If you’re like many newbie business owners, you might have wondered why referral programs work. Almost every expert resource cites this strategy as more effective than traditional marketing techniques.
These programs hinge on trust and interpersonal dynamics. Such strategies work to bring more customers to businesses, grow brand awareness, and create more revenue-generating opportunities.
But why are such programs effective? How do they work, and what reasons can explain their unmatched bottom-line-boosting effectiveness? Is there a right way to ask for referrals?
Let’s answer these concerns in this article. Shall we start?
What is a Referral Program and How Does it Work?
A referral program is one of the most effective marketing strategies for building brand awareness and nurturing customer loyalty. These functions allow businesses to generate more revenue through improved customer retention and enhanced customer acquisition. It leverages people’s connections and the trust others have in them.
Referral programs work like any marketing strategy. Businesses develop a plan. Customers and partners promote the brand, inviting new customers or recommending the company to people they know.
The program leverages traditional word-of-mouth marketing. Happy customers share brand-related positive experiences with friends and social contacts. In turn, friends become interested in the brand. They become potential customers or paying ones.
Referral strategies leverage people’s trust. Studies show 83% of consumers trust friends and family’s recommendations. When customers recommend a brand to their social circle, you can expect four in five friends and acquaintances to listen to such recommendations.
That’s why referral programs work so well!
Brands show appreciation for the customers’ referral activities by giving incentives or rewards. It’s like a commission among salespeople, except most rewards are discounts, freebies, and similar incentives.
These rewards motivate customers to increase their referral activities. The more people they invite to become customers, the more rewards they enjoy.
Many companies also reward referred individuals or referees. Such a tactic acknowledges the strong bond between friends and social contacts. If a promoter knows the referred friend will also get a reward or incentive, the former will be more inclined to recommend the brand.
Why Do Referral Programs Work? 6 Reasons Explained
Businesses deserve to profit. That’s the bottom line. Although companies can implement different programs and strategies, few are as effective as well-planned, dutifully executed referral marketing programs. But why do they work?
Building Trust and Credibility
Trust is vital in any transaction. People who don’t believe in something won’t make that something a part of their lives. And that extends to brands, goods, and services.
Seven in ten consumers only buy from brands they trust. The figure is higher among Gen Zers, with nearly eight in ten.
Eight in ten people consider a brand’s trustworthiness as the single most important consideration in whether to do business with the brand. More importantly, 19 of 20 consumers will stay with a trustworthy company.
So, how does a referral marketing program build trust and credibility?
Businesses earn the trust of current customers by delivering high-quality offerings at reasonable prices. People want durable and functional goods they can use daily to address issues and improve their lives.
Brands also ensure unrivaled customer service. They engage customers with problems and make product use more pleasant. Businesses support clients, delivering positive customer experiences that convey the message – that the brand is trustworthy and credible.
But that’s not the only thing that endears customers to brands. The business’s loyalty program helps, too.
Referral strategies offer an attractive reward to make customers feel valued.
Happy and satisfied clients want to share positive customer experiences with family, friends, colleagues, and acquaintances. That includes rewards they receive from favorite brands.
For example, customers who refer friends can receive discounts on their next purchase. Some brands give exclusive items and once-in-a-lifetime opportunities.
People want to share these rewards and experiences with their close social circles. And if brands deliver on these promises, customers will strengthen their trust in the company.
Targeting the Right Audience
A successful customer referral program empowers businesses to identify the right audience. More importantly, it enables brands to connect with potential customers they might haven’t targeted but can benefit from offerings.
How?
Customers love sharing stories and experiences on social media. They comment on others’ posts and share them with social contacts. Over five billion people use social media. There’s a good chance your customers are on several social media platforms, too.
And get this!
Seven in ten consumers buy social media-referred products. You increase your target audience when customers share your brand on social media. And that translates to more leads, allowing you to generate more potential sales.
Unsurprisingly, many businesses with referral strategies have social media accounts. It’s an invaluable channel for finding and connecting with the right audience. Although Facebook remains king, other platforms are gaining ground.
Brands exploit social media to promote goods and services. They also leverage their communication and engagement mechanisms, allowing businesses to appreciate target audiences’ passions and interests.
We must reiterate that businesses already have a target audience. Referral strategies expand it. Moreover, referrals allow you to tap audiences you might haven’t considered.
And that’s why referral programs work.
Cost-effectiveness
Acquiring new customers to grow the customer base is costly. Businesses engage in marketing tactics to attract new clients.
