Chad Hetherington

Customer referral programs are a widely used marketing strategy for a lot of (majorly successful) businesses — and for good reason. But what exactly are these initiatives? For the most part, everything you need to know is in the name: customer referral. The fundamental nature of these programs seeks to encourage existing customers to refer newcomers, usually their friends and family, to purchase your product or service. This is usually — and best — done by providing a referral incentive, such as:

  •  Cash.
  • A discount code.
  • Store credit.
  • Premium subscriptions.
  • Free samples.

…or something similar.

Here’s an example featuring Evernote’s referral program and how it works:

Customer Referrals evernote

Relying solely on your product, though, is not the best way to go about it. Of course, your product or service has to be good — no exceptions — to get some organic referrals this way. However, as soon as you incentivize the program, there’s an exponential opportunity for growth through customer acquisition, as you’re not only rewarding your existing customer base but tapping into potential customers through a structured referral process.

Let’s take a look at customer referral programs from a top-down point of view, dive into how they work and why they’re important, and then have a little crash course on how to develop your own effective customer referral strategy.

An Intro to Customer Referrals and Referral Marketing


Customer referrals fall under the category of word-of-mouth marketing (WOMM), which is arguably one of the most classic forms of advertising. It’s important to note, however, that there is technically a difference between word of mouth and word-of-mouth marketing: The former is naturally occurring while the latter is actively encouraged by an organization. Here are some examples to paint a clearer picture:

Word of Mouth (WOM)


This phenomenon, if we can call it that, most often occurs when established brands have a great reputation or solid product/service. It happens when one of your customers enjoys or believes in what a company is offering so much that they voluntarily recommend it to their acquaintances.

Word-of-Mouth Marketing (WOMM)


Similarly, word-of-mouth marketing happens much in the same way, except here, WOM is actively encouraged. For example, if a brand has a customer referral campaign or strategy in place, they are most often offering a reward to existing customers who “recruit” new customers.

In short, and perhaps obviously, WOM is the goal of WOMM. Wow.

How a Referral Program Works


Now that we know how these programs work from a broad perspective, let’s get into some of the nitty-gritty details, as well as some examples.

Components of a Successful Referral Program


Depending on the nature of the business, the different elements that make up a successful referral program may differ slightly — but for the most part, they’ll be very similar. The end goal here is to make brand advocates out of your loyal shoppers so that they can encourage at least one new customer with a high lifetime value to convert — but hopefully more!

In general, you’ll want to follow a model that hits home on these components when building out your referral program:

Awareness


First things first: awareness. If people don’t know about a customer referral program, how can they participate? Once you’ve established a program — which, for all intents and purposes in this hypothetical, has already been done — you have to market it appropriately.

Social media and your own website are going to be the best tools to use here. Maybe you create a banner on your homepage that lets visitors know about your new campaign or a dedicated landing page that stands alone and provides all the information that someone interested in participating would need to know. Then, send it out on socials! Let your followers know about the exciting new opportunity, and make sure you include the reward you’re offering to pique their interest even more.

Messaging


The messaging that surrounds your customer referral program needs to be clear. Convoluted and confusing messaging may leave your customers unsure about the rules of the program, what’s being offered and how they can claim rewards after they’ve recruited some of their friends.

In a worst-case scenario, unclear information or shady and indirect rules may even harm your reputation — so say what you mean and mean what you say. It’s crucial to communicate the benefits of participating in the referral program, not just for the existing clients but also for the new ones they bring in. This could involve highlighting the advantages of your loyalty program or the exceptional customer service that supports every customer journey.

User Experience


Beyond clear and honest messaging, your customer referral program, and any associated tech, needs to have an exceptional user experience (UX). It shouldn’t be complicated or hard for customers to figure out how to enroll, sign up for, or take advantage of your referral program. So, whether you have an app, a website, or both, it’s important to ensure that anything associated with the campaign is easy to understand and easy to use.

Integrating the referral process seamlessly into the customer journey can significantly enhance user experience. Provide a simple referral link for sharing, along with clear instructions on how the referral reward can be claimed. This ensures that both the existing customer and the potential customer have a smooth experience. This ease of use encourages further participation and can turn a satisfied customer into a brand advocate.

Rewards and Incentives


Here we are: The lifeblood of customer referral programs.

Offering rewards or incentives is exactly what people expect when they choose to participate in referral programs, so their importance should not be understated.

What exactly does this mean, though? Well, rewards should be well worth your customers’ time and effort, i.e., they should not suck. Sure, everyone likes money to some degree, but offering $1 per referral is probably not going to cut it. Quality rewards will make people excited to participate and, therefore, encourage more activity.

A successful customer referral program hinges on the perceived value of the referral reward. Whether it’s a cash reward, a discount on future purchases or exclusive access to premium services, the incentive must resonate with your customer base. For B2B referrals, where the stakes and transactions are often larger, the rewards might include substantial discounts or enhanced support services. These incentives not only motivate existing clients to participate but also enhance customer acquisition efforts by attracting high-value potential customers.

Tracking


To properly measure the success of the program, you need a way to track and monitor it. Without a tool to do this, you’ll have no idea what’s working and what’s not — which will make it nearly impossible to improve.

This becomes especially important the larger the campaign gets. With potentially thousands of active participants, new challenges arise frequently, and you need to know how to pivot when necessary. Here are some great stats to start with:

– Enrollment or participation.
– Share rate.
– Impressions and outreach.
– Conversion rate.

Implement a robust tracking system to allow for the effective monitoring of key metrics such as enrollment rates, share rates and conversion rates. This data is crucial for understanding the performance of your referral program and identifying areas for improvement. For instance, a low conversion rate might indicate that the referral reward is not enticing enough for potential customers, or that the referral process is too cumbersome. By analyzing these metrics, businesses can fine-tune their referral programs to better serve their existing customers and attract new ones.

