Finding the right method to acquire new, valuable customers for your business is a tough job. Financially, it can cost even four times more than retaining your existing ones. Still, new buyers are essential for a company to grow.
But what if you could reduce the cost of acquiring new audiences while increasing revenue from existing customers?
Brands like Dropbox and PayPal have already done that and managed to grow 3900% in just 15 months or achieve an impressive 10% daily growth, respectively. The key to their success is a well-built referral program with a robust reward structure that leads to an increased customer base.
We'll show you how to create a referral program, following six practical tips and real-world examples of impactful schemes to succeed in referral marketing.
What is a referral program?
A referral program, often called word-of-mouth promotion, is a type of marketing strategy that rewards existing customers for introducing your product or services to people in their network.
Customer referral programs are steadily becoming a crucial part of growth for industries characterized by rare and high-value purchases like the automotive industry, banking, retail, and many others.
A successful referral program is a proven way to boost your customer loyalty and ensure customer retention. Buyers referred by a friend are 18% more likely to stay with your company and subsequently generate more revenue, according to a study by Harvard Business Review.
Usually, the referring customer is called the referrer, while the referee receives the recommendation via your referral program software. So, when it comes to referral marketing strategy, it really takes two to tango, given that referral campaigns are based on relationships between friends, family, or even colleagues.
So, quick recap:
- Referrer – the one that invites a friend.
- Referee – the one that is invited to join.
What are the benefits of referral programs?
Worldwide, referral programs have brought in thousands of users and generated immense revenue. One of many referral program success stories is PayPal. This world-renowned online payment system has chosen the referral scheme as its main growth engine, achieving an impressive mark of 10% daily growth.
Effective referral programs have also been shown to reduce customer acquisition costs and foster positive customer relationships – thus motivating people to invest more in your product or service.
What's more, Nielsen's survey of trust and advertising found that referral marketing ranked highest across all demographics, ahead of daily advertisements, editorial content, and sponsored campaigns. As a result, it makes it the most cost-effective marketing strategy for companies.
6 best practices to make a successful customer referral program
Referral programs can be simple, involving a few users, or complex, which are supported by powerful referral marketing software. Before starting your own customer referral scheme, check out this list of proven business tips on how to create a referral program that will give you an edge over others and bring you scores of new customers.
1. Set clear goals
What is your focus going to be? Advocates, referrals, or maybe both?
Let's assume you want your number of referrals to grow by 5% per month. To hit your goal, how many advocates must share referrals per month? Set a specific purpose so that you can track whether your referral marketing is on the right trajectory.
Here are a few examples of clear goals for your customer referral program:
- Decrease the Customer Acquisition Cost (CAC) by X%.
- Increase CLV, revenue, or average purchase value of referees vs. non-referees in X%.
- Get X new customers monthly from referrals (and compare changes week by week).
Setting goals for the referral program is crucial – if you fail to do so, evaluating the scheme's success becomes complicated. When developing and optimizing your referral program, keep in mind that sometimes goals can change.
Remember:
Setting realistic targets early on allows you to build a valuable loyalty system over time without the added stress of missed stretch objectives. Going slow and steady really wins the race.
2. Design structured benefits
Design a balanced referral program rewards system to entice both existing members and new customers. This could involve providing incentives to both parties, such as discounts, gifts, charity donations, or even tiered rewards based on the number of successful referrals.
By offering diverse referral incentives, you cater to a wider range of preferences, increasing the appeal of your program. Also, keep in mind to convey them concisely and to the point so that it's easier to remember how to get them, as Broadway Bank did.
Well-thought incentives serve both the referring person and the referee. It'll be easier for new customers to commit to handing over their money with a suitable set of incentives motivating them. The combination of a discount and a friend's recommendation makes it an offer not many will pass up.
Before selecting incentives for the referral process, answer the following questions.
Question 1: What motivates your customers to refer companies to their family and friends?
Gain insight into the driving forces that prompt your customers to enthusiastically advocate for your brand among their social circles. Comprehensive research is essential and dive into what triggers their inclination to refer companies to their family and friends.
Statistical evidence indicates that the implementation of referral rewards can amplify the likelihood of successful referrals. To arrive at a well-informed decision, engage in conversations with your existing customers. These interactions will yield invaluable qualitative data, shedding light on the underlying motivations that can be harnessed to optimize your referral program's effectiveness.
Healthy Paws Foundations example
Sometimes, people are driven to help others without expecting material rewards. The case of the Healthy Paws Foundation exemplifies this in referral loyalty programs, where the focus is on supporting new members rather than receiving incentives.
