Complete Guide on Referral Programs for Marketers and eCommerce Managers
— by Talkable

What is referral marketing?

What are referrals? They are probably the best and easiest way to break down the barriers of the unknown that keep your target audience from becoming your customers. What has once been the most ancient type of marketing (word of mouth), has evolved into a manageable and scalable user acquisition tactic, with one of the highest conversion rates among all the channels available to digital-marketers.

Sounds too good to be true? We plan to prove it’s not, while teaching you how to launch your first referral campaigns in this 20-minute read!

Definition of referral marketing

Referral marketing is a way to advertise your product, by providing your existing customer base with an incentive to invite their friends. This results in them trying out the service or product you’re offering.

In other words, a typical referral program is when you ask a client, one who has already completed your goal action (registered, subscribed or made a purchase), to share their personal referral code or a link with their friends or social media followers. Something is promised in return, in the case that their friends becomes your customer as well. Successful referral marketing campaigns, in most cases, also offer a welcome bonus to anyone who comes through using a referral link.

Why referral marketing is so effective

Although the answer to why running referral marketing campaigns is beneficial for businesses seems to be very obvious — after all, you’re giving money away, who wouldn’t love that — there are many other factors that make this marketing strategy even better.

Reasons why referrals work so well:

• 01
  85% of people trust the recommendations they get from someone they know (according to this Nielsen study ).
• 02
  Not only do you get new customers, but you also boost the loyalty of existing ones through bonuses, and the fact that they’ve proven themselves as your brand advocates.
• 03
  Your current and future customers will not only get an incentive, but also an opportunity to broadcast their own values and lifestyle through association with your brand.
• 04
  Welcome bonuses make it easier for the prospective leads to make a decision on whether or not to try out your services.
• 05
  Well-built referral campaigns tend to have a viral effect, meaning customer acquisition will snowball after you ge

Referral vs Affiliate programs

Referral and affiliate marketing may seem somewhat similar, but they’re not. What’s common between the two, is that in both cases, you will be offering an incentive in exchange for getting a new customer or a prospect. Other than that, they are very different.

WOM and referral programs

Starting a referral program is only one part of a successful WOM strategy. Most people think that referral programs = word of mouth marketing, but in reality, it’s just a tool that makes it easier for your loyal customers to share about the positive experience they had with you.
Here are a few things you should keep in mind before starting a referral campaign:

Apart from that, you have to take care of branding, customer satisfaction, and emotional triggers. They will all play a part in your clients’ decisions, when it comes to the question of whether they want to advocate for your product or not.

How to Start a Referral Program

Define your customer base

It’s no longer a secret - before you do anything in terms of marketing, you have to ask yourself who you are doing it for. If you don’t have a clear understanding of who your customers are, and what’s important to them, then it’s time to start asking those questions.
First of all, it’s best to define what target audience you want to address. There are a few standard options to target:

• Paying customers. If you’re providing a service that satisfies your existing customers, and they’re with you because of its greatness, not because there’s no other service to turn to, this will be the audience most likely to advocate for your brand.
• Registered users. They might have not given you their money yet, but that doesn’t necessarily mean they’re not ready to share the way they feel about your product.
• Newbies. Offering an incentive to the prospects, who have yet to connect with your brand, can be a powerful tool in helping those who have just learned about your brand, to make their first move.

Although you have to define and acknowledge the differences between those audience segments, it doesn’t necessarily mean that you have to choose only one. What you have to keep in mind is that, often, referral campaigns are not designed to be one-size-fits-all. The best practice is to separate the campaigns and deliver the unique value at the right time for each customer segment.

Customer portrait

Almost every marketer in the world has done customer profile research at least once. If you have, you know that creating a resemblant customer portrait is impossible without asking yourself and your target audience the following questions:

Geographics

Does it matter to us where they’re from? Can we still provide products or services to people if they are from a different region than most of our customer base? Will their behaviors or needs change depending on where they are in the world? Are there any specifics to the region where they’re from?

Lifestyle

What are their attitudes and beliefs towards life, what’s their personality like, what communities do they belong to, and which attributes do they choose to promote their lifestyle?

Emotional

What makes you relatable to them on an emotional level? Is it the message you send out, or the feeling they get when they make a purchase from you? Do they associate themselves with your brand and what makes them feel that way?

Demographics

Is our product made specifically for people of a certain race, gender, ethnicity, or background?

Socioeconomics

What’s the average income of our customers, how do they tend to distribute their household budget, and how does their education or current occupation affect their consumer behavior?

Rational

What benefits can you provide that would be valuable and meaningful to them? What are the rational reasons they’d choose your company over any other?

Personas

Once you find answers to all those questions, it should be easy for you to picture a person who represents your perfect customer and is the essence of what your target audience is. A great tactic that helps not only you, but also future generations of marketers who will be working for your brand, to visualize customers and understand what kind of people they are.