How to Bolster Your Referral Program (And Get More Referrals in the Process)


Actually getting referrals can be the trickiest part of the process. Unsurprisingly, getting high-quality referrals takes more than just setting up and shipping a referral marketing program via referral marketing tools. Sure, this is also a necessary part of the process (and why you’re currently reading this article), but there’s a little more to it.

Here are a few ideas that can help you gather high-quality referrals and bolster your campaign — beyond simply having a surface-level program in place.

  • Encourage customer reviews. Encouraging your customers to leave you an online review can do wonders for your reputation. In fact, a majority of customers who have not left reviews for a product or service they enjoyed say they would do so if they were asked. Sometimes it’s really that simple, and customer feedback can go a long way!
  • Focus on the customer experience. Customers want straightforward, fluid and personalized experiences. When you nail down superior CX, the referrals will come naturally.
  • Make the buying journey uncomplicated. Speaking of CX, both the buying and customer journey should be equally intuitive. Supporting buyers throughout the entirety of their journey is a great way to win organic referrals.
  • Introduce shareability. Ever purchased a product online and been prompted to share your new purchase on social media with a hashtag? Encouraging a happy customer to do this with their following is a no-brainer in today’s social media-savvy landscape.
  • Align with customer values. More than ever, consumers want to do business with brands that align with their values. By aligning and communicating with them clearly, you can help win more people over (and inspire your like-minded customers to mention you to their like-minded friends).
  • Build meaningful relationships. Focusing on customer relationship marketing can help build your customer satisfaction and loyalty. By treating each customer as an individual and providing personalized customer support, you create a strong customer community that feels valued and appreciated. This sense of belonging can motivate customers to become brand advocates, actively participating in your referral program by sending referral requests to their network.

Understanding Referral Rates


Your referral rate is, for all intents and purposes, the percentage of total purchases completed with your brand against the number of purchases that were completed as the result of a referral.

Referral rate = Number of referred purchases / Number of total purchases

This is the easiest way to calculate your rate. Another easy way to imagine it is if you had 100 sales at your store, and one of them was a referral, your referral rate would be 1%. But what’s considered a good referral rate, and is it an appropriate way to measure the success of your program?

Across all industries, a referral rate of 2% is considered healthy. Is yours not quite there? That’s OK! Following the steps outlined above (and scrolling to the bottom of this article for more information) are all great ways to help improve your referral rate.

Reasons Why You Need a Customer Referral Strategy


The benefits of a strong customer referral strategy are plenty, but the most advantageous bring things like increased customer loyalty, a higher lifetime value of the acquired customer and a pay-per-performance model that’s conducive to a positive ROI. Here’s a brief breakdown of each:

  • Increased customer loyalty: A product recommendation that comes from a friend or family member is inherently more trustworthy than almost anything else as far as marketing is concerned. That said, a person who is acquired via an authentic recommendation is more easily transformed into a loyal customer.
  • Higher lifetime value: A referred customer is more highly qualified than one that is reached via other marketing channels and tactics. This is mainly due to the trust that is already established between the two parties, making that referred customer more likely to become a recurring patron.
  • Pay-per-performance model: Positive ROI is something that every business is after, and a successful referral strategy is the epitome of the pay-per-performance model. Aside from the possibility of a recurring software fee, with a referral model in place, the amount you pay directly correlates to how successful it is — which is great for your ROI.

The Value of Customer Referrals


To communicate just how valuable these programs can be when they’re executed properly, here are some choice stats:

  • Customers are more likely to convert when they’re referred to you by a friend — up to 4x.
  • On average, referred customers represent a 16% higher value than those who are considered non-referred.
  • Customer retention is majorly important. In fact, as little as a 1% increase in retention rate can result in as much as a 20% annual boost in revenue.

OK, we’ve discussed the nature of the customer referral and the referral marketing program, as well as dove into the value that these initiatives offer businesses. Now, it’s time to build your own strategy so that you can reap the benefits for yourself!

Onto the tutorial!

How to Develop an Effective Customer Referral Strategy


If you’re looking for a more comprehensive guide on how to build a winning customer referral strategy, we’ve written about it! But, if you’re looking to save a click, we’ll recap some of the key points outlined in that article about how to build out a referral program here — for your convenience!

  1. Have a great product or service. This is the gold standard to increase your chances of getting referrals. People recommend stuff because they like it, find it useful or understand its value. Behind your referral program, you must have a strong product!
  2. Know your target audience. Your target audience is the most likely group of people to purchase your product or service. This should be clear in your messaging because when it comes time for a customer to recommend you, you want them to share your brand with the people in their circles most likely to convert.
  3. Set achievable goals. Goals are essential in business, and it’s no different here. Set actionable (and attainable) ambitions for your program and measure its success.
  4. Build a strong marketing campaign for the program. An exceptional referral program that goes unnoticed is not very exceptional after all. Make sure that you’re sharing your new initiative on socials, building a landing page on your website and making it known all around so that eager customers can take part!
  5. Make it easy for customers to use. We’re back to CX! A referral program needs to have top-notch CX so that it’s as easy as possible for people to take advantage of. This will not only satisfy existing customers because it’s simple for them to receive their reward, but it may also increase the chance that they send it out to more people.

Well, that was quite exhaustive — but we hope you found some value here! Customer referral programs are truly a win-win for everybody. When done effectively, customers and newcomers both walk away with a prize (and a great product/service), and you are, like magic, suddenly serving more customers all around.

Referrals FTW!

Editor’s Note: Updated July 2024.