As marketing and sales professionals, one of your foremost goals would be to increase customers and to ensure that your existing customers stay with you. In fact, a number of businesses combine the two goals. How? Through customer referral programs. The most significant revenue drivers of businesses are expert-rated in terms of how valuable they are to revenue generation. The question is, how to create a profitable customer referral program?
Customer retention is scored to be 52% valuable and customer acquisition to be 45% as per the above-said rating.
Customer Referral programs are no secret. They are a part of most marketing strategies and plans. However, when it comes to execution, a large number of efforts fail drastically 2. Take the example of Worldwide 101, a virtual assistant company that connects founders and executives with skilled virtual assistants. In her blog, founder Sandra Lewis shared how their referral rewards program backfired and nearly damaged their brand, in no time. The reason:
Either the programs are ambiguous, the actual request for a referral is never made to the existing loyal customers, or it leaves out the referrer (the existing loyal client who got you the new client).
There’s one underlying secret to a customer referral program...
Rewarding the one who referred your product/service to his/her friend can increase the performance of your refer-a-friend program. By miles!
Researchers Philipp Schmitt, Bernd Skiera Christoper, and Van den Bulte set out to explore whether customer referral programs actually benefited companies or were they just an added expense. They found promising results, as shared in the Harvard Business Review:
- Their three-year study of 10 thousand accounts in a large bank revealed that customers obtained through referrals are more loyal and valuable than other customers. Referred customers stayed 18% more with the bank and generated 16% more profits.
- Customers who made referrals were essential, good matchmakers. They brought in people who liked the bank’s products and services and because they already knew and liked what the bank offered, they quickly find features that they want and are willing to pay for.
- The bank, thus, required fewer marketing efforts and generated more revenue at a lower cost.
Questions to ask
The researchers emphasize that customer referral programs work for multiple industries, especially for the industries where finding prospects is hard. They urge companies to ask a few simple questions:
- What kinds of customers are most likely to bring in highly lucrative referrals?
- Once the high-ROI referrers have been identified, how can companies market selectively to them
- What referral reward strikes the optimal balance between the acquisition cost and the subsequent value of a customer?
Simple trials can help companies answer these questions and get better at converting their customers’ social capital into their own economic capital.
But what about the customer who referred? What do your existing customers (referrers) care about the most?
Think like a customer
Shalini loves to eat at a particular continental restaurant in her neighborhood. She likes the food, service, and ambiance of the restaurant. The restaurant recently launched a customer referral program – whenever a customer referred them to a friend, the friend would get a 20% discount on their first order. This is great! Thought Shalini and thought about a few foodie friends who enjoy an experience at the restaurant. However, weeks and months passed by, but Shalini made no effort to fill in a referral form. The reason?
“I’m not that excited about this referral program.”
And why is that?
“Because what’s in it for me? Of course, I would like my friends to avail of a 20% discount at the restaurant, but this program doesn’t excite me enough. I feel like the restaurant is squeezing out of me. I would really appreciate it if I too was given something in return.”
Non-cash incentives are 24% more effective at boosting performance than cash incentives.
—The University of Chicago
This is exactly what the restaurant needs to do. Think like Shalini; put themselves in Shalini’s shoes and ask a few simple yet vital questions about why should an existing customer refer your brand to someone?
Incredible rewards; profitable to the company
To understand this, let’s take the much-talked-about case of Air BnB’s success owing to the customer referral program. Like most small businesses, Air BnB had implemented a referral program.
But over time, it wasn’t effective and was mostly forgotten. The company revisited and reinvented the program. Their new referral program encourages existing users to invite friends by giving both the sender and the recipient $25 of travel credit once the invited user completes the first trip.
More than 50% of people are likely to give a referral if offered a direct incentive, social recognition, or access to an exclusive loyalty program.
- Software Advice
Not only did Airbnb focus on the product, but they also put enough emphasis on marketing. They sent out promotional emails that read ‘Send your friend 25$ travel credit’, which made the referrer feel more motivated and less like trying to earn from their friends.
Now, let’s look at the case of Dropbox and how they managed to increase customers to 3900% in just 15 months. The cloud storage and file hosting company based its referral approach on Paypal’s successful model. While Paypal offered referrers a cash bonus, Dropbox offered its referrers additional storage space for free; 500 MB!. This means it’s users got something that they would actually use.
What is more, instead of paying out cash, the company chose to give up space, making use of a resource that they had in abundance and made sure the users could use more of their services and products.