A few things that an awesome buyer’s persona should have:

• Image. Choose a photograph of a real person that fits into the idea of how your typical customer might look.
• Name. Make them as human as possible. Nothing helps marketers and product managers more than the realization that their customers are real people, and real people have names!
• Bio. Who they are, where they’re from, how old they are, what they do for a living, and whether or not they have family — tell their story and include everything that really matters.
• Personality. What do they believe in, what routines do they have, and how can your brand fit into their image of the world they live in.
• Goals and challenges. This part should represent their rational reasons to choose you over anyone else.

Loyalty and customer satisfaction

While referral programs show incredible results for pretty much any digital business out there, the brands who have the easiest time starting with their first campaigns are the ones whose customers show the highest levels of customer satisfaction and loyalty.

What helps a lot is knowing where you are at the moment on those KPIs. The approaches that can help you learn about the true state of affairs can be either passive or pro-active.

For instance, we understand the passive approach as analyzing the data you already have, without taking any additional steps. The metrics you can rely on in this case would be:

All of these metrics can show you whether it is a good idea to start a referral program at this point, or if you should work on improving your business frameworks first.

The pro-active approach, on the contrary, means that you have to ask for feedback on the specific parts of your operations that you are not so sure about. After that, you’ll want to do some in-depth customer interviews with open questions about everything that may be a concern for you.

There are pros and cons to both methods of gathering and processing data on customer satisfaction and loyalty. For example, if you only rely on numbers and data analytics, you may not learn about the exact things that serve as dealbreakers for your existing customers and leads. When it comes to personal interviews, you might fall into the arms of false assumptions and focus on things that don’t matter on a bigger scale, while ignoring the real weak spots.

Of course, the logical solution would be to stick to both hard data and personal interviews. They give you a chance to hear what your actual living and breathing customers have to say, without disregarding the analytics.

Brand advocates

Brand advocates are the people who are loyal to your product or service and feel confident about recommending it to a friend.

On average, only 10% of your most loyal customers will become active brand advocates, ready to spread the word, even if you don’t offer incentives. They are your most valuable players, and here are some stats that will make you truly believe this statement:

Naturally, you have to understand that in order to keep your most active brand ambassadors motivated and excited, you have to show them a little appreciation. That’s why, in the long run, it’s best to set up full-fledged loyalty programs instead of simple referral campaigns.

This approach also opens up an opportunity to spice up your referral game, using leaderboard campaigns and profile dashboards, where the engaged advocates can keep score of their shares, referrals, earned bonuses, and ratings.

Design a referral strategy

You already know that referral programs will work best for business that take care of customer loyalty and satisfaction. Similarly, WOM will not be as effective if you do a lousy job designing referral campaigns. Luckily for you, after over 9 years of experience building, customizing, and improving referral programs for our clients, we at Talkable have narrowed down the ingredients of successful referral marketing to just a few simple steps. The results will provide killer campaigns, and we will guide you through the entire process!

Find the right incentive

There are a few different types of incentives you can choose from:

• Discounts

  Who doesn’t love discounts and special offers? Well, maybe your target audience doesn’t. The rule of thumb for choosing discounts over points or store credit, and vice versa, is to go with whichever number looks more significant. But you know what’s even better? A/B testing!

• Gifts

  This could be anything depending on what kind of products or services you’re selling - starting from an awesome branded sticker pack or t-shirt, to sample kits or free products. This incentive is not as popular, compared to ones that are directly related to your AOV, store credit, or discounts, because they tend to have lower performance and engagement.

• Added value

  You can offer free delivery or any additional service that your clients want, but might hesitate to spend money on. This approach can also help you upsell those services too, so make sure to deliver the same quality as you would for money. Just like with gifts, you have to be careful with this type of incentive. If your results are not positive, we recommended experimenting with your offers and observing what effect that has.

• Bonus points

  For businesses who want to combine referral campaigns with already existing or up and coming loyalty programs, adding bonus points, that can later be used by clients for purchases, can be a great idea.

• Money (store credit)

  One of the most popular incentives used for referral campaigns, and it’s that way for a reason. We want to emphasize that offering discounts and store credit incentives work in a very similar way. For the best results, we recommend split-testing the two offers before settling with one.

Overall, the best incentives on average tend to follow this rule:

Pro tip: Double-sided rewards

Double-sided rewards offer incentives for both brand advocates, and their friends that join the referral program. Most businesses are well-aware of these rewards and actively take advantage of them, as they lead to an increase in conversions. What is much less known is that offering bigger friend rewards actually raises the advocacy rate.

