Blog / Referral Marketing – How your customers refer other customers
Referral Marketing – How your customers refer other customers
Maurice – September 8, 2023 – 10 min read
We all underestimate the power of word-of-mouth. Because nothing makes it easier to win new, loyal customers and go truly “viral.”
That’s why every marketer should look into referral marketing. And this is exactly where our guide should help by answering the following questions:
- What is referral marketing?
- How does referral marketing work?
- What can a referral marketing program look like?
- What are the advantages and disadvantages of referral marketing?
- What are the tips for successful referral marketing?
What is referral marketing?
Referral marketing is a marketing approach that encourages existing customers to refer new customers to a company. This often happens through word-of-mouth.
There are various forms of referral marketing, such as compensated referral programs, sharing information on social media, or simply asking customers to tell their friends and family about a brand.
How does referral marketing work?
Referral marketing is a method that encourages existing customers to refer new customers. This is achieved by getting existing customers to refer their friends, family and acquaintances to a particular company’s products or services through various incentives such as discounts, awards or exclusive access to special offers.
Referral marketing usually consists of the following steps:
- Incentivizing existing customers: In this step, companies offer rewards or other incentives to their existing customers to encourage them to recommend their brand to others.
- Tools for recommendations are provided: In this step, companies provide tools and resources to help customers recommend the company and its products or services, such as referral links, social media sharing buttons, or custom referral codes.
- Tracking recommendations: It is also important to track recommendations and monitor recommendations to ensure that recommenders are actually benefiting from them. Various tracking mechanisms, such as recommendation codes or cookies, can be used for this purpose.
- The recommendations are converted into customers: After that, it is important that the new referrals are actually converted into customers, for this purpose a first-time buyer discount or something comparable is a good idea.
Ultimately, referral marketing is about always rewarding customers and giving them the opportunity to share their good experiences with others in the form of testimonials. If this goal is achieved, the process is rather secondary.
The three pillars of recommendation management
Although the three pillars of referral marketing vary by technique and strategy, customers, employees, and communications/networking are often considered the most important pillars of a successful referral marketing campaign. And the reasons for this are very simple:
The cornerstone of any referral marketing is existing customers. They are the ones who refer people to the company and therefore they should always be seen as a valuable source of new customers. Indeed, companies can only harness the power of word-of-mouth by treating their customers as a valuable marketing resource and always rewarding them for referring others to the company.
Employees are far too often neglected as a true referral source, yet they can be a tremendous asset to any referral marketing campaign through personal recommendations. Satisfied and committed employees are more likely to recommend the company to others. In general, the marketing department should view each employee as an industry ambassador.
Therefore, referral bonuses or other benefits for this group should not be forgotten. After all, employees are the key contributors to the customer experience and can additionally help identify areas for improvement.
Communication and network
The prerequisites for a successful referral marketing campaign are effective communication and a functioning network. Indeed, through the use of social media, email marketing and other means, companies can keep consumers and employees informed about the referral program.
In addition, networking with other companies and organizations can help increase the reach of the referral program and generate new contacts and referrals.
Ultimately, the three pillars of referral marketing are customers, employees, and communication/networking because they are the cornerstone of any successful campaign. Indeed, only when companies focus on these pillars and develop a thorough referral marketing plan can such efforts be successful.
What distinguishes referral marketing from word of mouth?
Although the terms referral marketing and word of mouth are sometimes used interchangeably, there are some important differences between the two terms.
Basically, the two terms differ in:
- their purpose,
- their incentive,
- their control and
- their range.
Referral marketing is a targeted and organized marketing technique that encourages existing customers to recommend the company to others.
Word of mouth, on the other hand, is a more natural and spontaneous form of marketing that occurs when consumers talk to others about a brand.
In referral marketing, customers who successfully refer new customers to a company as referral sources are often offered specific incentives or benefits.
In contrast, word-of-mouth marketing has no formal incentives or rewards.
Referral marketing is a company-driven, regulated marketing concept. The company decides on rewards, follows up on referrals, and executes the program.
Word of mouth, on the other hand, is completely independent and is controlled solely by the consumers themselves.
Because referral marketing targets existing customers who are more likely to recommend a brand’s products and services, it is often more targeted and focused.
Word-of-mouth, on the other hand, has a wider reach and targets a larger audience.
Although there are some parallels between referral marketing and word-of-mouth, referral marketing is a targeted and planned marketing approach that offers incentives and prizes for successful referrals to existing customers, thus also helping to maintain existing customers.
Word of mouth, on the other hand, is a more organic and spontaneous type of marketing where people tell others about a company without expecting official incentives or rewards.
How is referral marketing different from affiliate marketing?
Both referral marketing and affiliate marketing depend on third-party advertising to increase sales as a result, but they differ in some important ways:
- the nature of relations
- the target audience
- the remuneration
- of control
Referral marketing often rewards existing customers for recommending the company to others, while affiliate marketing involves working with third-party vendors who promote the company in exchange for a commission or other compensation.
Referral marketing often targets existing customers who are more likely to recommend the company to others.
