onto you and the rest is history. Likewise, there will be those among your base that actively advocate for your brand and bring you new customers in the same way. It is fundamentally important to understand who these individuals are, how much they are worth to you in LTV terms, and what drives them to do this.
Customer feedback drives the whole process
Customer feedback is very important in this, particularly if you use it to measure satisfaction and propensity to recommend. Net Promoter Score® (NPS) is the gold standard for the latter. If you regularly survey your customers on NPS, you’ll already have the ability to segment them according to how likely they are to recommend you to others – given the opportunity. Again, it’s worth understanding why customers do this. If nothing else, you can focus on orientating your business to do more of this, thereby maximizing this propensity among your customer base. By the same token, you should ask the same about those customers who don’t wish to recommend you so that you can do less of whatever offends them.
This is also the opportunity to interrogate referral sources that go beyond just your existing customers. What about your employees, suppliers and partners? Or even customers that have since lapsed or are stuck in your lead funnel? You should consider whether your customer referral program is open to anyone who wishes to make a referral, or just to existing customers only.
Deciding on referral incentives
You don’t technically need to incentivize your customer referral program. Many are operated on a purely goodwill basis to ‘spread the love’. There are two ways of looking at this approach, either as lazy and a missed opportunity or as a supremely confident approach that reflects the strength of your brand. It depends on how customers perceive it. If they generally believe your offering to be wonderfully useful and valuable, the very act of recommending it to people they care about will be its own reward. However, for the most part, non-incentivized referral programs could achieve greater engagement and throughput if an incentive were to be added.
Typically referral incentives take the form of:
- Dollar credit or gift certificates/vouchers of a cash value
- Gift certificates/vouchers at unrelated outlets (e.g. Amazon, Apple, Google, etc.)
- Free or discounted products
- Free or discounted service subscriptions
- Loyalty program points to redeem on future purchases
A recent study found that ‘dollar credit’ is the most popular in use among current customer referral programs, and the most common amount is $10. The study also revealed that dollar credit is most generous relative to the size of purchases referred when these are for the least expensive items. For example, for items worth less than $20, reward values are around $8. For items worth over $500, the rewards are around $70-80.
Single-sided incentives and double-sided incentives
Before you get to the actual incentives you elect to provide, you need to consider who exactly receives them. One-sided incentives (so called “reward me” schemes) are where 100% of the reward for making the referral goes to the referrer. Double-sided incentives (“reward both” schemes) split the rewards between referrer and referee (the party being referred).
Both approaches have their merits. “Reward me” maximizes the benefit and therefore the motivation for customers to make referrals. However, “reward both” more naturally fits the model of a win-win for all involved. There’s also an argument that referrals rewarded in this way are most likely to stick. This is because some prior discussion and agreement is needed between referrer and referee, along the lines of “there’s this deal I’ve heard about from my mobile provider where we both get 100GB extra data a month if I introduce you to get signed up…”
Referral reward timing
Another consideration is the timing of when the reward is given. Again this depends on whether you are going single-sided or double-sided as the timings can be different.
Let’s take an example of Jack who refers his friend Jill to an online bingo site. Jack sees that he stands to get $10 credit for doing this, and so does Jill. So how does the timing work? Well, Jill can’t really make any progress unless she’s given the $10 credit at the start of the process. And it doesn’t make sense to the bingo site to reward Jack with his $10 until Jill has used hers. So that’s how it works:
- Jack sends the referral to Jill: “check out this bingo site and we both get 10 bucks!”
- Jill clicks and is provided with a guest account with $10 in it
- Jill ‘converts’ to becoming a customer by completing the registration process and starting the bingo service with her free $10
- Jack finds his bingo account topped up with an extra $10
Very few organizations reward their customers for bringing them ‘leads’, only ‘conversions’. It is highly unusual for consumer-based referral programs to provide rewards for anything less than this. However, the practice of rewarding leads is more widely used in affiliate and partner programs, and those in the B2B sphere.