Write a clear message

It should be easy to understand the conditions of your referral program. It’s best to keep copy short, but if you find it reasonable to write a longer passage explaining the conditions of participation — go for it! Anyone who’s been in digital marketing long enough would tell you that there isn’t one single solution that works well in all cases.

You already know what we’re about to say next, don’t you? You guessed it:

If you're not sure - A/B test!

To get you started here are the 5 most popular headlines for referral programs:

Spread the message

Spreading the message about your new or ongoing referral program shouldn’t be limited to outbound traffic sources. The most effective ways to engage with your customers is to use on-site resources. Just think about it - referral revenue might increase by 100% just by adding more placements for your referral offer.

A few sweet spots to place your referral campaign banners can be these:

Here are a few ideas on which media you can use:

As you might have noticed, these are all the traditional channels. What’s unique about spreading the message about referral programs, is that it’s wise to use the placements that aren’t available to any other advertisers but you - your own website or app.

Make your referrals easy to share

Your referral program has to be easy to understand, but it should also be easy to use with no extra steps required. Referral marketing software like Talkable makes recommendations to friends effortless for customers, and it's easy for your team to implement and maintain.

An alternative to using an existing software solution would be developing the referral program modules from scratch. However, even in the long term, a decision like this is questionable. This is due to the significant challenges that businesses face when deciding to develop a referral program in-house:

Measure and improve

Ground level benchmarks

To understand the real effect of your referral program, it’s best to set benchmarks on some of the basic marketing and user acquisition KPIs.

Of course, you’ll always be able to make side by side comparisons of CAC, ROI, conversion rates, and all the other metrics for different channels (e.g. Referral vs Organic or Referral vs PPC). What you might discover is that starting a referral program will affect your overall user acquisition and marketing performance across different channels, due to the growing viral coefficient.ё

Referral funnel

Just like any other traditional marketing channel, a referral campaign’s analysis and management can be visualized through a funnel. Let’s take a closer look at a typical referral funnel and average referral program metrics that you should be aiming for with your own campaigns:

Advocacy

Advocacy is a percentage of customers who have decided to share the offer after viewing it.

The average Advocacy level is 8-10%.

Advocacy is considered to be the top of the funnel in referral marketing campaigns, and a few ways to fix weak advocacy are:

Clicks

Clicks are the percentage of links that have been clicked on after they were shared by an advocate. This also may be referred to as CTR, or click-through-rate.

The average CTR for referral campaigns is 35-40%, but it varies based on traffic channels as well. Usually, the referral program benchmarks have the following multipliers based on the platforms used:

The best way to increase the CTR for a referral campaign is to, first of all, test the incentives offered to join the program. By increasing the offer, you will get the main question out of the way.
- if people don’t opt in, is it because they are not motivated enough?

Once you find the perfect incentive that gets you the most referrals for the least amount of money, other ways to increase the CTR are: A/B test copy, design and CTAs of promotional materials, referral campaign messages, and emails that people get when they’ve recommended your product.

Visits

Typically, when a user clicks on the referral link shared by an advocate, they will get to the claim page, where they'll have to get through an email gate, in order to claim their coupon and enter your website. Therefore, the number of visits is the percentage of people who made it to your website after they clicked on a link.

On average, the visits percentage is between 30-35%.

To increase visits, you should minimize the friction that users face once they click on the link. This can be done by removing any gates on the claim page. One way to do this is to only show a notification welcome-message that says a coupon will be automatically applied to the person’s order. Here’s an example of how one of our clients, Native, executed a page like this:

Conversion

Conversion is the share of visitors who have made a purchase from you.

On top of the typical conversion optimization tactics, you get a few other techniques that may help you increase the conversion rate with referral traffic.

First of all, you should once again try adjusting the friend offer. For example, you can try offering your leads a discount percentage, instead of a monetary amount, lower a minimum required order, or emphasize the time limit for which the offer will remain active.

Another way to increase conversions and referral revenue is to add a widget or a pop-up with a reminder to claim the offer and complete their first purchase. If you acquired their email address during earlier stages, you can send such reminders via email as well.

Beware of fraud

Referral programs that are built without keeping the possibility of fraud in mind, risk becoming a target. The most typical scams that involve referral programs are:

There are many ways to distinguish and prevent fraud using technology that will save you money. While it’s possible to execute them with the help of your in-house developers, we recommend finding a software solution for referral programs that would be capable of fraud-prevention. Talkable is the perfect solution, since it’s often a faster and more financially efficient way to fight fraudsters.

Here is a diagram of the most common indicators Talkable uses to identify and prevent fraud:

How much does it cost to start a referral program?

There are many factors that impact the cost of starting a referral program. The cost of starting and running your own referral marketing campaigns depends on the size of your company, how big your customer base is, what traffic loads you have, and whether you decide to develop your own solution or use an available software.

To help you calculate the budget needed to launch, here’s a list of things you have to account for: