Building the Business Case for Referral Marketing

What can referral marketing bring to your business?

Maybe you’re wondering what a well run and managed referral program could bring to your business? Perhaps you’ve seen some breathtaking headlines in the press and wonder how that can be true? Maybe you even tried and failed with referral marketing before and are a little sceptical about whether it can work for your business? Maybe you’re just a natural born sceptic, and that’s fine? A little bit of scepticism never does any harm. But whatever your case, we thought we’d document some of the case studies of referral marketing success and provide examples of what a well run and managed referral program can achieve.

Now you probably all that know that several iconic and unicorn businesses were built on referral marketing, for example:

Uber’s ex-CEO Travis Kalanick famously claimed that:

“95% of all our riders have heard about Uber from other Uber riders” and reputedly for every 7 Uber rides, word-of-mouth generates a new user

Slack’s CEO and Co-Founder Stewart Butterfield stated in 2015 that:

“97% percent of new customers…[are] referrals” and that people hear about how useful, and efficient Slack is from friends in the office, colleagues…

Tesla’s CEO and Founder, Elon Musk, claimed a 42X ROI on each dollar spent on referral marketing and that a quarter of sales in 2015 came from referrals:

“Word of mouth has always been a major part of how Tesla sales have grown… When I meet Tesla owners, one of the first things they often tell me is how they have convinced many others to buy the car.”

Dropbox’s CEO and founder, Drew Houston claimed in 2017 that 35% of all daily signups came from its referral program and said:

“What ended up really working was we had this incentive referral program, so that if I invited you to Dropbox, you would get some free space, I would get some free space, so that two-sided incentive and kind of game-ifying ended up making something that was otherwise a pretty single-player utility into something that people used for sharing or that spread virally.”

Airbnb’s Head of Engineering Jason Bosinoff claimed in 2014:

“Referrals increased bookings by over 25% in some markets.”

But you might think that these examples are a little old, or that they were only relevant for fast growing businesses while they were ramping up, and that referral is not so relevant for established businesses. Well, in both cases you’d be wrong.

For a start, here are some contemporary examples:

• Shortly before its successful IPO in December 2020, Airbnb announced that 91% of all traffic to its website came through direct or unpaid sources, including turning guests into brand advocates and acquiring hosts by referrals.
• In 2021, UK recipe box provider Gousto announced that due to its investment in brand marketing, 82% of its sign ups come organically or via the referral program.
• Nu Bank, a leading fintech in LATAM, announced in 2020 that it acquired 80% of all customers in Brazil via referral despite offering no referral rewards or incentives other than a non guaranteed better chance of getting a Nu card.
• Polish mobile brand Mobile Vikings recently stated that it drives 70% of all new customer acquisition from its MGM program.
• Kim Faura, the ex-Chief Consumer Officer at UK mobile network Giff Gaff, stated at the UX Telecoms Exchange event in 2017 that it got 50% of its growth from referrals.
• A leading global meal-kit delivery service recently disclosed to us that it drives 40% of all customer acquisition from its referral program.
• Leading US online bank Ally Bank gets 10-15% of all customer acquisition from its referral program at a cost of 4-5x less than from other channels.
• Canada’s leading fintech Wealthsimple gets about a quarter of all customer acquisition from referral.
• The UK’s financial technology business Wise achieved phenomenal growth through referrals and said that there’s nothing more powerful than growing advocacy among your customer base.
• Two leading UK based pre-paid telecoms brands currently achieve between 25-35% of all new customer acquisition through their referral programs.

Hear from David Hixon, Executive Director – Head of Product & Lifecycle Marketing at Ally Bank, how they get between 10-15% of all customer acquisition from referrals and how those cost 4-5x less than from other channels:

See the full interview here.
 
Hopefully these recent successes across a variety of different industries and geographies have convinced you that referral marketing remains very much a potent and relevant customer acquisition strategy today, and not just for new businesses, but also mature businesses seeking to launch new business lines or convince existing customers to take out new products with them, or even win back lost customers. And actually, as you can see from these examples: no brand is too big for referral.

“This referral program, and our customers love for the brand, has turned our customers into a marketing channel, and arguably one of our most effective marketing channels. Our cost to acquire a traditional customer through traditional marketing channels is probably 4 to 5x what it is through the referral program. So, it’s a dramatic decrease in terms of cost to acquire. We’re talking about, depending on how you measure this thing, since launch it’s north of 10 to 15% of our customer volume [that] is coming from this program. So that’s a meaningful chunk of new customers, especially when they come at such a lower cost than the than the rest.
David Hixon, Executive Director – Head of Product & Lifecycle Marketing at Ally Bank

And, when you consider, that Buyapowa’s Reward Revolution research found that 95% of people have referred a friend in the past year and an amazing 83% have done so more than once, with 76% of people reporting having received at least one referral invitation in the past year, and 46% of people report having received between two and five referral invitations, the power of referral marketing is evident.

