The Complete Guide to Creating a Customer Referral Program
A customer referral program is one of the most successful avenues for customer acquisition, which is why high-growth businesses often leverage referral programs. Having a successful referral program can help take your business to the next level. This article covers different types of referral programs and their success factors to design a referral program that’s right for your business.
What is a customer referral program?
A customer referral program leverages your existing customer base and incentivizes the introduction of their personal network to your products and services. Existing customers promote your business to friends and family in exchange for a reward, resulting in mutual benefit and an increased customer base for you.
What makes referral programs effective?
The concept behind the success of customer referral programs is a marketing concept called social proof. According to social proof, customers adapt their own behaviour based on what other customers are doing.
Social proof is why influencers are an integral part of business promotion on social media channels like Instagram. This is because consumers are often looking for inspiration from people they have something in common with or people they look up to. As a result, when they see ‘social proof’ that someone makes a purchase decision, it has a ripple effect on their own consideration set.
However, executing an influencer program to promote your business is costly, and finding the right influencer for your brand takes time – and can backfire. Thankfully, there is a way to leverage social proof with less risk and upfront investment with a customer referral program.
A customer referral program is more effective than regular promotions
A customer referral program uses social proof as currently to build brand trust. By incentivizing loyal customers to tell others about your product, you are reinforcing their love for your business and spreading awareness to potential customers through trustworthy sources – their friends, peers and colleagues. In fact, consumers are far more likely to trust the recommendation person in comparison to ads. A Nielsen Global study says that 92 percent of consumers trust the recommendation of a person they know, while only 33 percent trust an online ad making the same recommendation1.
As a result, a customer referral program can help you grow your customer base with significantly less investment than an advertising campaign or an influencer program – if done the right way.
Components of a referral program
Simply having a referral program doesn’t get you new customers. In order to succeed, it must include a targeted promotion, strong brand advocates, a motivating incentive system and a gratitude loop.
The Targeted Promotion
Having a targeted promotion means putting your offer in concrete terms. What action are you rewarding your existing customers for? Are you clearly communicating what the reward is? What action triggers the reward? Referral programs with high participation rates are those that communicate the required customer behaviour and the reward in a succinct and memorable manner in a simple formula:
Behaviour X + New Customer = Reward
For example, real estate agents often reward potential buyers by asking them to bring their friends to viewings when a building project enters the pre-sale phase, in exchange for a reward. The benefit of this incentive program is that it increases the likelihood of attendance and increases the agent’s potential client base while offering very little commitment to the prospective buyer. In this case, the targeted promotion looks like:
“Bring a friend for a showroom viewing and receive a coupon for a free manicure at Business X.”
As you create your own referral program, it’s important to communicate to your customers the ease of the referral process in order to get people to participate. Because you are already counting on them to promote your business to potential customers, having a confusing referral process can dissuade people from participating in your program as it may seem too laborious or not worth the payoff.
The Brand Advocates
As part of creating your referral program, you want to consider who your most loyal customers are. This is because they are the ones most likely to advocate for your brand on your behalf. If you are unsure how to find them, you can spend some time getting to know your target audience to segment your customer base before targeting them with the referral program. For example, you can choose to extend to offer only to frequent buyers, or reward your most vocal customers with a social-media based referral program.
Every successful referral program includes the right incentive for its customers. Incentives can take the form of something physical, like an item, or hold monetary value, such as a gift certificate. The incentive is the “hook” for your entire program, so if your potential customers don’t find it exciting or relevant, they won’t take the time to invest in learning about the details of your referral program.
As a result, it’s important to know your target audience and what they value before selecting the right incentive. You incentivize your customers by providing complimentary items, services, or offers to those they already use through your business or uncover what is relevant to them. A good way to discover what customers want is by leveraging your mailing list and distributing a survey through platforms like MailChimp.
The Gratitude Loop
Last but not least, the gratitude loop means including a thank you to your existing customers for directing new customers to your business as part of the design of the referral program. This small but important step lets your customers feel valued on a human level in addition to the incentive and encourages them to keep referring others – especially if you create a scale of incentive by volume of referral, as you’ll learn about later in the article.
Types of referral programs
While customer referral programs are diverse in their structure, they generally fall into one of three categories. Customer referral program structure can be direct, implied or tangible. Each has its own benefits, depending on your business model, industry, and the level of involvement you want your customer referral program to have.
Direct Customer Referral Program
A direct customer referral program rewards your existing customer with an offer when someone they direct to the business becomes a customer. An example of this type of referral program is Goodlife Fitness, which offers a free athletic swag like a water bottle or T-shirt when you refer a set number of people to sign up for an annual membership. In a direct customer referral program, the reward is tied directly to the nature of the business and helps customers get more use of the original product they recommended – in this case, the use of Goodlife’s facilities and classes.
