Referral Marketing 101: Everything Needed to Build a Referral Program

When your potential customers look for a business, where do you turn? If they have a friend or family member who recently hired someone, they’re likely to ask them for a recommendation. If they don’t have a large network in your city or town, they might turn to a review site like Angie’s List or Yelp. Essentially, they need a referral so they can find you. What better way to incentivize your customers to refer you than through a referral program? Let’s get into creating a referral program.

A referral is a trusted recommendation from another individual. As a business owner, customer engagement specialist, or marketer, you want to ensure that when people are asking about your services, your current customers are quick to recommend you.

Referrals are important for businesses of all sizes and in all industries. Whether you run a hair salon, a software company, or freelance marketing consulting business, you need to build a referral program that provides you with a steady stream of new customers.

Why do referrals matter in marketing?

Referrals matter because people ask each other when they want recommendations on products, services, and experts. Not only do they ask, but they often act on advice from their friends and family.

In fact, a study by Nielsen showed that referrals are the most trusted form of advertising by a large amount. It makes sense– if a friend tells you how great a product is, you’re likely to give it a try.

You probably already spend a healthy amount on advertising and marketing in the hopes that these avenues will drive profits. You may already carefully consider how much it costs to acquire a customer (cost per acquisition, or CPA) through certain channels.

Referrals, however, are often free. By creating an army of happy customers, you’ll be able to spread the word about your business through the mouths of others. Customer referrals drive profits at a low price. Plain and simple. Before we can look at how to build a referral program, we need to make sure we know what a referral program is.

What is a referral program?

The best way to get referrals is to offer exceptional products and services. When your offerings impress your customers, they’ll be happy to refer you to others in need.

However, these happy customers might not freely spread the word about your services without a prompt from a colleague, friend, or family member. If no one asks, they might never tell. So, we need to look at how to create a referral program that helps you spread the word.

A referral program is an organized process in which customers are rewarded for spreading the word.

For example, customers at a gym might get two free personal training sessions for referring a friend. The friend, coming to the gym because of a referral, would get the same deal. Because there is an incentive to refer someone, it further encourages a customer to complete a certain action. In this case, it’s referring a friend for two free personal training sessions. Referral programs prompt customers to refer.

Why do you need a referral program?

A well-organized referral program can help any small or mid-size business get new, loyal customers at a very low price. These programs incentivize happy customers to share their feelings in exchange for a small gift.

But referral programs aren’t just for sharing lovey-dovey feelings. These programs generate substantial and tangible ROI. Yep, referral programs bring in big bucks. Not only that, these referral programs don’t just bring in new customers, they bring in good customers.

A group of researchers at The Harvard Business Review studied 10,000 accounts at a large German bank for three years. The bank offered a simple referral program– they would reward anyone who referred a friend with €25. The researchers found that customers obtained through referrals were both more loyal and more valuable than other customers. In fact, these referred customers were about 18% more likely to stay with the bank. The researchers also found that these referred customers generate about 16% more in profits. At the end of the day, the bank earned a return of 60% from their initial €25.

You need a referral program to encourage your happy customers to tell their friends, so you can acquire more loyal customers who love your brand. Let’s see some ideas on how to make a referral program.

How to build an effective referral marketing program

Now that you understand why referrals and referral programs can help your business, it’s time to get tactical. How can you build an effective referral program that actually works?

Provide exceptional product

Providing exceptional products and services is the first step in building an effective referral program. In fact, if what you offer isn’t exceptional, people won’t recommend you (not how you start a great referral program).

“Believe it or not, I built my entire business through word of mouth referrals,” says Ritika Puri, Founder of Storyhackers, a Silicon Valley-based marketing firm in an interview with Grasshopper.

But Ritika didn’t get these clients because she’s lucky– she got referrals because she does amazing work. “I genuinely love getting to know my clients and love to make them 200% happy,” she said. “I am very passionate about (and completely believe in) the work that my clients are doing. This passion guides me towards amazing projects and people.”

