The Complete Referral Program Guide

Humans love to share. It’s in our nature. If we have a great experience — whether it’s discovering a new product that makes our life easier or having a delicious meal at a local restaurant — we want to tell others all about it. And thanks to the omnipresence of social media today, sharing our experiences with our closest friends and family, and even complete strangers, has become a cinch.

Marketers understand this impulse and know that word-of-mouth advocacy of a product or service can be an extremely powerful tool for expanding a brand’s customer base, building loyalty, and ultimately, generating revenue. But how do businesses specifically tap into this power? They establish referral programs — supported by referral marketing software — to support their initiatives and marketing campaigns. In this guide, we cover all of the basics and benefits of building an effective referral program.

A referral program is a marketing strategy that encourages existing customers to vouch or advocate for a business’s product or service. These programs rely heavily on word-of-mouth marketing, or the organic conversations that people are having about the product or service.

The goals of referral marketing in all of its forms — from customer recommendations to official ecommerce marketing partnerships — is to generate high-quality, targeted leads that will increase brand reach and boost sales. These programs operate under the premise that referred consumers are likely to become converted customers because they’ve been driven to the brand by people they trust.

A customer referral program should provide the following:

• Easy and safe methods for customers to submit their referrals
• Capabilities for accurately tracking the success of those referrals
• Rewards or incentives for each verified referral

Products and services in industries such as fashion, beauty, music, film, automotive, and home decor are natural fits for referral programs, given the cultural trends and attraction driven by social media. More functional services and products such as communication services, insurance, banking, or utilities have to lean harder on higher-value referrals from existing customers. The higher-value the customer, the more robust the loyalty program.

A referral program attracts new customers who align with the brand and want to make purchases. Typically, the referral leads are much more apt to purchase because of the trust that already exists between the referrer and the referred friend or family member. By tapping into this trust, referral programs increase the customer base while decreasing the marketing spend. When strategically planned and executed, referral programs:

• Build brand credibility
• Provide cost-effect customer acquisitions
• Produce higher-quality leads
• Increase customer retention and lifetime value

Harvard Business Review reports that referred customers buy more and make 30–57% more referrals than other customers.

Think of a referral program as an invitation to become a brand ambassador. When a customer joins the program, the company shares a unique code or referral link that the person can then share with their network. Most referral programs include the following features and capabilities.

• Signup: The customer registers on the referral system and creates a customer profile.
• Referral code or link: Using the referring customer’s unique identifier, referral program software is able to track who is doing the referring, who is accepting the referral, and the type of incentive or reward the company is offering.
• Incentives: Most referral programs include an incentive to entice the new customer to make a purchase. This could be in the form of percentage discounts, dollar discounts, reward points, or a free gift.
• Referrer awards: This incentive offered to the referrer may be the same reward as what the newly referred customer received or a different reward altogether.
• Tracking: Referral program software tracks referrer and referee activity and determines whether referral codes or links are being shared with multiple leads.

There are two basic types of customer-referral programs.

• The referral-recipient model focuses on who receives the rewards.
• The referral-reward model focuses on how many customers receive the rewards.

Referral-recipient models encourage the referrer, the referee, or both parties to interact with or purchase from the brand. These programs are either one-sided or two-sided. One-sided programs provide incentives to either the referring customer or to their referred friend or family member, but not to both. Two-sided programs provide incentives to both the referring customer and their referred friend or family member. Companies may give the referrer and referee the same incentive or different ones.

Referral-reward models are focused on how recipients receive incentives, not who receives them. They support one- and two-sided programs. Here are some examples.

• Standard reward program: These provide the same incentive for every referral and can support one- or two-sided programs.
• Tiered reward program: This type offers different incentive levels, which are typically based on the number of referrals a customer shares.
• Multistep reward program: These programs reward customers after the referee successfully makes a purchase, accomplishes a step, or achieves a brand milestone. It’s similar to the tiered reward program but focuses more heavily on the sales-funnel stage that the referral reaches.
• Gamified reward program: These create a more fun (and potentially competitive) referral experience. While this type of program is engaging, it’s the most complex model to manage and structure given the measurements and tracking required. Examples of gamified reward programs include public leaderboard for bragging rights, incremental levels that increase customer status, and awarding badges or achievements.

