Word-of-mouth marketing is often cited as the holy grail of growth: it converts like crazy, costs virtually nothing, and scales as you bring on more, satisfied customers.
But what many marketers miss is that this doesn’t always happen on its own.
With a little push using a referral program, you can encourage happy customers to spread the word and promote your products. This way, you get all the benefits of word-of-mouth marketing at a fraction of the cost of other paid acquisition channels like ads.
But how do you create an ecommerce referral program for your customers that will drive growth in a way that’s both scalable and cost-effective? In this guide, you’ll learn:
- What is a referral program?
- Why referral marketing is so powerful
- Things to consider when setting up a referral program
- Essential steps to creating a successful referral program
- Examples of successful referral programs
- Common referral program mistakes to avoid
- And much more.
Sounds good? Let’s get started.
What is a Referral Program?
A referral program is an incentive structure for your existing customers to tell their friends, colleagues, and contacts about your product in exchange for rewards.
These rewards could be free products, perks, and benefits, store credits, or even cold hard cash. The exact structure is completely up to the business to decide.
Referral programs have become the bedrock of many ecommerce stores because they have comparatively low customer acquisition costs. Especially since you’re only obligated to pay for performance, it’s a low-risk way for a chance at viral growth.
Since every referred customer can refer one, two, three, or even more customers, the combination of the right product and the right incentives can create a network effect that practically scales on its own.
The Power of Referral Marketing
According to a Nielsen study, 92% of people trust their friends’ and associates’ recommendations. It’s the same reason why customer testimonials, social proof, ratings, and product reviews all play a key role in customers progressing through the buyer’s journey.
In short, people trust people. And as an ecommerce retailer with a referral program, you can tap into human nature and turn your best customers into evangelists for your product, service, or brand.
While it might sound complicated to set up, even simple referral programs can produce massive results. Here are some of the key characteristics that make referral marketing so powerful:
- Simple to launch. You don’t need a complicated rewards structure to get the benefit of a referral program. Valuable, yet attainable, rewards are the cornerstone of any successful program.
- Low-cost. Ads are expensive. Social media can be hit or miss. But referral marketing simply involves your customers spreading the word for you. If you know the lifetime value (LTV) of your customers, it’s easy to determine a profitable reward structure.
- With a bit of automation, there’s little operational difference between running a referral program with 20, 200, or 2,000 monthly referrals.
- With referral marketing, everything is trackable via your referral program software of choice. KPIs like impressions, clicks, sales, commissions, and more are all available via your program’s dashboard.
- Additional benefits. Finally, referral marketing brings social proof, customer loyalty, and trust, brand validity, brand awareness, and it helps with PR and brand mentions.
And since brand awareness is a driving factor in many purchasing decisions, a referral program can help you scale growth in a way that leads to customers far beyond what you can attribute directly to the channel.
Things to Consider When Developing Your Referral Program
Referral programs don’t have to be complex, but they have to be valuable to your customers. After all, no one is going to refer their friends for a reward they don’t actually want or isn’t worth their time.
To ensure your referral program is competitive, enticing, and effective, here’s what you want to consider when setting it up.
1. Research the Competitive Landscape
Start by creating a list of your ecommerce competitors and research their referral programs. What kind of incentives are they offering? And what kind of performance is required to reach each incentive?
For instance, if your competitor gives out $25 per referral and you see their referral links on blogs, social media, media outlets, and forums, this is a good indicator that it’s a sufficiently motivating reward for people to take action.
But you need a balance; Too high of a reward, and people may promote your product disingenuously or in a way that doesn’t align with your brand in exchange for a high payout. Too low, and your customers may not feel valued or like it’s worth their time and effort.
Observing the success factors of your competitors’ referral programs is a good place to start.
2. Know Your Customer Needs
You can analyze your customer needs in several ways, whether through conducting surveys, analyzing recent support inquiries, or just reading reviews of your own products online.
One of the most popular ways to gauge customer satisfaction is through an NPS survey. The more your customers participate in these surveys, the better you’ll get at tweaking your products and customer onboarding.
This asks your customers to rate your product on a scale from 1 to 10, and indicate how likely they are to recommend your product to a friend. The more your customers participate in surveys, the better you’ll get at tweaking your products and customer onboarding.
The average number is your NPS, or net promoter score. A high NPS can be an early indicator that your referral program can become highly effective with the right incentives.
And the better you know your customer needs, the more easily you’ll be able to create a reward structure that aligns with what they value. This brings us to our next point.
3. Provide the Right Value
Building a successful referral program is a balance between what’s attractive to your prospective referrers and what’s profitable for you as a business.
Referral programs can take several different shapes. Two-sided discounts for the referrer and referee, points and credits, extra product, or even cash rewards. We’ll share specific examples of referral programs later, but it’s important to note that there is no one-size-fits-all solution.
4. Know Your Key Performance Indicators (KPIs)
Key performance indicators (KPIs) are metrics that help you understand how your referral program is performing.