For example, Software-as-a-Service (SaaS) brands spend about $700 to acquire a single customer, while B2B companies allocate $536 per new client.
On the other hand, referral systems rely on customers’ social connections and word-of-mouth marketing to obtain new customers. It still entails costs (i.e., free items and discounts) but is substantially lower than conventional customer acquisition.
Would it surprise you to learn that acquiring new customers through word-of-mouth referrals costs $23 lower than traditional client acquisition tactics?
That makes referral marketing more cost-effective.
Customer acquisition isn’t the only aspect where referrals beat conventional marketing tactics. Word-of-mouth marketing also empowers businesses to generate higher revenue.
Did you know businesses with successful referral strategies grow their revenues by 86% in two years? Some companies cannot even post marginal growth within the same period. That underscores the power of referral marketing.
Moreover, the Wharton Business School observed that referred customers make businesses more profitable by 45 cents daily. Suppose your brand has a hundred referred customers. You add $45 to your revenue. It’s small, but imagine how thousands of referred clients can translate into a higher ROI.
Wharton says a referred customer can boost return on investment by 60% over six years.
Analyzing the bottom line and comparing it with costs lead to a realization that referral marketing is more cost-effective than other programs.
Increased Customer Engagement
Businesses reward a loyal customer for every qualified referral. They could offer discounts, store credits, free items, and exclusive deals. Some brands offer personalized experiences to entice customers to continue referring friends and social contacts to the brand.
We can consider incentives and rewards as tools for engaging customers. Brands know the rewards work if more customers join the program.
For instance, how many customers availed of a special discount offered only to referrers? Has your stock of free items dwindled due to increased giveaways?
These signs show customers love your rewards and incentives. That’s why they aggressively invite friends and social contacts to become customers.
Rewards aren’t the only things that facilitate customer engagement. As mentioned, many businesses with referral systems have social media accounts. They use these channels to promote and interact with customers and potential clients.
Social media engagements empower businesses to form close customer relationships. They answer queries and bring noteworthy solutions to clients’ problems. Brands also leverage social media to offer exciting product developments and events.
And since social media is less formal than traditional online channels, customers feel more at ease interacting with brands.
Valuable Customer Acquisition Data
Referral systems empower businesses to evaluate critical parameters showing success.
For example, businesses can compare ROI generation between referred and non-referred customers. How many new customers come from referrals and other channels? How much did the company spend to acquire a single new client?
As mentioned, customer acquisition costs are lower by about $23 per client when businesses use referrals. Companies can examine their metrics if such is the case. They can increase their referral activities if data shows lower costs.
Another valuable data from referral strategies is the customer retention rate. It describes customers staying with the brand within a predetermined period.
Referral strategies increase customer retention because clients stay loyal to the brand. High-quality offerings, impeccable services, and irresistible rewards or incentives will keep customers interested in the business. Engaging them on social media and other platforms increases loyalty.
Referral marketing software can also generate reports about the conversion rate. It’s a metric underscoring the percentage of referred individuals who become paying customers.
For example, suppose your brand has 100 referred individuals but only ten buys. You could say the program converted 10%.
These metrics are essential to any business. They enable companies to determine the effectiveness of strategies.
Positive Brand Image
It’s easy to imagine how referrals can enhance brand image better than any other marketing channel.
Businesses with successful referral strategies leverage customers’ trust. Consumers believe in the products and trust brands to deliver outstanding solutions. Moreover, the company’s customer-centric services cement credibility and trustworthiness. People can depend on these brands to make their lives more convenient and comfortable.
Rewarding customers with exclusive items and meaningful incentives also conveys a positive brand image. Customers know the business cares for and appreciates them. The brand is willing to reward them for inviting friends and families to the fold.
Customizing rewards and personalizing experiences have a similar effect. It underscores the brand’s customer focus, prioritizing customers above all else.
Engaging customers and their social circles also promotes a positive brand image. People not previously targeted by the company will be more aware of the brand. They will try to learn more about the business and its offerings to appreciate why customers are happy to recommend it to friends.
A positive brand image creates recognition. People become instantly aware of your business, making you their top-of-mind choice. The good news is they will share these sentiments with social and business contacts, allowing you to gain more leads.
The more customer leads you get, the more chances you have to boost revenue.
How to Ask for Referrals in the Optimized Way
Referrals work. But how do you encourage customers to become brand ambassadors, promoters, or advocates? Here are some tips to help you ask for referrals optimally.