“We achieved phenomenal growth through Word of Mouth. There is nothing more powerful than growing advocacy among your current customer base…With referrals you could actually decide by yourself what is the acquisition cost that you would have. And usually it’s lower than traditional marketing channels.”
Asya Kuznetsova, Head of Product and Growth – Wise
See the full interview here.

Furthermore, our Referral Codebreakers research found that across all age groups, about eight out of ten people want to refer their favourite brands, and almost two thirds of all respondents said they’d view a brand positively or slightly positively if they knew it had a referral program.

Our referral program is quite significant for us. About a quarter of our new user acquisition comes via referrals. What’s really great about referrals is that because we have a control on the CAC and what we’re asking clients to do, it really gives us tight control over our ROI.”
Natasha Saviuk, Growth Director – Wealthsimple
See the full interview here.

And finally, our recent The Referral Myth Debunked research also showed that referral marketing does bring in incremental customers, with less than half of respondents claiming to have known a brand before it was referred to them. And even when they had previously known about it, most said knowing that their friend also appreciated the brand was very important, and two thirds claimed that the referral was what moved them from considering to purchasing.

“When you’re able to get that compelling first-hand testimonial and you’re able to use, say, a referral link or something like that where your friend gives you a method to enroll, those memberships last longer. That trust is built much more quickly. Those are our stickier members who are going to stay with us a long time and they’ll refer their own friends…It becomes this kind of chain of referrals that that people build over time. In terms of tenure, lifetime value, they become advocates for the brand themselves. All of that is kind of heightened when they have been brought in by a friend or a loved one. Our cost per acquisition for a referral pet is significantly lower than we see in other channels.”
Jacob Tice, Senior Marketing Specialist – Trupanion
See the full interview here.

Hear from Mobile expert David Caton why referred-in customers and people who refer are more loyal:

See the full interview here.
 

“What I found interesting in my time across different operators is the customers who join through a referral scheme or have referred, are the most loyal. You trust the person who’s referred you more than a company that you bought from directly. My friend Jim has told me about this company and I bought it so, therefore, I trust Jim, so I will stick with them. Whereas if I just went and bought it from a website or from a shop directly. I’m going on my own hunch, my own belief in that company. And people believe people more than they believe companies.”
Mobile expert David Caton

 

So what’s a referred-in customer worth?

Research from Philipp Schmitt, Bernd Skiera and Christophe Van den Bulte from Wharton University in 2013 compared some 10,000 accounts at a leading bank over a three year period and found that, after accounting for a referral reward of 25 euros, referred in customers:

• were 25% more profitable;
• churned at an 18% lower rate;
• had a 16% higher LTCV over six years;
• generated a higher CLV of 40 Euros and, before allowing for the fact that the customer acquisition cost was 20 Euros less, had a conservative 60% ROI over six years from referrals.

More recent research from Rachel Gershon of UC San Diego and Zhenling Jiang of the University of Pennsylvania analyzed the anonymized data of 41.2 million customers of a large US mobile brand over a ten year period and found that referred-in customers were 32% more valuable based on their increased spending alone. However, by failing to take into account that referred-in customers are themselves more likely to refer in new customers, we risk underestimating their value by a third.

What does a referred-in customer cost?

The elements to consider in determining the cost of a customer from a referral program include the costs of:

• the software (third party, agency or in-house build);
• the rewards and incentives paid out, including the percentage claimed and the percentage redeemed; and
• staff (internal and agency) used to run and manage the program

In the example of the leading global frozen meal delivery service mentioned above, we understand that the in-house team running referral comprises 40 people, and we also know of a leading European iconic travel business that has 30 staff dedicated to referrals. That’s before we factor in the costs of any agency support. In those cases, you can imagine that staff costs can be a high percentage of total costs. However, where a program performs well, the largest part of the total cost is typically the cost of the rewards and incentives paid out, and the software cost is a low overall percentage, being a fixed cost amortised across a large number of referrals.

A factor to consider is also whether the rewards and incentives have an actual or immediate cost to your brand. If you pay out cash rewards or third party vouchers then, to the extent that these are claimed by the referrer and referred-in friend, these have an immediate and real cost to your brand. However, if you pay out gift cards, loyalty points or offer discounts on future purchases, these may never be used and not have any cost to you, other than costs for issuance. If you offer a product or service, the apparent value to the referrer or referred-in friend may be much higher than the actual cost for you, for example in the case of Dropbox offering free storage, which has almost no marginal cost for the brand but has a cash value in the eyes of the customer.

Due to all the different variables at play, it’s difficult to give one figure as to the CPA from referrals. Instead it’s easier to compare the cost of a referred-in customer with the acquisition cost from other channels in percentage terms. Here our client survey in 2022 found that the CPA for customers acquired from referrals was typically 53% less than that from other channels.

In Summary

Hopefully we’ve convinced you that referral marketing can drive a very significant proportion of total customer acquisition, and bring better customers at a lower CPA. If you’d like to know more about how this could work for your industry, contact us and we’d be happy to help you model a business case for referral.