What can companies learn from these successful examples?
- Most importantly, referral rewards have to be two-sided wherein both the referrer and the referee earn something – monetary, in-kind, a product/service, or emotional satisfaction and happiness.
- When you reward your existing customers, it is important to select a reward that resonates with them.
- Rewards do not have to be only monetary. Why not offer creative and unique rewards that your competitors might not be able to offer?
- Like most companies, your company too might already have a referral rewards plan, but if it’s not converting to profits, it’s time to revisit and re-organize the program.
- A good referral rewards program is a great starting point, but if it isn’t marketed well or if it doesn’t reach the right audience, it is pointless.
But have you as a marketer ever wondered, what are customers really loyal to?
A Corporate executive Board study conducted on 7000 consumers across the United States, United Kingdom, and Australia, revealed one key element that is part of a customer’s brand loyalty: shared value. “We saw that emotional attachments to brands certainly do exist, but that connection typically starts with a ‘shared value’ that consumers believe they hold in common with the brand.” – Aaron Lottonn, CEB
Creating shared value and a profitable refer-a-friend program
Learning from researchers, examples from businesses and experts, what are some of the key points to follow in order to make a profitable referral rewards program? Here are some cues:
Personalize your ask
When you make the customers feel they’ve earned the right to make a referral, your program will be more successful, research by Stanford Graduate School of Business revealed.
Make the rewards irresistible
Rewards come in all shapes and sizes, but the best way to go about is to offer something that resonates with the consumer and at the same time goes with your brand experience. This is what Tesla did. The electric car company offered the first person to refer 20 people a free Model S or Model X. Among other referral rewards, were invitations to exclusive parties and to purchase special edition products not available to the public.
1 offline word of mouth impression drives sales at least 5x more than 1 paid.
Know your loyal customers and keep a track of them
Most companies treat all their customers as equals. Big mistake. Keeping a track of the most loyal customers and offering them incentives would only create a stronger loyalty cycle. Treating highly profitable and loyal customers as equal to regular customers could backfire. Highly profitable customers who were expecting better incentives could choose to find other brands. The example of American Express proves this. American Express conducted research on one core segment of its business - affluent business travelers. They realized that the rewards offered by competitors were one of the major reasons why customers were defecting.
Make it discoverable
Along with having a separate tab and space on your website, make sure the referral rewards program is discoverable to all your customers. Emails, blogs and other platforms must have the information clearly displayed.
Offer free complimentary services/products
Here’s what Evernote, the note-taking software does. Evernote awards points to referrers every time they make a referral, which, customers can. redeemed to use the software’s premium features. Not only do referrers get to use premium features, but chances are, they are likely to pay and sign up to the premium account if they like the features. It’s a win-win.
Make your referral rewards program easy
What to do and why to do it should be clearly outlined. The call to action should be clear, easy, and prominently shown on different platforms.
Have a clear target market
Your existing customers need to know who you’re looking for; there’s no need knocking on every door. The more specific you get, the more focused your program will get.
There’s the best time to ask for a referral
A study by Texas Tech University found that 83% of consumers are willing to refer a friend after they had a positive experience with a brand, but only 29% actually do refer. The best time to ask is after a customer has had a successful and positive experience with you.
When referral tools are used, companies are 3x more likely to accelerate referral generation and conversion. Yet only 22% have a tool in place to effectively scale their programs. - Heinz Marketing
Steps to launch your customer referral program
An article on www.inc.com, 7 steps on how to launch your first referral program, shares these cues:
- Set goals, whether you want to grow sales, increase customer loyalty, or grow the brand.
- Define the message. Make your referral reward program clear and easy to understand.
- Choose an incentive. Put yourself in the customer’s shoes and choose the right incentive.
- Create a landing page. This is where customers can get all the information they need.
- Focus on analytics: make sure you have your analytics set up before you launch your program
- Spread the word. The marketing is what will roll out the program.
- Train employees to talk about the referral program
Referral programs can be found in every industry and business model because they work! But have you learned the tricks to make your program work for you?
In today’s world where your competitors are just a click away from your customers, how are you going to make sure that your customers remain loyal to you as well as help your business grow?
1. Quicksprout.com, https://www.quicksprout.com/2018/07/11/how-to-implement-a-customer-referral-program-that-drives-sales/
2. Medium.com, https://medium.com/startup-grind/from-bribing-to-delighting-how-a-referral-program-nearly-damaged-our-brand-5af257a98780