Instant incentives and deferred incentives
One last thought is whether to defer referral rewards beyond the normal time lag between referral and conversion. In other words, to make the referrer wait longer than the initial conversion point to get their reward.
It’s a novel concept, but one in which some organizations are innovating. Some of the new models include:
- Delaying rewards for both referrer and referee until the referee has completed X months’ subscription to a service
- The same as above, but with the referrer getting rewarded at initial conversion and the referee getting theirs after X months of not churning
- A graduated, multi-step system of reward that unlocks a series of benefits for the new customer, the more they buy and/or the longer they subscribe.
This last model is effectively the same as taking customers that come to you via a referral program and transitioning them seamlessly into a loyalty program.
Lastly, you can use customer feedback to get an accurate sense of what kinds of rewards are most likely to interest your target referrers. This can influence your choice of rewards, and whether it’s worth structuring a tiered customer referral program. These work like tiered loyalty programs, reflect different levels of reward depending on the commitment, frequency and impact of a customer’s referral activity.
Marketing your customer referral program
There is no “if we build it, they will come” with customer referral programs. Yours could be generous, appropriate and well put together – but you need to promote it in order to maximize engagement and adoption.
Get word of mouth for your word of mouth
We have limited guidance to offer for creative campaign ideas and so forth, but it shouldn’t escape your attention that all ‘referral marketing’ is based on word of mouth. If you can generate a buzz around your customer referral program then you’ve started some of the essential conversations between people that allow referrals to happen. A few things to consider:
- Get people talking on social media with campaigns to drive engagement
- Use different communications channels to maximize your message
- Publish case studies and testimonials
- Inspire customers to talk about their positive experiences of your product/services to show that there’s more reason to recommend you then cashing in a reward
- Leverage different forms of media from point of sale items (if applicable) to video clips, playlists, podcasts and photography
- Encourage user generated content
- Showcase stories about people who’ve used your customer referral program and benefited (both sides)
Prioritize your happiest customers
Segment your target audience of existing customers and other contacts according to their likelihood of referring you on your merit alone. That means understanding who has already recommended you informally to others, and who is most happy and satisfied with what you provide.
Customer feedback plays another key role here, allowing you to keep a regular check on customer satisfaction and other measures. If you track NPS, you should be targeting your ‘promoters’ in the first instance.
Pick your moment
Customer satisfaction (CSAT) fluctuates depending on stimuli such as interactions with your staff and receipt of goods and services. It can go up and down depending on how well you’ve met their expectations. These touchpoints are often the best opportunities to deploy a quick CSAT or NPS survey to check in on how they think you’re doing.
So, as well as introducing customers to your referral program through a blanket communications drive, you should also plan to remind them about it at carefully timed intervals. Namely, whenever they tell you they think you’re doing a great job!
Imagine a customer giving you a 9 out of 10 for your latest customer service, and straight away offering them a special referral reward for getting friends and colleagues on board. This is best practice for dealing with positive feedback of any kind, as is following up with happy customers to enquire whether they would be prepared to leave a review or take part in a testimonial.
Managing your customer referral program
Now you’ve set a structure for your customer referral program and put a plan in place to launch and market it. Next you should work out the best way of managing it.
Be customer-centric and have a product/service worth referring
Your customer referral program will go much better if customers are already motivated – by merit alone – to recommend and refer you. They’ll do that because you have a good product/service and a way of dealing with them that’s fast, effective, simple, honest and empathetic.
Make referring an easy thing to do
Another tip that sounds obvious but isn’t. You really have to consider how much effort you’re putting referrers and referees through by engaging in your program. If it’s too much effort, some people won’t bother – whatever you’re offering them.
One of the metrics you can use customer feedback to gauge is ‘customer effort score’. As the name suggests, this gets respondents to score you on how much effort a process or task took to complete. It’s worth factoring this into your program both at the testing stage and once you’re up and running.
