Referral Program: How to Encourage Customers to Promote Your Brand
A referral program is an incentive system that encourages customers to recommend the brand's products or services to their acquaintances. For bringing in new customers, the company rewards them with discounts, cash, or points on a bonus account.
A referral program from Wise
Let's Start With the Terms
Who is a referrer? It's your existing customer who attracts new buyers and gets rewarded for it.
And a referral? That's the new user brought in by the referrer.
How do you identify them? You'll need a referral code or a link.
Where do customers come from under the program? From your website, social media page, or app by clicking on a referral link. Traffic from such a link is called referral traffic.
What does the referrer get for their efforts? A reward (money, points, gifts, free periods, and more).
What is the goal of attracting referrals? To have them take a desired action — register or make a purchase. The process when a person takes action is called referral conversion.
How Referral Programs Work
A company offers its customers bonuses for recommending the product to friends.
Users share information about the product with friends and encourage them to try it, referencing themselves to get a discount.
The new buyer, brought in by a friend's recommendation, contacts the company and expresses interest in trying the product.
If the business is small or in the early stages of a referral program, the brand often manually searches for the new customer in the database to find out who invited them. Most commonly, personal links are used. Customers receive a unique link to share with a friend. When the friend clicks the link and makes a purchase, the referrer immediately receives their bonuses (or other rewards).
Another way to link old and new customers is through a personal promo code. The referral copies it into a special field when making their first purchase or signing up for a service. Many companies offer both links and codes for convenience.
Influencer referral promo code
Why You Need a Referral Program
A referral system is a fairly cost-effective and efficient method of promoting a business. Here’s why.
You save on acquiring new users. Nielsen research shows that about 80% of people trust recommendations from friends, while only about 40% trust social media ads. Referral programs are particularly effective for complex products like banking services and investments.
By the way, do you know what social proof is and why many businesses use it? If you haven’t encountered this term before, you can read more about it in our article What Is Social Proof and How Does It Work?.
Here, influencers from the internet — bloggers, experts, niche celebrities — can act as friends. People usually respond well to recommendations from these content creators, especially when their audience isn’t too large.
Referral program from hellofresh.com with the participation of food blogger Emmymade
Referral payouts are often much cheaper than advertising through other channels since maintenance costs and manpower can be minimal. It’s enough to periodically remind customers about bonuses (for example, through email newsletters).
Referrals are a source of good profit. Customers brought in through recommendations generate 16% more revenue (LTV) compared to those acquired through other means.
Additionally, your customer base will quickly grow. On average, each referral brings in nearly three new customers. Moreover, people who come through recommendations are much more likely to recommend the product to their own acquaintances.
Steps in a Referral Program
The company announces the program, clearly defines the terms, and provides participants with special resources. These can include personal accounts for referrers and participants, tools for creating links or promo codes, reward systems, and more.
People join the program and receive personal links/codes for invitations.
Referrers share the received codes with acquaintances, motivating them to join the program and make a purchase.
To participate, referrals click on special links or enter codes during subscription or purchase.
Completing a specific action, such as making a purchase or registering on the website, becomes the condition for the referrer to receive a reward. After this action is completed, the referrer receives bonuses or other rewards.
Referral partnerships benefit both parties. Brands take advantage of the opportunity to expand their customer base through loyal users while saving on marketing budgets.
Customers, in turn, receive additional bonuses or discounts by sharing their positive experience.
Referral program from SimpliSafe. Both parties in program get a reward
Types of Referral Programs
Referral programs vary by model, goals, and types of rewards. Let’s look at the most common types below.
Program Model:
One-sided model: Only the person who invites a new customer receives a reward.
Two-sided model: Both the referrer and the invited person receive bonuses.
The second option is more costly for the company but is often much more effective than the first because the referral has an incentive to use your product.
Advantages of the Two-Sided Model:
Some people are hesitant to share referral links out of fear of appearing selfish — "What if people think I’m profiting off them?!" The two-sided system eliminates this barrier. Here, both participants receive bonuses.
This model encourages loyalty among new customers. Welcome bonuses increase their interest and attachment to the brand.
In the article Customer Loyalty: What Is It and How to Calculate It, we discussed loyalty in detail, why it's important to maintain it, and shared techniques for boosting CRR.
Rewards program from Marriott
Program Objectives:
Here are the functions that referral programs typically serve:
Attracting new customers: This is the most popular type. Companies offer clients a bonus for inviting newcomers.
Attracting employees: Companies offer their workers rewards for recommending suitable candidates. The bonus amount varies — from basic gifts for entry-level positions to hundreds or thousands dollars for top managers or specialists in complex technical fields. Through this approach, companies save on recruiters, attract highly qualified employees, and increase team engagement.
Intel's Employee Engagement Program
Program Reward Options:
For participation, both referrals and referrers receive various bonuses. Here are the most popular types:
- Discounts: The existing customer gets a discount on their next purchase if their friend uses the service for the first time based on their recommendation. For example, Madison Reed, a haircare brand offering color treatment products, hair accessories, and styling tools, has a referral program where customers earn a $15 credit for each friend they refer who signs up. The referred friends also receive a $15 discount on their first purchase.
Bonuses: Users earn points for sharing a referral link or code, and their friend completes a specific action, like registering or making a purchase. Both the existing user and the referred client can receive bonuses.
