What is a Referral Program?
A referral program is simply an incentives system to encourage existing customers to refer new customers. A typical referral program includes either one-sided or two-sided rewards. One-sided rewards are incentives for either the referrer or the person being referred (but not both). Two-sided rewards give a benefit to both the existing customer and the new customers they refer to your business.
A good referral program acts as an accelerant or rising tide for all marketing channels by providing a conversion lift and improving unit economics across the board.
Characteristics of Referral Programs that Scale
Good referral programs tap into positive customer sentiment that already exists. No one is going to recommend their friends to a company they don't value. A person making a recommendation is putting their reputational equity on the line.
If your company has high Net Promoter Scores (NPS), raving reviews and some amount of organic word-of-mouth sales already, that's a good indicator that your business may be ripe for a bona-fide referral program.
Secondly, you'll want to have marketing automations and a CRM in place. If you're on Shopify, for example, it's easy to plug a referral software app into your Shopify store.
While many referral software companies focus on ecommerce, there are referral platforms for SaaS, newsletters and many more. Referral Rock, for example, offers integrations with Hubspot and Salesforce.
Lastly, it's important to model out the potential financial benefit before investing time in a referral program. If your company has low sales volume and low LTVs, it's unlikely that a referral program will have a significant financial impact.
Referral programs work best when either the volume of sales or the value per transaction makes a 5-10% referral rate meaningful.
Companies like Referral Rock can work with you to assess whether a referral program is right for your business. They've seen the spectrum of good vs bad outcomes and can advise you during the sales process / onboarding as to whether you're a good fit.
Referral Program Statistics
- Referral marketing generates 3-5x higher conversion rates than any other channel
- Word of mouth is the primary factor behind 20-50 percent of all purchasing decisions.
- Customers referred by other customers have a 37% higher retention rate
How to Run an Effective Referral Program
- Identify and target happy customers at peak happiness times
- Offer two-sided rewards (referrer and referee both rewarded)
- Incorporate referral opportunities into all consumer touchpoints (onboarding, purchases, CRM engagement etc.)
- Use incentives with an obvious benefit that's aligned with the product
- Make it as easy as possible to invite referrals
- Make it easy to view referral status. Offer a scoreboard with real-time updates
Designing Referral Program Incentives
In Josh's experience, the best referral incentives do the following:
- Disrupt patterns: for example, injecting a dollar sign ($) into the user flow can make most people stop and pay attention immediately
- Align with your brand's values: for example, a pet supplies brand making a donation on your behalf to an animal shelter when you refer a friend
Referral Program Mistakes
Josh cites only 50% of intended referral programs ever launch (if they don't get external help/assistance), meaning 1/2 of initiatives fail without ever being tested.
Referral programs often fail for the following reasons:
- Lack of sufficient sales volume or transaction sizes to warrant the effort and investment
- Lack of an internal champion to implement and make it successful
- Viewing referral promotions as a one-time activity rather than an always-on marketing mechanism embedded in customer automations (don't just do a one-time email blast)
- Complex rewards and contests whose benefits can't be understood quickly
Common Referral Program Misconceptions
- Referral programs are typically associated with B2C businesses, especially ecommerce. But that doesn't have to be the case. Referral programs can work well for B2B services as well.
- Many people assume that referral programs only attract low quality customers. While customers are motivated by the reward incentives, by targeting your highest quality customers, you're enhancing the customer experience of an existing set of valuable users, and enhancing the brand experience.
- Companies often underestimate the work required to set up a referral program. In reality, you'll need someone with the bandwidth to research referral platforms, implement the customer touchpoints and monitor the results. It's helpful to have someone keep an eye on it to test incentives and improve their effectiveness over time.
- Don't view a referral program as a one-time effort. The best referral programs are embedded organically into customer touchpoints and operate in an always-on, largely automated fashion.
How AirBnb Uses a Referral Program as a Growth Strategy
Airbnb's referral program is one of the most successful examples of how to use rewards, social proof, and user data stored in email services to drive massive growth. Their growth team has set a new standard for how to design a refer-a-friend system that builds awareness and drives huge increases in new bookings or sales. By offering rewards for referrals, Airbnb was able to quickly build a base of loyal users who were motivated to spread the word about the service. Additionally, by leveraging social proof (such as user reviews and testimonials) and using user data stored in email services, they were able to target new potential customers with personalized messages, resulting in even more growth.
Referrals was an exciting project to undertake because it embodies growth: it’s highly measurable, scalable, and is all about identifying a growth pattern that’s already happening but amplifying it at a key moment.
– Jason Bosinoff, Director of Engineering at Airbnb
In what consist the customer referral program?
The power of social proof is undeniable. When we see others using a product or service and enjoying it, we're more likely to want to use it ourselves. This is why social media platforms like Instagram and Snapchat have become so popular – they allow us to see what our friends are doing in real-time and show us how much fun they're having.
Email is another powerful marketing tool that can be used to great effect. By sending out regular updates to subscribers, businesses can stay top of mind and encourage customers to come back time and again.
Rewards programs are also a fantastic way to keep people engaged. By offering discounts or special offers, businesses can incentivize customers to keep using their products or services.
Airbnb’s referral program is a key part of their explosive growth. By offering rewards for referrals, they’ve been able to tap into social proof and email marketing to drive even more growth.
The referral program works like this: when a user signs up for Airbnb, they’re given a unique referral code. They can then share this code with friends, family, and others. When someone uses the code to sign up for Airbnb, the referrer gets a $25 credit.
This referral program has been hugely successful in driving growth for Airbnb. In fact, it’s estimated that Referral programs are one of the most effective ways to grow a business—and Airbnb’s is no exception. Not only does it incentivize users to spread the word about Airbnb, but it also provides social proof that can convince others to try out the platform.
Analyzing Airbnb's Success
To get a true sense of Airbnb’s financial health, it’s important to look at both their top-line revenue growth and their customer churn rate. According to Crunchbase, Airbnb’s revenue grew from $200k in 2009 to $2.6B in 2016 – an impressive 13x increase in just 7 years. And while it’s difficult to find exact numbers on customer churn, various reports suggest that it was very low throughout this period of rapid growth. For example, one report from 2014 pegged Airbnb’s customer churn rate at just 1%.
In order to grow its business, Airbnb needed to not only acquire new customers but also keep the ones it already had. To do this, the company heavily relied on customer data – both qualitative and quantitative – to understand what was working well and what needed improvement.
One way they collected customer data was through user interviews. By talking directly with customers, the team was able to get valuable insights into how people were using the platform and what pain points they were experiencing. This feedback was then used to inform product decisions and help shape the direction of the company
Should You Launch a Referral Program?
Your company will have a higher likelihood of success with a referral program if it meets these criteria:
- There's already an existing word-of-mouth component driving sales. This signals that customers are willing to put their relationship equity on the line to endorse your brand.
- Your company has automated CRM touchpoints in place, into which it can simply inject referral opportunities
- Your company has bandwidth to implement the program (a program champion is helpful)