Ask for Referrals from Satisfied Customers Right after Purchasing
Timing is everything, including asking for referrals. Imagine a friend complaining to you about work-life imbalance. Would you ask for a favor? Folks in their right mind wouldn’t. It’s not the right time to request something.
That’s the same with referral requests. We don’t ask customers to become our advocates and recommend our brand to friends when they are gloomy. Businesses must wait until the gray clouds above the customer’s head clear.
So, when’s that?
You have several options. The first trick is to request referrals right after purchase. For example, the customer finalizes the checkout. You can thank them for their purchase and open the idea of becoming an advocate.
Most customers don’t buy impulsively. They research the item and compare it with other brands. Sometimes, they ask friends and social contacts about the product. So, purchasing the product means the customer is happy with it or at least satisfied.
It’s a positive experience. Customers who just bought something are happy. They can’t wait to receive the order. Now’s a great time to ask for referrals. They can invite friends to buy the same product or at least check your brand.
You can observe this trick with repeat or returning customers, too. Satisfied customers will continue buying products and patronizing your brand. You can ask for referrals from them, too.
Always Remind Customers of Your Offers
Create a social media business page if you still don’t have one. Most customers are on social media, and you can leverage these platforms to communicate with them. You could post about becoming your brand’s advocates or ambassadors, highlighting the rewards or incentives.
You can also consider email marketing. Sending regular updates about your brand helps foster and strengthen customer relationships. Moreover, it gives you the chance to remind customers about your offers.
Consider integrating a floating referral widget on your website. This tool empowers customers and visitors to know your referral offers regardless of where they navigate your website. Floating widgets are ever-present across pages. And if you create these tools in attractive designs, gaining more referrers is easy.
Alternatively, you could position the referral offer at the website’s heading or banner. It’s like a floating widget, except the information is visible at the top.
The trick is to keep customers informed of your referral offers. They might not be interested today, but they might soon. Hence, consider other communication channels, like messaging apps, newsletters, and SMS.
Make the Referral Process Easier
Although inviting a friend to try a product sounds easy, accomplishing a referral form is never fun. Some brands have a tedious referral process, requiring aspiring advocates to fill up too many data fields.
For example, the business might require customers to supply their personal details, account information, addresses, and social media accounts. While these pieces of data are essential, they can make referring seem like a chore.
Sometimes, the referral widget isn’t visible on the company’s website. Customers must scroll to the bottom to check a Refer-a-Friend link. Some brands have dwarfish referral buttons that people with visual problems cannot spot.
Some referral platforms have vague reward offers. Customers don’t know if the referral incentives are for the referrer only or include the referred friend.
Customers are more willing to promote your brand if your program is easy to join. So, make referral widgets easy to access with a clear message. Consider limiting the sign-up page to the customer’s name and email address. Moreover, optimize the referral landing page’s design to account for mobile devices.
Add social media sharing buttons. This technique will simplify customers’ invitations on their social media accounts. You can also check your referral link generator to ensure it produces unique codes without a hitch.
Show Gratitude for Successful Referrals
Some businesses consider a referral reward or incentive enough to show appreciation. However, thanking customers for recommending your brand to friends or inviting social contacts to try your products is more effective.
People have an inherent desire to feel wanted, valued, and appreciated. Rewarding them achieves this purpose. However, personalizing a thank-you note to show appreciation connects to the heart.
Psychologists say the two-word phrase strengthens interpersonal relationships. It also reinforces positive behaviors.
Thanking customers for referring friends and social contacts to your business deepens the customer-brand relationships. It makes them stay more loyal. In turn, it motivates them to refer more friends or recommend your products to other contacts.
We recommend writing the thank-you note by hand. This tactic conveys heartfelt appreciation for the customer’s referral efforts. It underscores how much you value the customer by taking the time to write the letter.
If you’re pressed for time or must thank hundreds of customers, an email thank-you note would be okay. You can personalize the thank-you email by filling in empty fields on the template.
Conclusion
Referral programs work because they leverage customer trust and loyalty for the brand. People tend to trust those closest to them. Brands exploit this attitude by creating high-quality products, delivering stellar services, and offering memorable experiences. Adding attractive incentives and rewards to this mix further cements customer loyalty.
Loyal customers become staunch supporters and brand advocates. They do the marketing with little cost to the brand. More importantly, their referrals bring higher revenues for extended periods.
Now’s the time to develop and implement your brand’s referral program.
