How to Build a Referral Program to Encourage Word of Mouth Marketing

May 10 2021

Many new ways to advertise to consumers are emerging, ways to get your messages across to potential customers, yet a Nielsen study showed that consumers still thought word-of-mouth advertising is the most trust-worthy.

83% of consumers say they either completely or somewhat trust recommendations from family, colleagues, and friends about products. –Nielsen

However, even if you have happy and satisfied customers that absolutely love your product, they still might not recommend it to others.

According to a Wharton School of Business study:
83% of satisfied customers say they are willing to refer products or services. Only 29% ultimately do.

This is where your referral program comes in, referral programs is a way to nudge happy and satisfied customers to refer your product or service to the people around them.

Why should you have a referral program?

Referral programs are more influential than other marketing efforts, due to the fact that people trust their friends, family, and colleagues more. The fact that they tried the product or service, liked it, and recommended it, is enough reason for them to try it. Built-in-trust plays a great role in getting consumers to try new products or services.

92% of consumers trust referrals from people they know — Nielsen
People are 4 times more likely to buy when referred by a friend — Nielsen
Cost-Effective Marketing

Another reason is the low cost compared to your return on investment. The cost compared to other marketing efforts is much lower, since the message you need to send out is for your existing customer base, making targeting much easier. The other factor is the referral incentive you will offer. Your referral program, depending on your business, will most probably need a two-sided incentive. A referral reward for the existing customer that refers and the referred friend that buys your product or service.

Dropbox Success Story

For example, Dropbox implemented a two-sided incentive referral program, offering 500 MB of bonus space for the referred friend as well as the existing user. Dropbox went from having 100,000 users to 4,000,000 users in only 15 months!

Setting Up Referral Incentives

You get to set up the referral incentives, and can calculate the exact incentive that is good enough for your customers to refer you.

Setting up the referral program or the cost paid to the service provider should also be considered. On the plus side, service providers that can create and track your referral programs can range from low to high pricing, and what you need for your own business-size can easily be found.

Building Customer Loyalty

Another reason to try out referral marketing if you don’t already have a referral program as part of your marketing strategy, is because customers that are referred are more loyal than those that were obtained through different methods.

A referred customer is 18% more loyal than a customer acquired through a different method, spends 13.2% more than a non-referred customer, and has a lifetime value that is 16% higher than a non-referred customer. [Source: Journal of Marketing]

How to build a referral program?

In order for your referral program to be amazing, first your product or service needs to be outstanding. Customers will not refer family members and friends to a product or service that they are not satisfied with. First, create a great product consumers need, then focus on exceptional customer service, make sure customers will be willing to refer your company before building your referral program, usually a high net promoter score is a great sign!

Choosing Referral Incentives

When choosing the referral incentives you would like to present to your customers and prospect customers, make sure to choose incentives customers will find interesting and rewarding. Know your customers and make sure to present rewards they will love! It should also be related to your product, for example a free sample of a product, a discount for your product/service, or account credit.

Making Referring Easy

I’d like to link back to the Dropbox referral program already mentioned, another reason it was such a great success is also that the incentive (free storage up to 16 GB) was very appealing to users, and inviting friends was an easy process, made very clear, and the rewards (free storage) earned were very clearly listed and showcased to each user.

Make it as easy as possible for customers to refer friends, you don’t want customers to get frustrated from the process and give up. In order to make the sharing experience easier, have a clear landing page, add a share button to all social media sites, and have auto-filled text. Also, to make it easy for customers to find and start referring friends, sending Email blasts, writing a blog post, and posting on social media pages, will help get the message out.

Analytics and Tracking

Pay great attention to analytics and tracking. Whether you’re building the referral program in-house, or you’re using a referral program software, stay focused on analytics, and track where new customers are coming from. You need to know whether your referral program is working or not, if it was worth implementing, and if the new customers you are gaining are satisfied and loyal. If you’re using a referral program software, analytics and tracking are included.

To wrap things up...

Having a referral program as one of your marketing campaigns is essential and will help your business thrive. You’ll be getting new customers that are more likely to be loyal, the ROI is high compared to the initial investment, and the fact that referred customers are more likely to try out your product/service.

Before building your referral program, make sure your current customers are happy and your product and services are well received. When thinking of what incentives to offer make sure they are incentives the customers will find interesting and rewarding. Also, make your referral program relatively easy to use and measurable. Lastly, continuously check the analytics and track where new customers are coming from to know what works.

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