Affiliate marketing, on the other hand, is often aimed at a larger audience, such as bloggers, influencers, and other websites that can drive traffic and purchases to a brand.
Referral marketing rewards existing customers who refer new customers to the company in a way that is important to them.
In contrast, affiliate marketing involves paying commissions or other types of compensation to third-party vendors that increase the company’s sales.
Typically, the company manages referral marketing, where incentives and prizes are awarded to customers who refer new customers.
Affiliate marketing, on the other hand, is often managed by an external affiliate network or program that monitors, pays and manages affiliates.
Although both referral marketing and affiliate marketing rely on third-party advertising to generate revenue, their approaches, audiences, rewards, and management differ. Referral marketing is primarily about rewarding existing customers for recommending the company to others, while affiliate marketing is aimed at a larger audience and involves working with third-party vendors to promote the brand in exchange for compensation.
Advantages and disadvantages of referral marketing
However, referral marketing has not only advantages and therefore we want to talk about the disadvantages as well. But first, what are the basic benefits of referral marketing?
Referral Marketing …
- …is a very cost-effective approach to attracting new customers.
- …can help increase the customer retention rate.
- …leads to a higher conversion rate than other lead forms.
- …reaches a very specific target group of potential customers.
- …improves the reputation of a company.
- …strategies can be monitored and evaluated.
However, wherever there are advantages, there are also disadvantages:
- By using only existing customers, the reach is limited.
- Referral marketing is unexpected and difficult to regulate.
- There is a risk that referral incentives will be viewed as bribery.
- Referral marketing depends on a strong customer base.
- Difficult tracking and evaluation of results.
14 tips for successful referral marketing
Referral programs can be as individual as companies and their customer bases. Nevertheless, these 14 tips will help fundamentally with the implementation of any referral marketing approach.
14 tips for successful referral marketing:
- Be specific about your referral program
- Make your referrals as simple as possible
- Never underestimate a good referral program
- Talk about your own positive experiences with other products
- Focus on customer satisfaction
- Build a relationship with your customers and get to know them
- Turn your customers into followers
- Inspire your employees too
- Always pay attention to your brand ambassadors and design your program accordingly
- Organize your referral marketing into a pyramid
- Offer really attractive benefits
- Personalize your referral program
- Align your incentives with your business goals
- Track and follow your recommendations
1. explain exactly about your referral program
It’s important to describe your referral program in detail so consumers know what they need to do to participate and what they’ll get in return. Indeed, this clarity increases basic program participation and engagement.
To accomplish this, companies should explicitly outline the rewards, the referral process, and all terms and conditions of the referral program. Use simple language and give your customers clear information on how to get involved. Make sure the referral program is easily accessible and clearly explained and listed on your website or in your marketing materials.
2. make your referrals as simple as possible
Making referrals as easy as possible increases the likelihood that your customers will join the referral program.
To achieve this, companies should offer clear and simple referral methods such as referral links or custom referral codes. Also, ensure that the recommendation process is simple and straightforward for both the recommender and the recommendee.
Only if you can make referral a seamless experience will you have success with such a program.
3. never underestimate a good referral program
A strong referral program should never be underestimated, as it can be a very cost-efficient and effective tool for acquiring new customers.
Numerous companies are gaining customers through the power of the word of mouth to an extent that is hard to imagine, and all metrics also show that a customer who came to a brand through a recommendation is much more loyal and will make their purchasing decisions in favor of the recommended vendor time and time again.
4. talk about your own positive experiences with other products
It’s important to talk about your own good experiences with other products, as this can help potential buyers build trust. By sharing your own experiences, you can demonstrate your expertise and show that you have only their best interests in mind.
Plus, you’re setting a good example as a recommender. Therefore, think of every referral you make as an extended service that ultimately helps you attract customers.
5. focus on customer satisfaction
When it comes to referral programs, it’s important to focus on customer satisfaction. Since referrals will only happen if the customer experience is great.
To achieve this, companies must offer high-quality products or services and exceptional customer service. This can be achieved by asking users for suggestions, solving their problems and complaints, and thus continuously improving the customer experience. In addition, customized referral tools and incentives can contribute to a more pleasant and enjoyable customer experience.
6. build a relationship with your customers and get to know them
It’s important to get to know your customers beyond the confines of your usual sales and build a relationship with them, as this can help build customer loyalty, making it easier to turn a customer into a referrer.
Businesses can build a relationship with their customers by engaging with them through social media, email, or other methods. Responding to inquiries or complaints promptly and individually can also help build customer trust and build rapport. Personalized incentives and prizes can also show that you respect their business and care about their satisfaction.
7. turn your customers into followers
It’s important to convert your customers into followers, because that’s how you can build a network of engaged supporters who will actively promote and advocate for your business.
Companies can do this, for example, by engaging with their customers on social media, setting up a blog or forum to provide up-to-date information and insights, and offering customized incentives and prizes to encourage engagement. In general, a high-quality product or service and a great customer experience can most easily convert customers into followers.