Some of the most common metrics include net orders, the conversion rate of referred customers, and the average revenue per order.
We’ll dig into this later, but your loyalty program or referral marketing software to keep track of many of these KPIs for you.
This way, you’ll be able to understand how you measure up to industry benchmarks and how your referred customers compare to your overall customer base.
5. Set Your Program Goals
By setting goals for your program, you’ll be able to measure whether referral marketing is a channel worth investing in versus the other channels you’re already using.
Some examples of common referral program goals include:
- Grow the average order value (AOV) by $15 within three months.
- Grow website traffic by 10% month-over-month.
- Increase conversion rate by 25% year-over-year.
- Increase revenue by $5,000 by the end of the year.
An effective referral program can be a driving factor towards any of these goals if you set it up correctly. That’s because referrals tend to spend more and convert better than cold customers, and can add significantly to the bottom line.
5 Essential Steps to Creating Your Referral Program
If you are ready to start leveraging word-of-mouth marketing, follow these steps to create a customer referral program that grows your business.
1. Define Rewards or Incentives
Incentives or rewards are what encourage your customers to be part of your referral program. You want to be generous with your rewards, and optimize for your customers to reach their first referral as quickly as possible.
This sets up a positive feedback loop where they become more likely to refer customers to you again and again.
Knowing your competitive landscape comes in handy because you can match the commission or incentive offered by your most successful competitors.
Some of the most common rewards for ecommerce referral programs include gift cards, discounts, free products, features, or services, store credit, branded swag, and cash.
No matter what kind of reward you end up choosing, make sure that your customers will view them as valuable. One of the most powerful tactics is offering what’s known as a two-sided reward, where there are benefits for both the referrer and the person being referred.
For example, Harry’s, a shaving brand, teamed up with an ecommerce store to launch a referral program. Each referrer got a free razor for 10 referrals, a free shave cream for 5 referrals, a free shave set for 25 referrals, and a year of free blades for 50 referrals. Each referee got 10% off their purchase.
2. Make It Easy To Find
For a referral program to succeed, your customers need to know it exists. Make your referral program easy to find on your website, and notify new customers about your program soon after they’ve made a purchase.
The process for claiming rewards, and the rewards structure, should be easy to understand. You also want to make the referral process simple, by providing a memorable link or discount code your customers can share with potential referees.
Here are a way ways to improve the likelihood your customers will have an easy time using your referral program:
- Keep It Simple. Make it clear to your visitors that you want them to refer friends, what benefits you offer, and specific methods for them to achieve this. Your referral page doesn’t need a ton of copy on it to communicate the purpose of the program.
- Reduce the number of clicks. A one or two-click process for sharing with friends is far more likely to actually get used to. Don’t make your customers jump through hoops to send you referrals. Here’s a great example from Tabbedout:
- Multiple sharing options. Social sharing buttons, a clear and short referral link, or email templates are all great ways to reduce the friction of sharing the brand with friends. Remember that convenience is king.
- Mobile-optimization. Not only do people read their email and skim social media on their phones, but mobile shopping on ecommerce websites is at an all-time high. Meet your customers and potential buyers where they are by making your referral program and ecommerce flow mobile-friendly. Make sure your website loads quickly and it’s easy to navigate.
- FAQ page. Keep the load on support low by answering common questions on an FAQ page. Include topics like how you handle refunds, how quickly people can expect to receive their rewards, and how they can track their progress.
3. Use a Concise, Clearcut CTA
Encourage participation in your referral program through a clear, concise, and bold call to action. Put the text in a prominent place in your user interface like the main navigation menu, or feature it at the bottom of all of your transactional emails.
The best CTAs for referral marketing are usually one-liners (4 to 8 words) and use specific numbers or giveaway a popular product for free.
Here some examples:
- “Give $5, get $5”
- “Get $25”
- “Tell a friend, receive 20% off”
- “Spread the word, get free ___”
- “Refer and Earn”
Put it like this, a CTA=What Do Your Customers Exactly Get. Here’s a great example from HARRY’s:
Notice how they have the referral link right under the CTA? This allows for quick conversion of the visitors into customers.
4. Customer Support is Key
84% of consumers say that customer service is a key factor in buying a product.
If the customers you want to turn into evangelists have had a great customer experience with your brand, they’re that much likely to turn around and share that story with your friends.
One great way to boost your referral program is to send details about it to someone who’s recently had a positive customer service experience.
Since popular customer service tools let the customer record positive feedback after an interaction, you can use this information to send them an email campaign that promotes your referral program.
5. Know Your Numbers
As an ecommerce retailer, you’re probably already tracking a fair number of the same KPIs. But referred customers, and customers who’ve referred new customers, are an interesting segment you can use to further drill into your KPIs.
Here are a few of the numbers you’ll want to stay on top of when it comes to a referral program:
- Gross orders: The total sales through your referral program.
- Net orders: Gross orders minus orders that are canceled out by cancelations or returns.
- Click traffic: How many clicks your referral links are generating
- Commission: How much you’ve paid to your referrals, both as a percentage of revenue and as an absolute number.