Devise a mechanism for handling invitations, codes, links and credits
Customer referral programs necessarily have to make your back-end customer onboarding processes more complicated. Instead of being straightforward, you need to issue rewards to the right referrer (and referee) at the right time/s and tie the two together so that you reward people when you should.
There are referral platforms that deliver this capability, typically as an extension of your web properties and digital marketing strategy.
Whichever you select, don’t focus solely on how it satisfies your objectives for slick back-end integration. Remember you’re making changes to the sensitive, initial stages of the customer journey, so everything has to run like clockwork.
Track people who’ve referred and gather intelligence
A key feature of any management of customer referral programs is being able to track people who’ve referred others. How many referrals have they made? What’s motivating them to make referrals? What do you referrers have in common that could help identify and motivate others?
We’ll return to this subject before the end of this guide.
What are the different types of customer referral programs?
We’ve covered many of the options when designing elements of customer referral programs. Here we tie it together with a list of customer referral program types and how they work.
Merit-based customer referral program
A customer referral program with no rewards on offer, other than the satisfaction of having a trusted recommendation facilitated.
Reward-me customer referral program
A customer referral program where rewards are provided to the referrer only, not to the referee.
Reward-both customer referral program
A customer referral program where both referrer and referee receive a reward when the new customer converts.
Multi-stage reward customer referral program
A customer referral program that provides rewards at various stages in line with actions (normally purchases) performed by the newly incoming customer.
Tiered customer referral program
A customer referral program that enlists referrers onto levels that deliver more rewards to them the more they refer others. This relies upon the customer referral program having sufficient capability to track the aggregate value of referral impact in much the same way tiered loyalty programs track the aggregate value of purchasing behavior.
4 examples of great customer referral programs
There are lots of good examples of customer referral programs out there. We’ve chosen 4 to showcase a wide range of ideas and possibilities.
Airbnb gets top marks for devising a customer referral program based on understanding their customers and what they’d told them. By using extensive A/B testing and customer feedback, the homestay booking giant was able to factor its reward structure to optimize the success of the program. The program has since closed, but the lessons it teaches are incredibly useful.
Airbnb experimented with differing combinations of reward for referrer and referee. What worked best was skewing it in favor of the referee by communicating the reward to the referrer as a ‘gift’ to a friend. This produced better results than factoring and positioning toward the referrer’s reward.
Tesla has operated a bunch of customer referral programs both in relation to its cars and home power solutions. The programs hinge on the principle of ‘QRs’ (qualifying referrals). These are accumulated by referrers each time the referral code they generate is acted on by a referee they nominate.
A single QR might attract some Tesla merchandise such as apparel or a scale model of one of the cars. Gaining 5 QRs got you an invite to tour the Tesla factory and attend the grand opening party.
This is a great example of a brand that enjoys extraordinary levels of customer loyalty, advocacy and excitement harnessing that goodwill to achieve growth. It does this by giving customers more access to products and the overall brand experience, via a tiered customer referral program and the kudos that brings.
Robinhood is a commission-free stock trading and investing app. To scale its business and attract more subscribers, it came up with a customer referral program rooted in its own platform.
The structure of the program is a 50/50 double-sided split reward for referrers and referees. The reward itself is randomly generated from a pool of tradable stocks that could be worth anywhere between $2.50 and $225.
There are three really interesting aspects about this approach:
- First, it’s unusual but not unheard of to offer a random reward for customer referrals. However, people typically tend to want to know what they’re getting before making any commitment. In this case, the fact that the reward could be so high is appealing, especially since the nature of the app is holding and trading stocks.
- Second, once in receipt of the stock, customers are faced with a decision of what to do next. They might hold the stock until it goes up in value, or sell it to convert into a re-investable balance. As a commission-free platform, earning interest off the cash balances of app users is how Robinhood makes much of its income.