The foundation established a referral loyalty program called "Healthy Paws." This program encourages individuals to refer their friends to assist homeless pets.
The brand encourages spreading the word about Healthy Paws to people's friends who love pets. When a referral is successfully completed, Healthy Paws Foundation donates on the member's behalf to support homeless pets.
These donations enable pets in critical need to receive essential medical care and supplies, bringing them closer to finding a forever home. Isn't that wonderful and compassionate?
Question 2: Who receives the reward?
The foundation of your referral program lies in the delineation of who should reap the benefits of your incentives. Contemplate whether your program should adopt:
- a unilateral approach, wherein only the referrer receives a reward, or
- a bilateral model, where both the referrer and the referee are duly recognized.
For instance, consider offering a 20% discount on the next purchase for the person referring and a 15% discount for the new customer.
You can also introduce tiered rewards: if a customer refers three friends, they receive a free product; if they refer five friends, they get a higher-value gift. This approach appeals to customers at various engagement levels.
Here are the most popular referral program rewards approaches:
A) Two-sided referral campaign. The referrer receives additional points or a reward when a new user signs up or makes their first purchase via recommendation. Two-sided referral programs are commonly regarded as emblematic of exceptional customer service, as they not only acknowledge the contribution of your loyal customers but also extend a welcoming gesture to potential new clients.
B) Earn when a referee buys something. The referrer gets points every time the new member buys something.
C) Referral milestones campaign. A referrer gets reward A after inviting three members and reward B after referring a total of 10 new customers.
Ponder the implications of each approach in alignment with your brand's ethos and overarching objectives.
Question 3: How should the mechanics of the refer-a-friend program look?
Conceiving the mechanics of your refer-a-friend program requires meticulous consideration. Craft an engaging and user-friendly framework that seamlessly integrates into your customer experience. This encompasses elements such as referral tracking, reward distribution, and ease of participation.
The visual and procedural aspects of your scheme should resonate with your brand's aesthetics and core values. Strive for a referral program that isn't only efficient but also resonates with the ethos of your business, ultimately fostering a sense of camaraderie and mutual benefit between your brand and its advocates.
Referral incentives, also known as referral rewards, are an essential part of any successful referral marketing program. They help motivate your customers to be brand ambassadors for your products or services.
Remember:
The success of your referral program depends on knowing your target audience and choosing the right set of incentives and rewards accordingly.
3. Establish clear conditions
Establishing transparent conditions is crucial to maintaining the integrity of your referral program. Specify that the new referral needs to make a purchase within a certain time frame, such as 30 days, to trigger the reward. Additionally, set a time limit for using the referral link to encourage prompt action.
Uber’s example
For instance, Uber's referral program requires the referred friend to sign up using the referrer's unique referral code or link. Once the referred friend takes their first ride using the Uber app, both users receive credit in their accounts. The conditions are straightforward: the new user must complete their first ride within a certain time frame, usually a few weeks, to trigger the reward.
4. Implement anti-fraud measures
Prevent fraudulent activities that could potentially exploit the referral program. Implement safeguards like limiting the number of referrals a single user can make within a given period (e.g., a maximum of five referrals per month). Requiring a purchase before rewarding the referrer ensures that the referred customer is genuinely interested.
PayPal’s example
PayPal's referral program offers both the referrer and the referred friend cash rewards when the referred friend signs up, links a bank account, and completes a qualifying transaction. The qualifying transaction varies by region and may involve sending or receiving money. Additionally, PayPal implements strict rules against self-referrals and multiple accounts.
PayPal's multistep process ensures that referrals involve genuine users actively using the platform for financial transactions. By requiring the completion of a transaction and linking a bank account, PayPal adds layers of verification to prevent individuals from creating fake accounts solely for referral rewards.
Remember:
Take precautions against fictitious emails or throwaway addresses. For instance, in cases where users register with email addresses similar to "name.surname+10@gmail.com," it's advisable to validate the authenticity of these addresses before providing rewards. This is important because email addresses in such formats are aliases of the primary address.
5. Invest in quality acquisition
While prioritizing the quality of referrals is crucial for long-term success, quantity also holds its significance. Aim for members who are genuinely interested in your products or services and are likely to become loyal customers and encourage your buyers to refer individuals who align with your target group is essential. In other words, reward customers who refer individuals with a history of engagement, such as previous purchases or interactions with your brand.