Whether you run a marketing firm or a small, local business, you can learn from Ritika. You must be dedicated to exceptional products and services at all times. Otherwise, it will be hard for a referral program to take off.

Make it easy for existing customers and new ones

The best referral programs make it easy for customers to tell others about your brand. If a customer has to jump through hoops just to refer a friend, they’ll give up on the process early in the game.

“Referral programs should be convenient,” says Vahagn Aydinyan, Digital Marketing Manager at TTAG Systems. “Customers aren’t willing to put too much effort into taking advantage of a referral promotion.”

For example, American Apparel, a popular clothing retailer, sent an email to their subscribers to encourage them to share the brand with their friends. In exchange, the subscriber gets a 20% off coupon, and so does the friend they refer.

But the reason American Apparel’s program works isn’t because of this email. Instead, it’s because of how easy it is to refer a friend. If you click on the email, you get directed to the American Apparel website and see the following message:

American Apparel allows subscribers to share the coupon via email, Facebook, Twitter, or by using a direct link and even provides a pre-filled copy to make it easy to explain the deal. The process is easy as pie, making it easy for everyone to participate.

Come up with a referral program that’s right for your brand

All brands are different, and the referral program that works for a clothing retailer is going to look a lot different than one from a B2B software company.

To figure out what type of referral program will work with your customers, think about what they’d most benefit from. In the case of a cosmetics retailer, customers might like to receive a free product or sample for making a referral. Customers at a software company, however, might prefer a substantial account credit, or the ability to access a paid feature for free. There are a ton of ways to reward your customers and their referrals, just make sure whatever it is, fits your company.

Keep in mind that the best referral programs offer something for the current customer, as well as for the person they refer. If you only offer something to the current customer, the other person will be less likely to take advantage of the connection.

Ask yourself:

  • Who are my current customers? What types of prizes would they most enjoy?
  • Are the rewards for this referral program on brand? Do they make sense for who we are?
  • Am I offering something to the current customer as well as to the new customer that is getting referred?

Implement analytics and tracking

In order to see whether a referral program is working, you need to make sure you’ve implemented analytics and tracking systems. This is where referral program software comes in handy, as these solutions come with analytics and tracking built in.

If your development team chooses to build a referral program on its own, it’s absolutely essential to implement an analytics and tracking system that will help you understand how many referral links get shared and clicked.

Google Analytics actually has a special referral section that can help you see where people come from to get to your site. However, this solution is not as comprehensive as a referral software solution.

What about reviews?

Positive reviews are a form of referrals. So are celebrity endorsements and social shares.

Wow, Pixar exhibit at @museumofscience is a must. Check it out!
— Dan Allred (@dgallred) December 31, 2015

You can create a referral program that rewards customers for positive shares on social media, or you can simply reach out to them and thank them when you see their glowing reviews.

Interacting with these happy customers will help keep them happy so that they’ll continue to share positive sentiment on and offline.

Examples of referral programs to inspire your own

When you’re creating your own referral program, it’s helpful to see successful examples of other brands. Here are three examples of effective referral programs to inspire you:

Example #1: Harry’s uses a referral program to create awareness before a launch

Sometimes, referral programs are the catalyst that makes a brand a household name. For example, Harry’s Shave Club offered a referral program before they even launched. Jeff Raider, Co-Founder, and Co-CEO of Harry’s described the process on the Four-Hour Work Week blog:

“First, users entered their email addresses on a splash page. This first step was essential since we wanted to capture emails both for our list and so that we could use it as an identifier for tracking referrals.

The second page was where the referral mechanisms lived. It contained a shareable link to the splash page coded specifically to the user. Below the link were buttons to share the link through email, Facebook, and Twitter with the click of a mouse. By sharing the link with friends, users had the opportunity to earn free product. The more friends who signed up using your unique referral link, the bigger the prize you earned.”