- Third, unlike customer referral schemes that offer unrelated or loosely related rewards, this one really focuses on the use of the core product/service. Customers are literally drawn into using the app as part of the referral reward process and beyond.
Harry’s is a subscription service for men’s grooming that uses its customer referral program to get more people into the habit of consuming their razors this way. Nowadays, theirs is a simple scheme offering a double-sided $5 credit for referring a friend. But its first first into customer referral programs happened in the weeks preceding its brand launch.
To generate a buzz in advance of launch day, Harry’s devised a tiered system of rewards based on how many friends their existing customers wanted to refer.
- 5 friends = free shaving cream
- 10 friends = free razor
- 25 friends = free premium razor
- 50 friends = free shaving for a year
There was a double-sided element too: referees received 10% off their first purchase.
What’s important to understand about this approach is that the rewards were available simply for referring potential leads, not when customers converted. Harry’s goal was to create an opted-in marketing database. And they succeeded in grand style, accumulating a massive 100,000 emails in the space of a week!
How effective are customer referral programs?
Here are some curated facts and stats that underline the effectiveness of customer referral programs.
- Referral marketing is the most trusted form of marketing, trusted by 86% of consumers
- 92% trust recommendations over traditional forms of advertising
- Customers acquired through referral spend 200% more than the average customer and make 2x as many referrals
- A consumer is up to 50x more likely to buy a product recommended to them by close friends or family
- Referred customers are 18% more loyal and spend 13% more than non-referred customers
How do you measure the success of your customer referral program?
Another key statistic is that 91% of satisfied customers are willing to refer products and services but only 29% actually do. There are numerous explanations for this deficit of well-meaning intentions being turned into action, but among the most compelling:
- Customers who say they are happy to recommend don’t wish to expend the effort it requires to do so
- Organizations who encounter customers that are happy to refer them aren’t adequately facilitating this process
Customer referral programs are good at making conversions happen and typically incur the cost of rewarding participants only once the conversion has taken place. However, the ultimate measures of success for customer referral programs are:
- The maximum number of people each referring the maximum number of potential customers
- People predisposed to refer choosing to use the customer referral program so that it can be measured and rewarded
Used alongside evidential data about referral activity, customer feedback is (again) critical in ascertaining your success in the following ways:
- Finding out what customers think about the customer referral project
- If they’ve used it
- Why they haven’t
- Finding out if customers are motivated by the rewards
- Both to themselves and people they refer
- If not these rewards then what else?
- How easy is the customer referral program to engage with?
- Do they understand the rules and terms?
- Does it take too much effort?
- Are there any points of friction and delay?
Correlating referral activity data with NPS metrics
One very important way of measuring the success of your customer referral project is to link the referral results with NPS scores.
NPS (Net Promoter Score®) is a commonly used metric for customer loyalty. It asks customers to rate on a scale of 0–10 the probability of recommending you/the brand/a product to a friend or colleague. Those answering at the top end (9–10) are ‘promoters’ and avid supporters and advocates of your brand. Those at the bottom and middle (0–6) are ‘detractors’, the opposite of promoters and potentially damaging to your brand and reputation. In between these two groups are the ‘passives’ (7–8) who are relatively benign and could flip up or down depending on how you treat them.
The only real problem with NPS is that it collects customers’ professed intent rather than action. Hence it is mostly used as a measure for how loyal a customer is likely to be (if someone likes you enough to recommend you to others then they are unlikely to leave) rather than a mechanism for engineering referrals.
By linking the two together, you can learn more about what NPS data is telling you about referral success. For instance, with a customer referral program in place, a company is able to heavily promote it to promoters and track what happens. This will enable future forecasting of referral success based on prevailing NPS score e.g. if the NPS score increases from X to Y then this could equate to increased referral revenues of $Z.
The originators of NPS, Bain & Co, have cottoned on to this approach with the latest iteration of the system: NPS 3.0. You can read more about that here.
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