It’s often said that there’s no better advertisement than a happy customer. That’s the simple idea behind referral marketing, which might just be the most cost-effective marketing strategy your business can employ.
What is Referral Marketing?
Referral marketing means inviting customers to recommend your business to their friends, family and colleagues. When done properly, it’s a powerful strategy.
Electric auto-maker Tesla grew through viral word of mouth thanks to its generous referral programme and still offers rewards such as free miles in exchange for sending family and friends its way.
Mattress-maker Casper used referrals to sell £1.3 million worth of mattresses in just 60 days, experimenting with different rewards including Amazon gift cards and 20% off first orders in order to maximise its ROI.
Referral programmes have been shown to increase customer loyalty by as much as 18%, according to loyalty marketing platform SaaSquatch.
This is especially true if your business has a high Net Promoter Score (NPS). Companies with NPS ratings in the top 10% of their industry typically see their referral rates double, and spending by those customers can be up to five times more than average.
How do referral marketing programmes work?
Most referral programmes fit into one of three categories:
- Referrer reward: “Refer your friend to our business and get a £25 credit on your next bill.”
- Referee reward: “Refer a friend and they’ll get a 25% discount on their first order.”
- Dual reward: “Share this voucher with a friend and you’ll both receive £25 to spend with us.”
SMEs with referral programmes that reward both referrer and referee tend to see conversion rates of 4.8% compared to an average of 1.7% where only the referrer is rewarded.
“Referral marketing can be a fantastic growth marketing strategy with low entry costs and low risk,” says Nikki Hesford, founder of digital marketing agency Hesford Media.
“The great thing about referral marketing is that if nobody responds to your campaign, the cost is virtually zero. But if a referral marketing campaign is successful, the ROI can be higher than most other marketing channels.”
Ready to get started? Here’s a quick guide to how to start your own referral marketing programme:
How to set up a referral programme
Step 1: Is referral marketing right for me?
On average, referral programmes generate a response rate of 2 to 3%. This means that for every 1,000 sales your business makes, you can expect 20-30 of those sales to come via referrals.
There are hundreds of ways to measure the benefit of referral marketing, starting with cost versus benefit. Does the cost of the referral marketing programme (incentives + administration) offset the benefit of the programme (increased sales), assuming you generate a typical response rate?
When calculating the ROI also consider the time it takes to set up a referral programme and the commission paid to any referral platforms you might use (which can be up to 5% of sales).
When looking at the benefits of referral marketing, the volume of sales is critical, but don’t overlook the value of increased brand awareness, advocate information (referrals help you identify your brand’s biggest fans) and the lifetime value of new customers after they have accepted an incentive or made the first purchase.
Step 2: What rewards should I offer?
According to SaaSquatch, the top three referral rewards are credit, gift card and percentage discount. If your business sells high-ticket value items, you might want to consider credit. For example, a conservatory company with an average order value of £10,000 could reward referrers with £100, without affecting their profit margin too much.
If you rely on smaller orders from high volumes of customers, a percentage discount might be more appropriate. For example, a company selling underwear online could offer a 10% discount on qualifying orders over £50.
Remember an incentive doesn’t have to be cash. Note-taking app Evernote runs a highly successful referral programme that gives users 10 points for each new friend who signs up, plus an extra five points when they sign in. Points accrued can be redeemed for a free subscription to its service.
Hesford Media recently worked with a large gym chain that used referral marketing to give a unique code to all members of the gym, which they could use to offer up to five friends a free taster session at their local gym.
Each referral counted as an entry into a prize draw to win free personal training sessions and other fitness prizes. In just six weeks, the campaign saw 400 new referrals and generated £9000 in new business. All for an investment of £1,000.
Step 3: How do I track referral marketing?
Tracking referral marketing can be a major undertaking, so it’s important to know what you need to track versus what you can actually track.
Referral marketing generally relies on the new customer entering a code that is given to them by a friend. This code lets your business know where the referral came from.
If you are offering a reward to the referrer (the person sharing their code with friends and family), then you will need to generate a unique code for every customer. If you are only offering an incentive to the new customer, then generic codes that simply tell you “this is a referral customer” will work. In some cases, you might use multiple generic codes for different channels, so you know which channel generated a referral.
To grow its monthly subscriber base, mail-order company Craft Coffee Club added a leaflet with a referral code to boxes sent to existing customers. Leveraging existing shipments helped keep costs low, explains Simon Boydell, Head of Marketing at Craft Coffee Club. The campaign delivers a positive ROI to this day with £5 generated for every £1 spent on running the programme.
Step 4: How do I make referral marketing easier?
The easiest way to track a web-based referral campaign is to use a third-party referral platform. Check out platforms including Buyapower, Talon, ReferralCandy, Extole and Shopify which help SMEs get set up, generate codes and track how they’re used.
To set up a campaign, you’ll need to connect your online store to the referral platform, specify your chosen reward, and create a campaign page that provides customers with all the information they might need about your referral programme.
Linking the referral app to your marketing platform also allows you to share offers with your mailing list, track response rates and give regular “nudges” to remind people about the referral offer.
These types of sites usually charge a monthly fee based on a percentage of sales generated via the referral campaign of up to 5%. For example, Referral Candy charges customers $49 (£35) per month plus a sliding commission rate of between 1.25% and 5%, depending on the volume of sales generated.
Use your American Express® Business Card to set up your referral programme with up to 54 days to clear your balance¹. The Card is accepted on platforms such as Shopify. Earn Membership Rewards® points for every £1 you spend on marketing² and redeem points on a wide range of Membership Rewards to invest in your business including new tech for your team, gift cards to reward employees and much more.
Step 5: How do I make sure my referral marketing campaign is working correctly?
The success of a referral programme lies in ensuring your customers hear about your campaign and know what’s in it for them.
With this in mind, it’s worth spending some time designing a web page that clearly explains the programme and making it easy for customers to find from your website home page. Some referral sites will offer this as part of the package.
Before launching any referral marketing, test the fundamental parts of the campaign. Set up a generic email address and make sure the process runs smoothly, and as expected. Ask colleagues to do the same and make sure all the instructions are clear, and the next steps are clearly expressed.
Step 6: How to review and improve my referral marketing programme
Once your campaign is live, use analytics to compare the performance of different codes and consider what models are most effective – do your customers respond better to credit, gift cards or discounts? Do double or single incentives work better? Is email marketing likely to generate more referrals compared with Instagram?
Step 7: Already have a loyalty scheme?
Here’s how you can integrate your referral programme into a customer loyalty scheme with tips on how to build levels into your scheme and integrate your CRM stack.
- The maximum payment period on purchases is 54 calendar days and is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date.
- Membership Rewards points are earned on every full £1 spent and charged, per transaction. Terms and conditions apply.