This referral program worked wonders for Harry’s. In one week, they were able to gather almost 100,000 email addresses. Today, Harry’s owns the German factory that makes its blades, and its products can be found in J. Crew, Bloomingdales, and many other retailers across the country.

Example #2: Stitch Fix uses referral program to encourage women to share positive experiences

Stitch Fix is a subscription service that sends out fashionable clothing to help women find stylish pieces to add to their closet. The company, which was founded in 2011, is now valued at $300 million and continues to grow. Part of their secret sauce is a referral program.

Stitch Fix capitalizes on customer happiness, encouraging customers to share their positive experiences in exchange for a reward. Each customer gets a unique referral link to share with friends. For each friend who signs up and orders a shipment, the customer gets $25 in Stitch Fix credit. The more friends they refer, the more credit they get.

This referral model has helped Stitch Fix spread like wildfire, especially on social media sites like Facebook. Happy customers all over the country share their personal referral link with their Facebook friends, in hopes that they can spread the word and get their friends to sign up.

Example #3: Grasshopper fosters community through ‘Refer an Entrepreneur’ referral program

Grasshopper, a virtual phone system for entrepreneurs, sells to small business owners rather than consumers. The company has built a referral program to capture this audience– it’s called Refer an Entrepreneur.

Unlike Stitch Fix, Grasshopper grants the reward to the customer who makes the referral and to the new customer. In Grasshopper’s model, the happy customer gets a $25 credit and so does anyone they refer.

This referral program works because it incentivizes new users to take advantage of their referral. They’re not just rewarding their friend when they sign up– they’re also getting a deal themselves.

Referral program software tools that can help

There are a number of software solutions that make it easy to set up a referral program. Here are some of the best:

  • Referral Rock — Referral Rock’s software helps all businesses (not just eCommerce sites) design, track and manage referrals online.
  • Campaign Monitor — Campaign Monitor is easy to use email marketing service that can help you spread the word and effectively market a referral program.
  • HubSpot or Marketo — Marketing automation systems such as HubSpot and Marketo are excellent complements to any referral program.
  • Google Analytics — Google Analytics can help you track which websites and social media sites refer new customers to your business. It can also help you track the success of a referral program.
  • AdvocateHub by Influitive — The AdvocateHub by Influitive helps B2B companies capture customer enthusiasm to turbocharge marketing and sales efforts.
  • ReferralCandy — ReferralCandy helps you easily create, run, and manage a referral marketing program.
  • Ambassador — Ambassador offers referral marketing software, as well as affiliate marketing software.
  • Friendbuy — Friendbuy specializes in customer referral programs for ecommerce businesses.

If none of these fit your needs, check out our comprehensive list of plug and play referral software solutions.

Quick tip: Remember to promote your referral program by featuring it prominently on your website. “Too many companies hide the refer feature in a sub-menu,” said Rob Edell, Founder of Servy, a tech startup that crowdsources mystery dining. “Meanwhile, referrals are one of the most important growth drivers for most apps.” (Note: there are a ton of ways to promote your program, so go ahead and make your program discoverable.)

Referrals that work for you

Referrals can come from anywhere– a happy customer, a friend or family member, or even a celebrity endorsement. The key is to harness these referrals in a well-designed program so that you can encourage all your customers to refer you. That is how to run a referral program.

Joni Holderman, Founder of Thrive! Resumes get 82% of new business from referrals. “I offer clients a free resume update when they refer a colleague who purchases a resume. It’s a win/win. I get great new clients who are an excellent fit, get to stay in touch with valued clients, and the costs are about the same as I would pay in marketing to acquire a new customer.”

When you design a referral marketing program, make sure to come up with something that works for your brand. Get to know your customers so that you understand what they’ll share, and so you can offer rewards that they want.

Referral marketing programs have the power to take your business to the next level, working as an engine that brings new customers directly to your door. It’s in your best interest as a small business owner, marketing, or customer engagement specialist to give them a try.

Originally published at