Implied Customer Referral Program
An implied customer referral program targets individuals in proximity to your customers in an indirect manner. Many home improvement companies leverage this type of referral program by displaying a lawn sign with their business services on the front lawn of the property that offers an incentive such as a free evaluation or estimate. This is generally one of the least utilized customer referral programs because it relies on customers to reach out to your business instead of bringing the incentive to them, like with a direct referral program.
Tangible Customer Referral Program
With a tangible customer referral program, you arm your existing customers with value that can be given to potential customers. Food boxes like Goodfood often leverage this tactic with “give a friend a free product” promotions. What makes this tactic particularly effective is that reciprocation is part of human nature, and giving someone a free item makes them feel indebted to you, and more likely to do business with you.
While this tactic involves more of an upfront cost for the item you choose to give away, it’s why direct-mail programs like the non-profit organization The War Amps have been successful in their fundraising efforts. Their direct mail campaign has included free keychain tags in the envelope for over 70 years, along with a prompt for donations. By including a free keychain, recipients feel they want to reciprocate the action and are statistically more likely to donate. The same principle applies to for-profit businesses when you invest in a tangible type of customer referral program.
Promoting your program
Of course, simply having a customer reward program is not enough. As your program comes to life, consider how you will tell your existing customers about it. Some of the common ways to draw customers to your offer are:
- In a blog, email blast or a newsletter
- Announcing and promoting it on social media
- Integrated in corporate communication like invoices or automated thank-you messages
- Displaying marketing materials at the checkout of your physical business location
Having a robust plan for promoting your program is integral to the success of the program. People should know and associate the program with your business as part of your branding approach, in the way the program works and in your language and tone communicating about it. After all, if people don’t know about your program, they can’t take part in it.
Scaling the reach and rewards structure of your program
As your referral program gets off the ground, it’s also important to remember that allowing customers to scale their rewards based on the number of customers they bring in can take your most reward-motivated customers to the next level. Consider offering a reward system where every extra customer that is referred gets your existing clients a more appealing reward for extra incentive to fully harness the power of their personal network.
Creating a customer referral program in 5 steps
1. Set your goals
Before you invest in creating a customer referral program, it’s important to set goals for what you’re hoping to get out of it. Setting goals is key to the program’s success as it will help you measure your progress and tweak the mechanics of your program so you can stay on track. Some of the common outcomes of a referral program are:
- Increasing customer base
- Increasing frequency of buying
- Raising brand awareness through word-of-mouth
Now that you have a clear line of sight in what you are trying to accomplish, it’s time to decide what you want your customers to take away from the program.
2. Select your message
Next, you want to craft a message to communicate to your existing customers that tell them about the program. It is essential that your message is clear about what the offer entails, and the reward mechanics easy to understand. Your message should answer the following questions succinctly:
- What do you want your existing customers to do?
- What are your existing customers getting out of it?
A strong example of a clearly communicated message is Airbnb’s incentive program. It uses a simple email registration mechanism that rewards both users with a credit upon their first booking. Short, simple, and offering a tangible reward, it makes for a strong referral program message:
“Recruit up to 25 hosts and get $100 per host when they sign up and host a trip.”
This message clearly communicates what Airbnb wants its customers to do (recruit more hosts) the incentive ($100) and the reward trigger action (existing customers receive the incentive when the new host becomes an active member and hosts the first trip).
In addition to clearly communicating your message, it’s important to pick the right reward to encourage your existing customers to participate in your referral program.
3. Define the incentive
To draw customers to your promotion, you need to offer them something captivating in exchange for their referral efforts. The reward can be physical or monetary, but most importantly, it needs to be relevant to your existing customers.
If you select an incentive that is too small and does not interest your customers, your customer referral program will have a low participation rate. It will not increase your customer base as much as an adequate incentive could.
An example of a clear and effective incentive is Lyft’s Uber driver referral program, which offers $250 to individuals who refer Uber drivers to register with their carsharing service, giving the new drivers a $500 cash starting bonus. The $500 cash incentive is tangible and sizable enough to encourage program participation.
4. Spread the word
Unfortunately, the idiom “if you build it, they will come” does not apply to customer referral programs. In order to see a significant customer acquisition lift, it’s important to promote your program on relevant channels. You can use your own business channels (website, social media platforms and mailing lists, and owned physical business locations) to promote your business. Consider budgeting for promoted social media posts that allow you to speak to your audience online in a way that makes your message more visible, and gives you access to analytics for what is and isn’t working.
In addition to promoting your business digitally, leverage your employee task force to help increase awareness. If your business has sales representatives, take the time to train them on how to promote the program. The same goes for customer support representatives, especially after a particularly positive customer service experience.