- Performance from each segment of referrer: You want to find the common characteristics of your most prolific referrers and measure their performance.
- Total referrers: Total number of customers who have successfully referred at least one person to your product.
- Referral conversion rate: What percentage of referred visitors make a purchase on your website.
- Percentage of customers who refer: What percentage of your customers have actually referred someone to your product.
- EPC: Earnings per click, or per 100 clicks, depending on the reporting method.
- ARPU: Average Revenue Per Order.
Keeping these numbers in balance will help ensure that your referral program is healthy, efficient, and primed for growth.
Examples of Successful Referral Programs
As we’ve said before, referral programs don’t need to be complex to be effective. Here are companies that have done millions of dollars in additional revenue and grown significantly, thanks in large to their referral program.
1. Dropbox’s Refer-a-Friend Program
Like many other startups in 2007, Dropbox was struggling to grow its userbase and turned to advertisement as a way of attracting new users. Their cost per customer from the ads ballooned from $288 to $388, while Dropbox was only charging $99 per year for their product.
The numbers didn’t work.
So when they asked users to refer a friend in exchange for each person getting 500MB of extra free storage up to 16GB, this was incredibly appealing to users at the time.
After all, in 2007 that 16 GB of storage was a whole lot of space for MP3s.
Once Dropbox established its two-sided referral program, it grew from 100,000 users to 4,000,000 users in only 15 months. Dropbox later filed for an IPO in 2018 with a valuation of $8 billion.
2. Airbnb’s Referral Program
While Airbnb has since discontinued its guest referral program, the way they started was clever (if a bit invasive by today’s privacy standards).
Airbnb started by scanning the contacts in a customer’s phone and monitored which contacts were most likely to need a service like Airbnb. Those contacts got an invite with hyper-optimized copy, boosting Airbnb’s referral bookings by 300%.
After this initial program, they switched to something more traditional by inviting the friends of guests who weren’t members of Airbnb to join up in exchange for a $25 discount.
While they’ve closed the program down, it was massively successful. Referrals were more likely to become hosts, book more frequent reservations, and refer even more friends and family to Airbnb.
3. Uber’s Discounted First Rides Program
When they first started, the market was skeptical of how this company would differentiate itself from taxis and cabs that seemed to work just fine.
But the age of smartphones ushered in demand for an even higher level of convenience.
To get new riders hooked on the service, they offered a First Rides program. Existing customers could offer new users a free ride by referring them to the platform. For drive referrals, Uber offered cash bonuses.
As a double-sided marketplace, this model helped them fill out their offering as they expanded geographically at a record pace.
Common Mistakes Referral Programs Need to Avoid
Getting a referral program right isn’t rocket science, but it does take thought and the willingness to iterate. You might not get your referral program right out the gate. But you can reach a referral model that fits your business and your customers better by avoiding these common referral marketing mistakes.
1. Offering Poor/Insufficient Incentives
In many cases, a poor incentive is worse than no incentive. The reason is, a poor incentive communicates to the customer that you don’t value their time, energy, and opinion. Failing to make your incentive attractive for referrers is a good way to botch your program before it’s even had a chance.
Again, be generous with what you offer to referrers. Consider the time and energy it takes them to make a referral. The most important thing you can do is help customers reach their first referral, so they achieve the reward and feel a sense of accomplishment.
2. Attempting to Set and Forget
If you’re lucky, your first shot at a referral program will work out splendidly: customers will immediately spread the word about your product, refer more happy customers, and the virtuous cycle continues.
But referral programs take time and iteration to get right. You have to find the balance between a good incentive, ROI for the business, and all the messaging and processes to keep things running smoothly.
Treat your referral program as a work in progress, and regularly reassess how it’s performing. As you learn, you’ll be able to make your program more efficient and beneficial for both customers and your business.
3. Complicating Your Referral Program
It can be tempting to create a complicated referral program, replete with multiple milestones, complex rewards structures, and endless text to explain it all.
Don’t fall into this trap. Many referral programs have a single, enticing referral bonus that their customers can achieve again and again.
If you start with the right value proposition for your customers, keeping it simple will yield better results than trying to concoct complex rewards for high-performing referrers. You can also get a look into our webinar on overcoming your agency’s dependency on referrals.
Ready to Craft Your Referral Campaign?
Referral programs are a marketing powerhouse: the low customer acquisition costs, viral network effects, and scalability make it an extremely attractive channel to all kinds of businesses.
You should also choose fast ecommerce website hosting so that your pages load up quickly and information is easily accessible to users.
The key to a successful referral program is aligning your incentives with those of your customers, making it easy for them to promote you, and providing a great product or service for them to rave about.
There’s no better time to start a referral program than today, so get to it!
Note: The article was published in collaboration with Alladdine Djaidani, Founder at hustlrethos.com where he writes about how people can make money online and grow a business in the digital space. His work has appeared in several online publications including the likes of Forbes. You can connect with him on Linkedin and Twitter.
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