Consistently tracking the long-term value of customers generated through referrals allows you to assess the effectiveness of your referral program accurately. Suppose you observe a low quality of referrals, characterized by a prevalence of one-time buyers or individuals with no transaction history. In that case, this indicates potential issues with the program that need to be addressed.
Sephora’s example
Sephora's referral program encourages customers to refer friends passionate about beauty and cosmetics – rather than solely focusing on the number of referrals, Sephora rewards clients who refer friends with a demonstrated history of purchasing beauty products. This ensures that the referred individuals align with Sephora's target audience and are more likely to become valuable and loyal customers.
By prioritizing the referral of customers with a history of purchasing beauty products, Sephora ensures that the referred friends are genuinely interested in their offerings. This approach drives high-quality referrals and reinforces the sense of community among beauty enthusiasts.
6. Enable seamless sharing
Simplify the sharing process by enabling one-click sharing options. Make it effortless for your existing customers to share their referral links through popular communication platforms such as WhatsApp, Messenger, or social media.
By eliminating friction in the sharing process, you increase the likelihood of your program being shared more widely, amplifying its reach and impact.
Urban Decay’s example
For instance, Urban Decay, the cosmetics brand known for its bold and edgy makeup products, incorporates their unique style into their seamless sharing strategy. By framing the referral program as a way to be part of a "beauty revolution," Urban Decay taps into their customers' desire to challenge beauty norms and showcase their unique style.
To get started, users simply need to log into the Urban Decay account and go to the "Refer A Friend" tab located in the settings. The brand assures that they'll receive a special code entitling them to a 20% discount on their first order, provided their purchases exceed £35. Then, the loyalty program participant must keep an eye on their email inbox, as Urban Decay sends the discount code five days after a friend successfully orders.
In addition, there's no restriction on the number of friends or family members who can use the sharing link – members can send a unique referral link to any number of people.
Making it easy to share the referral program
Bear in mind that the best way to get customer referrals and increase referral sales is to spread the word. That said, you need to promote your referral program. How do you do that?
- Use email marketing to regularly promote your referral program among existing customers.
- Create a referral landing page that will concentrate the referral traffic from all campaigns.
- Automate promotion with referral management software to keep your users engaged by making referring as enjoyable as possible – automatically send welcome emails, reminders, and unique referral links to your users when they need them.
- Build social sharing into the referral program to access huge lookalike audiences like your customers.
- Make your program visible by including it in your main menus, navigation bars, and stores. It's also a good idea to craft a referral program page containing all the information.
- Run a paid social media campaign if needed. Remarketing can boost the number of referrals in a much more cost-effective way than your run-of-the-mill paid ads.
By incorporating these best practices, your customer referral program will have a solid foundation for success. Always remember to promote customer referral programs exactly where your loyal consumers are because right next to them is a group that may be interested in your brand!
Plus, conduct continuous monitoring and optimization based on program performance and user feedback to ensure its effectiveness and relevance in increasing customer engagement and growth.
Successful customer referral program examples
Take a look at some of the best referral program examples, which have utilized referral marketing software and created a reward structure that has resulted in loyal customers, lower acquisition costs, and very impressive business results.
Tesla's referral program
Tesla, Inc. is an electric vehicle and clean energy company that designs and manufactures electric cars, battery energy storage, solar panels and solar roof tiles, and related products and services. With a market value of $20 billion, the company has become one of the world's twenty most valuable companies in 2021. To make it even more remarkable, instead of heavy advertising, Tesla purely bets on referrals and word-of-mouth marketing.
Tesla's referral program is a prime example of how a customer-centric referral program can generate a 40x ROI. While referrals were already coming in before Tesla launched its referral marketing program, the company took the entire referral process a step further and consequently yielded great results.
This brand proved that the best referral programs empower customer behaviors. By designing referral programs that reward referrers and referees with a $1000 discount or free services, Tesla boosted and standardized their most valuable marketing channel. This generous referral program also meant that Tesla's happy customers brought in more people, making the referral program engine a very profitable venture.
Tesla spent a great deal of time experimenting with different referral schemes right from the start. In recent years, the company has introduced as many as six iterations of its program. Changes to the Tesla program were well analyzed by Georgette Mikhael from Loyalty & Rewards. From the two-sided program, rewarding both the referrer and referee with cash rewards, to offering free Tesla Supercharging or the latest program iteration offering discounts for Solar Roofs.
The Tesla customer referral program is a great example of the need to iterate your campaigns to make them profitable for both customers and the business.