Gifts: The existing customer receives a gift, such as free access to premium features, when their friend registers through a special link.
Sales commission: The user earns a percentage of the profit from each purchase made by their referrals.
Advantages and Disadvantages of Referral Programs
Like most marketing tools, referral programs have their pros and cons. Let’s take a closer look.
Advantages of Referral Programs:
A referral program attracts active customers who love the brand and share their positive experiences with others. They regularly use the services themselves and bring in other interested people, who can also be encouraged to make repeat purchases. As experts say, acquiring a new customer is several times more expensive than retaining an existing one.
Referrers use various platforms to attract referrals, such as social media, newsletters, blogs, and webinars. This allows them to reach a maximum number of potential customers through different communication channels. This is beneficial for the brand as it reaches all segments of the target audience.
How to find your target audience? And how to segment it? Read more in the article Target Audience: Why to Define It, How to Classify and Segment It.
The economic efficiency of referral marketing is due to relatively low costs. The initial investment is needed to develop and launch the program, and then payments are made based on results (acquired customers). The more newcomers join through the referral program, the higher the costs for their rewards, but the profits grow as well.
In terms of increasing brand awareness, referral marketing works like word of mouth. Users are eager to share information about the company, thereby expanding the audience reach and raising awareness about the brand's products and benefits. People tend to trust recommendations from other customers more than advertising.
Referral marketing can also be a tool for social responsibility. For example, a percentage of the revenue from each referred customer is donated to charity. Such initiatives resonate with the target audience and enhance the brand's image.
Disadvantages of Referral Programs:
- Budget dependency: Launching a referral program requires investments in creating attractive landing pages, promotional materials, and marketing the program itself (social media, email marketing, pay-per-click advertising). You will also need analytics tools to track effectiveness. Additionally, you must allocate a budget for rewards to referrers, whether it's fixed payments, sales commissions, or multi-tiered bonus systems. For example, Casper, a brand known for its mattresses, has a powerful referral program that benefits both parties. When a member shares a $50 discount on a Casper mattress with a friend, the member receives a $75 Amazon gift card in return.
Program from Casper
Controlling referral marketing isn't always easy. When using a referral program, the company doesn't fully manage the actions of referrers. Some may resort to questionable methods of attracting clients, such as spamming, fake registrations, or artificially inflating subscribers, which can negatively impact the brand's image. It's also difficult to assess the real contribution of referrers, especially when using multiple channels. Not all referred users will perform the desired action immediately, making it challenging to evaluate the referrer's effectiveness.
The payback period can be long. Referral programs don't produce instant results—it takes time for referrers to become familiar with the program, start attracting new clients, and for those clients to take the desired actions. Sometimes, companies may wait several months to see a return on their investment in the program. Maintaining referrer interest may require regular reminders and even additional bonuses. Decreased activity can negatively affect the number of new clients attracted and the program's profitability.
The target audience isn't very large. Not all clients are willing to become referrers—some aren't motivated by the reward, others may not want to recommend the product, and some simply don't have a wide network of potential referrers. Additionally, referred users may not always be the target audience if they're not interested in the company's product or service. Some people participate in such programs just for the bonus—"just in case"—but ultimately never become loyal customers. Low conversion rates lead to wasted resources. The bonus was given, but there's no real benefit from it.
It’s difficult to assess the program’s effectiveness. Many analytics tools don't always account for all the nuances of a referral program, such as multi-level reward systems or the time lag between attracting a client and them performing the desired action. This makes it hard to evaluate the real effectiveness of the program and its impact on business metrics. Tracking the quality of referred clients also requires additional effort and time.
How to Create a Referral Program
Offer quality products and services: Even the best loyalty program won't work if your products aren't great. Analyze competitors to make your offer truly attractive.
Communicate with customers: Build strong relationships—your program is designed for people just like your existing users. Ask for feedback to understand what's important to them.
Set goals: Loyalty programs not only increase sales but also boost brand awareness, customer loyalty, and attract new clients. Defining goals in advance makes it easier to evaluate results.
Choose rewards for referrals: Customers always ask, "What's in it for me?" The right rewards are key to success. These can include discounts, giveaways, coupons, interesting gifts, or improved services.
Decide who to reward: There are one-sided and two-sided programs. In the first case, only those who refer others are rewarded; in the second, both parties are. Two-sided programs benefit everyone.
Choose the program structure: In a simple model, everyone receives the same rewards. In a tiered system, the more referrals you bring in, the more you earn.
Make the offer clear: Customers should easily understand how everything works and what rewards they can expect. Help them share the program with their friends on social media.
Conclusion
A referral program is a marketing strategy that incentivizes existing customers to attract new ones in exchange for rewards. It’s an effective tool for business growth, increasing brand awareness, and boosting customer loyalty.
For a referral program to succeed, it’s crucial to offer truly valuable products or services. Equally important is fostering loyalty by providing excellent service and support. Define your goals—whether you aim to increase sales, enhance brand recognition, or expand your customer base. Choose rewards that align with your goals and appeal to your customers. Make participation in the program as simple and clear as possible. Don’t forget to track the program’s effectiveness and gather customer feedback to refine it.
A carefully planned and well-executed referral program will become a valuable tool for attracting new customers, increasing the loyalty of existing ones, and boosting your business’s sales.