Why is referral marketing so cost effective?

Why Referral Marketing is so Cost Effective for Online Retailers

We have spent a lot of time on this blog talking about how referral marketing is the most cost-effective means for online retailers to win over new customers. In our experience, marketers tend to agree. For instance, Demand Metric’s 2016 referral marketing survey shows that 88% of respondents listed “acquiring new customers” as a core benefit of their referral marketing programs.

However, while our past blogs and posts have focused firmly on the benefits of referral marketing, they haven’t necessarily explained the why behind it all. Specifically, we haven’t talked much about why referral marketing is such a cost-effective way to attract new customers. Today, that trend changes. This blog will cover the top reasons why referral marketing is so inexpensive—as well as how you can use these factors to your brand’s advantage.

It’s cheaper to market to your customers than your prospects.

Part of the reason that traditional marketing can end up being so expensive is the nature of who you are targeting. You can narrow your target audience based on demographics and other factors, but you are still trying to push strangers through your funnel and convert them into customers. Some of these prospects will be familiar with your brand, but many others won’t be. As such, you are inherently fighting an uphill battle, trying to convince people to care about your brand and products when they are likely inclined not to do so.  This leads to leaks in your funnel, where single-digit conversion rates determine how many of the people you market to actually become customers.

Referral marketing flips the equation. Instead of promoting to prospects and trying to turn them into customers, you are promoting your referral program to your existing customers. Your goal is to encourage your customers to sign up so that they start promoting to their friends, family, and social media followers. In other words, you are still reaching your prospects, but you are taking a different route. Customer marketing is less expensive because you can know exactly who you are marketing to rather than using vague demographic information. It also achieves higher response rates, because your existing customers already know your brand and are more inclined to trust you.

>>    Customers will open your emails more often than your prospects will. <<


You can promote your referral program via existing channels

When you market to prospects, you have to go out of your way to reach them, whether by designing and placing display ads or by purchasing pay-per-click advertising. Promoting a referral program is easier because you already have existing communication channels that you can use to reach your customers. Perhaps you add promotional text to receipts or customer emails that market your referral program. You can surface the referral program to customers when they are experiencing positive emotions: you can promote the program with interstitial popup promotions during the browsing, buying and checkout processes on your store.  Promoting your referral program to your customers costs very little, because you are using your own materials and communication channels, but they can still encourage action from your customers.


>   It costs less to promote a referral program to your customers, than to promote your business to prospects.  <

Prospects who come from referrals are more likely to be valuable customers

Studies have shown that customers who come from referrals generate more profits than other prospects and are more inclined to become long-term customers. A big reason for these trends is that, with referral marketing, you have a level of trust built-in with your customers from the get-go. Most modern customers—especially online shoppers—tend to look for recommendations or guidance before making purchases. When a new prospect comes to your brand because a friend or family member referred them, they already feel inclined to trust you. The trust they feel for the person who recommended your brand is transferred over to you.

As a result, customers who come from referrals are more likely to feel confident and at ease when they start shopping with your brand, which leads to bigger and more profitable sales. And as long as nothing happens to shatter that trust, these customers tend to stick around for years to come. Some might even join your referral program and start bringing in new prospects on their own.

Compare this narrative to a prospect that comes to your brand from a banner ad or pay-per-click ad. Because so many customers today feel innately distrustful of online advertising, many will simply ignore these advertising efforts and will never even visit your website, let alone buy your products. Those who do take the next step may feel a bit skeptical about your company, even from the beginning. This skepticism makes customers less likely to buy big and more likely to have issues or complaints when their product(s) arrive.

Your rewards are your primary cost

The fact that prospects generated from referrals tend to make more purchases, are more loyal and have a higher lifetime value, would make referral marketing valuable at virtually any cost. What makes it the most cost-effective form of acquiring new customers, though, is that there is almost no cost to mention.

You will spend a bit upfront to implement your referral marketing solution. You will also have to spend a few hours each month to monitor the system and make sure that all rewards have been administered correctly. For the most part, though, your only cost for a referral marketing program is going to come from the rewards themselves.

Obviously, to encourage your customers to refer people they know to your store, you need to provide a perk. This perk may take the form of a discount, a gift card, or store credit, to name a few options. These rewards will cost you some money. However, compared to what you will make from 1) bringing new customers into the fold and 2) winning over high-value lifetime customers, the costs of the rewards are basically just spare change. The expenses you avoid, meanwhile—paid ads, pay-per-click fees, etc.—can add up to be quite a pile of cash.

Are you interested in learning more about the cost effective benefits of referral marketing, or in seeing what a referral program can do for you? Feel free to get in touch with the team at Buyapowa today.

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