Referral campaign configuration in Open Loyalty
- Trigger: Referee's purchase of the new Solar Roof.
- Rule for referrer: After the referred customer purchases the Solar Roof, both the referrer and referee get a $300 discount for Solar Roof.
- Trigger: Referee's purchase of the new Tesla car.
- Rule for referrer: After the referred customer purchases the car, both the referrer and referee get free Tesla Supercharging.
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Dropbox's referral program
In Dropbox's case, the program was built on the assumption that existing users would be motivated to actively engage by inviting new users to join the platform. This involvement was expected to stem from the program's incentive structure, offering bonus storage space to users for each successful referral they made.
The program likely employed a tiered reward system, progressively increasing the bonus for subsequent referrals. Dropbox likely anticipated that the value provided to new users through its services would lead to sustained engagement beyond the initial sign up, further contributing to the platform's growth.
To ensure fairness and maintain program integrity, the company likely capped the storage bonus a user could accumulate, and employed measures to detect and prevent fraudulent activities. The program likely came with terms and conditions specifying eligibility criteria, referral time limits, and guidelines for sharing referral links through various communication channels.
Thanks to the well-designed customer referral program, Dropbox, the online storage service business, grew from 10K registered users in September 2008 to a staggering 33.9M by September 2019. Dropbox's referral program ultimately became their main growth engine and was responsible for 35% of daily signups.
Dropbox implemented a two-sided referral program as the final part of their six-step onboarding process. It used its product as a reward. To make it even easier, the company made sharing as user-friendly as it could be. Happy customers could refer friends via email, by sharing a personal referral link, or through social media apps.
The referral process ultimately increased signups by 60% and generated more than 2.8 million direct referral leads in the first 18 months.
Referral campaign configuration in Open Loyalty
- Trigger: Referee's account registration via a unique referral link.
- Rule for Referrer: After the new customer activates their account and downloads the app, the referrer gets 500 MB for each successful referral. The referrer can get up to 16 GB for all referrals.
- Rule for Referee: The referee gets 500 MB of free storage after signing up using the referral link.
Harry's referral program
Harry's, a direct-to-customer brand that sells shaving equipment and men's personal care products, is another great example of an effective referral program in action; bringing in 100k (sic!) new subscribers and 65k referrals in the week following its launch.
This referral program implemented a milestone rewards system based on how many customers were brought in by the referrer!
Harry's entered a saturated market back in 2012 to compete with behemoths like Gillette and Venus. However, they identified customer pain points. namely the high price of quality razors, and addressed them, by making theirs for a much better price.
As of today, Harry's employs 40 domestic employees, has an online store and a barbershop in New York City, as well as an online magazine.
Harry's also made referring easy. It only took a few steps for referrers to send a referral link. The core part of their referral program was a two-page microsite that collected email addresses and email communication.
After submitting their email, the user was redirected to the referral landing page, where a gamified referral program awaited them. To boost the referral program messaging, Harry's ran paid advertising campaigns on Facebook and Instagram.
Referral campaign configuration in Open Loyalty
- Trigger: First purchase of the referee.
- Rule for Referrer: The referrer gets various rewards after reaching a specific number of successful referrals:
- Referred 5 friends — free shave cream
- Referred 10 friends — free razor
- Referred 25 friends — free shave set
- Referred 50 friends — free blades for the whole year
MSI's Rewards Program
MSI is a world leader in gaming, content creation, and business and productivity solutions. MSI has a wide-ranging global presence spanning over 120 countries, and it recently introduced its new referral program called MSI's Rewards Program. The program seeks to maintain contact with end customers, build an engaged community, and increase the cross and up-selling of their products.
Buying gaming gear isn't something that happens very often, so MSI implemented a referral loyalty program to acquire new customers. MSI Rewards Program members can earn points for referring friends, so every time a friend registers for MSI hardware, points will be credited right away.
Members of the MSI Rewards Program can invite friends via email. They can then check the invitation status directly from the customer portal. By maintaining transparency, members are more likely to engage with the program.
Referral campaign configuration in Open Loyalty
Rule 1:
- Trigger: The referee registered and activated their account.
- Effect: The referrer gets 50 points.
Rule 2:
- Trigger: The referee has registered and purchased an MSI product.
- Effect: The referrer gets 100 points.
Next steps
Hopefully, after reading this guide, you figured out how to create a referral program and what to do, and what to avoid to be highly successful and achieve your goals.
Don't stop here, though. Browse our next worthwhile read, "10 Market-proven loyalty campaign templates (2023)" to start on the right foot.