8. inspire your employees as well
It’s important to inspire your employees because this leads to the development of a great work culture while motivating them to actively promote or advocate for their company.
Companies can help their employees understand and participate in the referral program by providing training and support. In addition, incentives and awards for employee recommendations can help ensure that employees actively participate. Creating a healthy work environment where employee feedback and input is valued can also help increase motivation and engagement.
9. always pay attention to your brand ambassadors and design your program accordingly
It’s important to know your brand ambassadors and develop your program properly, because they can be a tremendous force when it comes to promoting and supporting your business.
Because in fact, most of the time it is:
On average, 3 customers refer one new customer. However, this average value in no way reflects reality. In fact, it is much more likely that 999 customers will not make a recommendation, but one customer will make more than 350.
Therefore, they should design their referral program accordingly and further motivate the actual “brand ambassadors” to advertise their company.
10. organize your referral marketing in a pyramid
Arranging your referral marketing in a pyramid can help in developing an organized and scalable referral program that optimizes the reach and effectiveness of word of mouth.
Companies can do this by implementing a referral program that pays both customers and the contacts they refer, creating a pyramid-like structure that incentivizes customers to refer others, who in turn refer more customers. Incentives or rewards for reaching certain referral milestones can also be used to encourage continued engagement.
Creating a sense of exclusivity or community among top recommenders can final help increase motivation and advocacy.
11. offer really attractive benefits
Attractive perks are especially important because they can encourage consumers to refer others and increase participation in referral programs.
Companies can do this by offering prizes or other incentives that are beneficial to customers and match their interests or preferences. Developing customized referral tools and incentives can also help increase customer engagement and satisfaction. In addition, timely incentives and follow-ups can ensure that customers remain engaged and are encouraged to recommend others.
12. personalize your referral program
Personalizing your referral program is critical because it provides a more engaging and fulfilling experience for customers, increasing engagement and referrals.
Companies can achieve this by creating unique referral tools such as referral links or personalized referral codes that are tailored to each customer. Incentives or rewards that are aligned with customers’ interests or preferences can also help increase engagement and motivation. In addition, contact with customers and responding to their inquiries or concerns individually can help build trust and relationships.
13. align your incentives with your business objectives
It’s important to align rewards with business goals, as this is the only way to ensure that your referral program is financially viable and efficiently meets your goals.
Unternehmen können dies erreichen, indem sie Anreize und Preise schaffen, die mit ihren Unternehmenszielen verbunden sind, wie z. B. die Steigerung des Umsatzes oder die Anwerbung neuer Kunden.
14. track and follow up your recommendations
Monitoring and tracking referrals is critical as it can help optimize and increase the success of the referral program.
Organizations can do this by tracking and analyzing referral data to identify patterns and opportunities for improvement and to make assessments. Contact with customers who refer others and individual follow-up can also help build connections and loyalty.
Developing a system to track and manage referrals, such as referral management software, can also help simplify the process and ensure that all referrals are managed and tracked appropriately.
These tips are all well and good, but does referral marketing really work? If you’re not convinced yet, maybe this will help:
3 examples of referral marketing that works
Referral programs are becoming more common. Therefore, we will briefly introduce you to only 3 relevant examples:
One of the most well-known and effective examples of referral marketing is Dropbox’s referral program. Dropbox was able to grow its user base from 100,000 to 4 million in just 15 months by rewarding both the referrer and the referred with more storage.
With Uber’s referral program, both the referred and the referrer receive a discount on their next ride. This program has helped Uber expand rapidly and become one of the world’s leading ride-sharing companies.
Airbnb’s referral program offers both the referrer and the referred a travel credit for the next stay. This campaign has helped Airbnb attract new customers and increase customer loyalty, which has contributed to the company’s success as a major online travel marketplace.
But how do you actually succeed in tracking your own referral marketing?
How to track your referral marketing
Companies can use a number of tools and capabilities to monitor their referral marketing:
- Referral tracking software: With referral tracking software, companies can monitor and manage their referrals in one place. This may involve monitoring the source of the recommendation, the progress of the recommendation, and the incentives received.
- Unique referral codes: Customers should be given unique referral IDs so that you, as a company, can track the source of each referral and trace it back to the consumer who referred it.
- Google Analytics: Monitoring referral traffic with Google Analytics can help companies determine which referral sources are generating the most traffic and sales.
- Surveys and feedback: If a customer deposits his e-mail address, you must see this as an inexhaustible source of feedback and suggestions for improvement. After all, it’s always about improving your own service to these customers. Collecting customer feedback can also help companies track the performance of their referral program and identify areas for improvement.
- Regular reporting: regular reports on referral program performance can help inform program effectiveness and identify opportunities for improvement.
Conclusion – Building your own referral program
A referral marketing strategy is a critical component of any growth marketing campaign, because nothing can grow your business faster than satisfied customers who become true brand ambassadors through a smart referral program, steadily acquiring new customers.
There are top-notch software solutions for building a referral marketing program, and so you should be thinking more about the overall architecture and service and less about the technical specifics. Just follow our tips and nothing should stand in the way of building such a program.