5. Make a landing page
It’s a good idea to create a digital extension for your customer referral program so that it is easier to spread awareness about it and promote your business. You can use software like MailChimp and Unbounce to create a custom landing page that allows you to track your referrals and measure the success of your program.
An important part of a referral campaign’s success is ensuring you can track participants and referrals. This allows you to discover opportunities for where to promote your referral program and to streamline barriers to growing your referral program. Leveraging the analytics features of programs like MailChimp and Unbounce can help troubleshoot or measure your customer referral program’s reach so you can effectively improve it over time.
Test and optimize your program
Now that you have the foundation of a referral program in place, you can test it and collect feedback to ensure you and your customers are getting the most out of it. Customer referral programs are not a one-size-fits-all process, so seeing what other businesses have done in the space is a good place to start as you design your own program.
11 ideas for customer referral programs to get you inspired
Hulu is a web-based TV streaming service available in the U.S., whose customer referral program uses a free trial existing users can extend to their friends for a risk-free introduction to the brand. Users can refer subscribers to receive a free two-week trial to see if they enjoy the product, and once the new users register for an account, the customer also gets a $10 Visa Gift Card.
Prezi is presentation software that allows real-time collaboration between members. What makes their customer referral program stand out is that it rewards successful referrals by giving a free three-month upgrade of the account type, unlocking premium features for the customer. This is especially effective as it may lead to a higher value customer in the long-run if sampling premium account features led to a permanent account upgrade as a result.
Soylent, a plant-based meal replacement product, leverages a percentage-off mechanism to incentivize its referral program. Existing Soylent customers can refer friends to receive 50 per cent off their first 12 bottles of the product. It also appeals to socially responsible consumers with a tandem CSR integration where the non-profit organization World Food Program USA provides four meals for the children when the new customer registers for a delivery subscription.
Frank and Oak
Clothing retailer Frank and Oak’s referral program leverages mutual existing and new customer benefits with its Share & Earn program. To benefit, customers can send a discounted offer to friends and then receive a $25 gift card upon purchase. In this way, both the new and existing customers receive a value incentive for participating.
World of Warcraft
WoW, the most popular MMORPGs in the history of online gaming, gets its referral program right by giving existing users more of what they value most – free game time. Their recruit-a-friend program allows players to enjoy free game time that exponentially grows based on the length of subscription commitment their friend makes. This incentivizes existing players to encourage their friends to sign up for a longer trial period so that their own reward for the referral increases.
The structure of Tesla’s referral program is as niche as its customer base. The brand adds a VIP factor to recipients of the referral, making it more sought-after than the average customer referral program. Those lucky enough to be referred qualify for a free tour of the SpaceX headquarters in Los Angeles.
MeUndies is an underwear and loungewear company that’s known for their playful designs. The brand’s playful persona is also front and center in their referral program, where existing customers can send a mystery gift to their friends as an introduction to the brand. This referral program adds a degree of mystery and excitement while providing the brand flexibility in the gift value.
Huckleberry, an active adventure and lifestyle brand, has a referral program that taps into their customers’ love of taking on challenges with the structure of their referral program. The program rewards the customer with the highest number of referrals with $1,000 on a monthly basis. As a result, the high-value reward serves as a powerful motivator.
Evernote, a note-taking software, has a points-based referral system. Existing users can earn points every time a referral registers for a trial or upgrades their account, which unlocks Premium account features for the original customer. Every time Plus, a customer’s referred lead upgrades their account, the original customer who submitted the referral receives additional Evernote points that can be redeemed for premium features.
Ready2Talk is an audio and web conferencing service provider that was struggling with the participation rates of their email referral program. As a result, they re-designed the program to include more advocate nurturing that focused on rewarding smaller acts of brand advocacy by tracking social media chatter and rewarding it in IRL, which also strengthened their relationship with existing customers.
Verafin, a fraud detection and anti-money laundering software, created an education-based advocate referral program that helps existing users talk about their products and even get certified with a Referral Certification. As a result of the built-in education efforts in the customer referral program, the company ensures that advocates only bring in valuable leads for its specialized product portfolio. To encourage participation, the brand also hosts “refer-a-thon” contests on a regular basis, offering a monetary reward for the customers with the highest number of referrals.
Now that you know how to set up your own customer referral program for success, you can design a program that harnesses the power of your existing customer base and takes your business to the next level.
Ready to start your business? Ownr has helped over 20,000+ entrepreneurs hit the ground running quickly – and affordably. If you have questions about how to register or incorporate your business, give us a call at 1-800-766-6302, Monday through Friday from 9 am to 5 pm EST, or email us at firstname.lastname@example.org.
This article offers general information only and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or its affiliates.