Why Referral Campaigns Work

Have you ever heard the phrase “word of mouth is the best advertising”? Even with all the bells and whistles of online digital marketing – this old saying is just as true today as it ever was.

Referral campaigns are a great way to take advantage of word-of-mouth, and turn it into your own marketing, to attract new customers and boost your growth. It works by asking existing customers to share their experiences with friends, partners, or colleagues who may benefit from your products or services.

The result? Higher retention rates, more satisfied customers, and more recommendations from friends – all of which make the effort worthwhile. 78% of B2B marketers say that referral programs generate good or excellent leads.

source: forbes.com

What is a referral campaign?

By having current customers refer potential customers who are likely to be a good fit for the business, it’s easier for marketing and sales teams to nurture and engage them. Referral programs also have a high conversion rate because recommendations from friends carry more weight than other forms of advertising. Plus, it helps build customer loyalty as satisfied customers are more likely to refer others and maintain relationships with your brand. There are 2 kinds of referral campaigns…

Direct referrals

Direct referrals are the tried-and-true way to get people interested in your products. When existing customers are truly happy with what you have to offer, they’re more than willing to spread the word and refer new potential customers. People trust their peers more than they trust ads or reviews, so getting your current customers on board with your referral program is key.

This kind of campaign is cheaper to run but converts less as there’s no reward for your customer referring you. The key to this is “Reciprocity” (see point 5 below) so you will have had to deliver for your customer in a big way before you can expect this approach to achieve anything. But the good news is that on average – 83% of customers are willing to refer after a positive experience.

source: referralrock.com

Incentive referrals

A more common approach is “Incentivised referrals” which work by offering a reward to both the referrer and the new customer. For example, an eCommerce website might offer a £10 voucher code for referred customers to use on their first purchase and 1,000 loyalty points for the referrer. These types of rewards are hard to ignore and provide an incentive for current customers to bring in more business.

With either route – the key is making this process easy and readily available to existing happy customers – which online referral tools and automation suites can help with.

Social Psychology Behind Referrals

1. Encourage sharing

When it comes to sharing your brand with their friends, many customers may be hesitant. After all, not everyone wants to be the one taking the initiative – especially if they’re not sure if their friends will appreciate the message.

That’s why referral campaigns can be so effective. Not only do they provide an incentive for customers to share (such as a gift card or special discount), but they also make it easy for them to do so. With a pre-filled message, customers can quickly and easily share your product with just a few clicks. Plus, by making the offer enticing and timely (right after purchase or delivery), you’re more likely to get that coveted referral action from loyal customers who are already satisfied with your brand.

2. Repeat purchases

A referral program is a great way to drive repeat customer purchases. The idea is simple: when customers refer their friends and family, they get rewarded with something for free or at a discounted price. This incentive encourages them to continue shopping with your company and makes it easy for potential customers to try out your product. Companies found that referred customers have a 16% higher lifetime value rate, and a 37% higher retention rate than leads generated from other marketing channels.

source: blog.hubspot.com

3. Social Proof

When people see others engaging in an action, it can influence their own behaviour. It’s the reason why successful nightclubs like to keep a queue out the door. According to a Nielsen study, 92% of consumers are more likely to trust personal recommendations when making purchase decisions compared to other marketing strategies.

source: referralrock.com

This creates a snowball effect; as more people join in, more potential customers become aware of the product or service being offered and are enticed by its positive reviews. See our article on leveraging social proof on your website.

4. Grow your audience reach

Related to the above – referral campaigns are a great way to grow your total audience reach. Having customers share your brand on social media, for example, taps into their network of friends and followers – many of whom will have similar likes, tastes and needs as proven existing (and satisfied) customers.

This helps increase your credibility, directly reach your target audience and build a loyal customer base that’s excited to recommend your brand.

5. Reciprocity

Reciprocity is an important concept in social psychology – and it could be the key to unlocking the potential of direct referral campaigns. The idea behind it is simple: humans are hard-wired to respond positively to those who have given them something of value – it creates a feeling of indebtedness or obligation to the giver, which can be used to your advantage when running a referral campaign.

This phenomenon explains why referral campaigns are so successful: Happy customers who feel like they owe you something will be more likely to spread the word about your products or services.

6. The Liking Principle

The #1 reason companies use celebrity endorsements to promote their products. The Liking Principle states that people are more likely to follow the recommendations of those who they admire and emulate.

Additionally, research has suggested that we feel a stronger connection with other individuals if we perceive similarities between us. Whether this relates to background information such as career paths or simply lifestyles, it appears to be an instinctual desire for like-minded camaraderie that drives our responses towards similar people.

Think about your ideal customer before starting a referral campaign

Have you read many of our other thought pieces? If you have, you’ve probably got a good guess where this is going – Customer Personas – or at the very least; truly knowing who your best, ideal customer is, what they want, and how to talk to them.

You’ll have a lot of different kinds of customers, and while you value them all, some are more valuable to your business’s bottom line than others. By laying out what an ideal “good fit” looks like, participants can make more tailored referrals that may lead to increased sales.

Focusing on these ideal customers will tell you 2 things:

• What to offer as an incentive to attract that kind of potential client and current customer.
• Who amongst your current customers you should approach for referrals.

This will avoid wasting time and resources on individuals who wouldn’t make good customers anyways.

What makes a good incentive for your ideal customer?

If you want to go down the incentive route – it should be attractive enough for customers to share it with their peers – and much like our lead magnet examples, you can give away almost anything you like – but to really give your campaign a powerful edge it needs to be something that greatly appeals to your target audience.

Don’t forget your referrer too – make sure there’s a suitable reward in it for them, preferably something that will encourage them to spend again with you in future. Discounts are always good – but don’t be afraid to think outside the box and get creative.

Track and monitor your referrals

Tracking referred accounts is absolutely crucial for successful customer acquisition strategies and ensuring the company’s success. With larger companies, this becomes even more important in order to make sure no detail is missed.

A tracking system should be set up to monitor who was referred, who referred them, when they were referred, and whether or not they converted or purchased an item from the business.

Ask us about our various systems/tools/procedures for tracking customer touch points.

How valuable is a referral?

Customer referrals are a hugely valuable part of improving a business, as they don’t cost much and the data backs up their effectiveness. Companies with formalized referral marketing programs experience 86% more revenue growth over the past two years when compared to the rest, yet… only 30% of companies surveyed by saasquatch.com have a formalized referral program.