If you’re looking to build a successful referral program that attracts quality customers who stay longer and spend more with your brand, here are some steps that can help.

Step 1: Set goals and define the target outcomes

Decide whether the program is helping scale a new product or service, factoring in top- and bottom-line growth versus top-line revenue generation only for an existing product or service. Set key performance indicators (KPIs) and goals to track and measure the effectiveness of the program. These could include hitting a set number of leads, gaining a target number of new social media followers, reaching specific revenue growth, or increasing conversion numbers.

Step 2: Start with a great product

Ensure that the referral program is built around a high-quality product or service that has a strong reputation and is valued by customers. This assumes that all of the necessary homework — including product development, market research, and product trials — has taken place.

Step 3: Understand target customers

Identify the customer who is an ideal referrer, and use ecommerce data and marketing analytics to understand their influencing behaviors and why they might prefer your product or service over the competitors’. Regularly send out friendly referral reminders to your target audience, and look for opportunities to ask customers who’ve had positive experiences to act as ambassadors. Be strategic and target the most loyal, satisfied, and profitable customers as brand champions.

Step 4: Determine the referral incentives

Conduct research to better understand what rewards or incentives customers are likely to want, and incorporate them into the referral program. Keep in mind that research shows that two-sided referral models are the most effective.

Step 5: Choose popular incentives or rewards

Market research will prove invaluable as you determine what kinds of incentives and rewards customers want the most. Consider offering customers discounts, coupons, store credits, loyalty points, product or service upgrades, free products or subscriptions, or branded swag items. Don’t forget to set — and stick to — a budget.

Step 6: Select the right loyalty referral marketing tool

Choose a loyalty referral marketing tool that manages referral invitations, generates unique codes or links, and tracks conversions. Look for tools that provide insight into referral-program progress and allow you to track how many referrals customers have made as well as how many referees have acted on those referrals.

Step 7: Keep it simple

Focus on reducing any unnecessary friction points that inhibit customer referrals. Incorporating a clear call to action (CTA) will ensure that participants know exactly what they have to do to earn the incentive or reward. Provide secure and easy ways for customers to make referrals and share codes or links, specify what the incentives will include, and clearly communicate eligibility requirements.

Step 8: Use innovative approaches

Gamification, for example, is an effective strategy for keeping referral programs engaging. It also helps activate customers’ “fear of missing out,” which is a popular social-sharing strategy. Periodically refresh the program’s messaging, look and feel, and incentives so that it doesn’t feel stale.

Step 9: Market the campaign across all touchpoints

Use the principles of activation and discovery to ensure customers know about the referral program and where to find it. At a minimum, make sure your marketing plan includes the initiatives on your company website and social-media channels, and in emails, newsletters, and blogs.

Step 10: Remarket and remind

Make meaningful contact and remind those who showed an interest but didn’t follow through with the program of its rewards. If a referrer hasn’t made a referral in a few months, consider offering an extra incentive for a new referral. In cases in which a friend has not accepted a referral, send an email to remind them that the referral offer is still waiting for them.

Step 11: Closely follow analytics and reporting

Last, take frequent advantage of analytics and reporting to assess the success of campaigns and learn what’s working and what’s not. Based on these findings, tweak and retest the referral program and supporting systems to improve conversion rates.

While there are numerous advantages for businesses that have a referral program throughout their lifecycle marketing, perhaps the biggest benefit is the potential for growth. These incentivized programs — bolstered by retail loyalty program software — provide opportunities for cost-effective customer acquisition, build brand credibility through positive word-of-mouth endorsements, and foster customer loyalty that translates to increased reach and revenue.