Customer referral program best practices

Referral marketing is not as easy as you might think.

A business looking at customer referral programs often has lots of questions to ask such as: Will it work for our business? What kind of ROI can we expect? How different is it from any other marketing campaign? Will our customers take part? What are the mistakes we should avoid?

Asking yourself these questions is normal, particularly if you’ve never run a referral marketing programme before. But here at Buyapowa, we have run over a hundred referral programs for leading businesses across 27 countries and in 21 languages in verticals as diverse as telecommunications, utilities, banking, insurance, fashion, beauty, e-commerce, homewares, and gaming/gambling. 

We spend all our time looking at referrals and how we can improve our software and the performance of our clients. We love doing what we do and we are very passionate about all things to do with customer referral marketing. So we would love to help you.

While we have written a long form 3 part blog article here, here is a quick speed read of what you need to know about making your customer referral program a success.

Let’s start with the basics… what is referral marketing?

Referral marketing is a growth marketing tactic that seeks to encourage existing customers to recommend a brand to their friends, family and colleagues. Often called word-of-mouth marketing or refer-a-friend marketing, it seeks to use positive word of mouth to help you get new customers. Research consistently shows people trust friends or family members to recommend a product or service more than ads online or on the tv. 

If done right, a well-run refer-a-friend program will deliver on its promises: low-cost customer acquisition, higher average order values and longer customer lifetimes. It can even help you win back customers who left your brand for negative reasons.

So what is the best advice to set up a successful referral program?

Our first tip is obvious: have an expert that has built and run referral programs for leading businesses on hand to help. Referral marketing can make an incredible difference to your numbers, but if not done correctly it’s unlikely to deliver.

You first have to choose the right software with accurate tracking, that is compliant with all legal requirements and regulations, that doesn’t treat all referrers the same, is continually being updated, allows a test and learn approach, is responsive on mobile and uses advanced psychology to get customers referring again and again. But it is not only about software, which is why we recommend you get the advice from experts.

Then you need to choose the correct rewards and incentives for your customer base. The options for rewards and incentives is a very complex topic in itself which is why we’ve outlined it in a separate post. But the best place to start is by working backwards from your desired outcome and plot everything out from there. Ask yourself what you really want people’s friends to do and whether these rewards would encourage you to take this action. 

Then you have to look at how your customers and friends might fall out of your referral funnel. It doesn’t matter if you get a million customers to visit your refer-a-friend program, if only 100 sign up because the rest fell out at different stages in the funnel. The steps in your funnel include when your customers sign up, when they share, when referred-in friends visit via the shared  link, and finally when they shop. You need to analyse all these steps to see where you could lose visitors. This is another reason for having an expert on hand to guide you as to what you should expect to see at each stage.

The next step is to consider how you will market your referral program, how you will drive traffic to your customer referral program. Think as to how your customers will hear about and find your program and when are the best times to ask for a referral, like after a positive review or NPS score.  Also as you are asking your customers to refer you, your program should be aligned with your brand to generate trust and confidence and not have logos of your supplier all over the place. Additionally, as you will want to keep your program fresh and engaging, being able to easily change copy and rewards quickly and easily is key. There are a lot of things to consider, which we go into in more detail here in our referral best practice guide.

And while we are happy to share what we have learned from powering hundreds of referral marketing programs globally, we would advise that instead of trying to do all of this yourself you should instead outsource your referral program to a best-in-class provider, like Buyapowa. After all, there is a reason global brands like T-Mobile, HSBC’s first direct, River Island, and GAP have to outsourced their referral program to us instead of tackling the development internally.

But do referral programs really work?

Statistics say that 9 out 10 customers trust peer recommendations and are four times more likely to buy when referred by a friend. Traditional advertising does not even come remotely close to these numbers, which is why more marketing leaders are indeed turning to referral marketing.

But how will it impact my business’ ROI?

It may be surprising to learn that referral marketing has the lowest cost per acquisition among digital marketing activities. But it doesn’t stop there. When you reward your current customers for bringing you new ones, this tends to encourage them to refer again and again, particularly if you use advanced psychological techniques like gamification, tiered rewards, flexible rewards, triggers and time jeopardy. 

Let’s say a new customer receives a $25 reward for being referred to you and purchasing from your site. The new customer receives the product he or she purchased and is impressed both with the product and your impeccable customer service. Not only will this happy customer be very likely to return to your site and purchase from you again, but will also be more likely to refer friends to you as well. It’s the gift that just keeps giving!

The ROI of referral marketing has several layers and costs that you have to consider, including:

  • The lifetime value of a customer
  • The costs of running your referral program
  • Calculating the ROI

A typical referred-in customer has a 16% higher lifetime value and is 18% more loyal than a customer acquired through a different method. That referred-in customer also typically spends 13.2% more than a non-referred customer.

But let the numbers speak for themselves. Below we show you how to calculate your ROI.

1. Calculate the Lifetime Value of a Customer

How much will you earn from an average customer over the lifetime of using your product? Your factors to calculate include:

  • Say, you sell electronics and your average customer spends, on average, $25 a month (factoring in that they will probably make one large purchase of $300 a year/12 months).
  • The average customer lifetime is 24 months
  • The average up-sell is $50

LTV = (Average customer lifetime * average monthly purchase) + Average up-sell = (24 * $25) + $50 = $650

2. Factor in the Costs of Referral Program

  • Your reward is 20% off to both the referee and the referrer for 12 months
  • The referee user spends approximately $25/month
  • And the referred-in customer also spends $25/month

Reward = 12 * ((20% * $25) + (20% * $25)) = $120

3. Calculate the ROI

ROI = (LTV – Reward) / Reward = ($650 – $120)/($120) = 4.4

If your ROI is over 1, congratulations, your referral program should be profitable. If you score under 1, you should tweak the reward in order to score over 1. Also remember that when you implement a customer referral program, each customer becomes more valuable, because they will now in turn help you find new customers.

So what should my next steps be?

This was just a quick introduction, we have lots more to tell you. Contact us today and we can help you get your referral program up and running.

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