It’s no secret:
We at PostFunnel place a huge amount of importance on brand advocacy and evangelism. And why wouldn’t we? After all, nearly three of every four consumers say word-of-mouth and referrals from friends, family members, and colleagues is the largest influencer as to whether or not they go through with a given purchase. On the company side of things, generating positive referrals can lead to major gains for an organization. According to a study by Neustar Marketshare, a 10% increase in positive word-of-mouth (WOM) can lead to a 1.5% increase in sales. Additionally, AdAge found that positive WOM can increase marketing effectiveness by more than 50%. In other words, positive WOM allows companies to sell more – while spending less to do so. However, there’s no guarantee that even your most satisfied customers will take it upon themselves to refer your brand; in fact, only about 30% of your happy customers will do so.
This is where an effective customer referral program comes in handy.
While we’ve previously provided various tips and tricks for creating a customer referral program that engages both current and potential customers, we’re going to take a more step-by-step approach to doing so in this article.
Considerations Before Getting Started
While customer referral programs can be big for business, they certainly aren’t a magic bullet.
You shouldn’t expect your current customers to begin making referrals just because you’ve created a platform that promotes doing so. So, before you begin developing a referral program, you’ll want to take a few things into consideration. First, you need to have a true understanding of your current customers’ overall satisfaction with your product or service – and with your brand as a whole. They’re not going to refer you to their peers if they aren’t happy with what you have to offer. Secondly, you’ll want to determine whether or not you need to implement a referral program in the first place. To find the answer to this question, you’ll want to compare your Net Promoter Score to the actual amount of referrals you generate in a given period. On the one hand, if your NPS correlates to your referral numbers, you might already be reaching the maximum amount of referrals you could hope for; on the other hand, if your NPS is much higher than the number of referrals you’re actually generating, you’ll want to develop a program that prompts your satisfied customers to begin making recommendations.
Finally, you might consider surveying your current customers to assess their willingness to participate in a referral program in the future. While the responses you receive might not be 100% accurate (customers might say they would participate but not follow through), you’ll still have a better idea of whether or not creating a referral program would be a worthwhile venture.
Once you’ve considered all of this information and confirmed that a customer referral program would benefit your business, you’ll be ready to move forward with the initiative.
The Step-by-Step Process of Developing a Customer Referral Program
Define Your Goals
As with all other marketing initiatives, you want to have specific goals in mind for your referral program. Aim to get your actual referral numbers lined up with your NPS. A high NPS that doesn’t correlate to actual referrals is a vanity metric; it only matters if your customers are following through with a recommendation. You also want to set a goal with regard to the conversion rate of your referred visitors. If a referral doesn’t lead to a new customer acquisition, then that referral is also a vanity metric. According to FriendBuy, you should aim for a referral conversion rate of around 10% – or more, if possible.
The whole point of generating referrals is to grow your customer base (and your revenues) in a cost-effective manner. You want to take note of how your referral program affects your overall customer acquisition cost – especially in relation to your total customer lifetime value (obviously, you want your CAC to decrease, and your LTV to increase). You’ll want to track the overall ROI of your referral program over time. According to data collected by Ambassador, enterprise companies should potentially aim to generate an ROI of 374% within a 12-month period from an effective referral program.
With these benchmarks in mind, you’ll be in a much better position to approach the creation of your customer referral program strategically – all but ensuring maximum effectiveness of the program.
Define Your Targets
The next step of the process is determining who you want to be a part of your referral program – both as far as current and potential future customers are concerned.
Targeting the Right Advocates
Ideally your absolute best and most-satisfied customers will be your most active advocates. Not only do these individuals genuinely appreciate and value your brand, but they also likely have a lot of positive things to say about your services, as well. So, when creating your referral program’s structure, offers, and promotional materials (which we’ll discuss momentarily), you want to do so with your best customers in mind. These are individuals who:
- Have the highest LTV
- Have responded positively to NPS and other surveys
- Have provided positive reviews and testimonials for your services
- Follow your brand and engage with your team via social media, blog comments, etc.
You want to focus on the type of customer we referred to earlier: those who say they’d be happy to refer your brand to their network, but simply have yet to do so.
Generating High-Value Referrals
Your best customers (the ones who love and have an in-depth understanding of your services) are more likely to refer specific people within their network to your brand. On the one hand, they may refer individuals who, like themselves, fit right into your target customer persona. On the other hand, your best customers might refer a completely different type of individual – one who somewhat fits your persona, but is also somewhat of an outlier; in cases such as this, you’ll have potentially found a new audience to begin targeting.
Define Rewards and Incentives
The main difference between having a referral “program” and soliciting referrals is that a program includes incentives to your participants. When determining what incentives to provide your referrers (and/or your referred customers, as we’ll discuss in a moment), you want to consider two main things:
- How effective the incentive will be in generating participation
- The cost of providing the incentive
Provide an incentive that your customers will appreciate. This is another benefit of targeting your best customers: since you’ve likely gathered a ton of information on these individuals, you’ll be in a much better position to develop an incentive that will resonate with them. It’s also worth mentioning, here, that non-cash incentives are actually much more effective in generating referrals than cash-related rewards. Additionally, providing incentives that tie into the services you provide (such as credit toward a purchase or a free item of choice) increases customer engagement – and can also incentivize future interactions, as well.
Here are a few ideas to get you started:
(Pro Tip: After you’ve generated a list of potential rewards to offer, consider surveying your best customers to see which they would prefer.)
Of course, you don’t want to give away so much that you cut into your desired profit margin. Typically, you want your incentive to amount to – at the very most – about 20% of the average value of an initial purchase. However, this all depends on a number of factors (such as whether your service is subscription-based) – essentially boiling down to determining how long it will take to recoup the cost of the incentive. You might also consider providing double-sided incentives within your referral program. Here, you’re not only providing an incentive for your current customers to make a referral, but you’re also providing an incentive for potential customers to accept the recommendation, as well.
While you’ll probably want to start out by providing more basic incentives such as the ones we’ve mentioned, you may want to get more creative as your referral program evolves. For example, you might want to begin offering tiered rewards for your best referrers, or perhaps develop a VIP program that includes special benefits for them. Or, you might want to experiment with the reward you provide per referral. For example, you might find that offering a $25 discount for a first referral and $5 discount for each subsequent referral is more effective (and more cost-effective) than offering a $10 discount per each referral. Above all else, however, you want to ensure that your customers understand exactly how your reward system works. If, for example, you make it unclear that a referrer will only receive their reward once the referred customer makes a purchase, you may unintentionally cause a rift in your relationship with the otherwise satisfied customer – the exact opposite of what you’d intended.
Promote Your Referral Program
In discussing promotion of your referral program, there are two main topics to focus on:
- Creating visibility for the program
- Teaching your customers how to engage with the program
If your customers don’t know about your new referral program, they’re not going to be able to participate in it. Provide numerous opportunities for your customers to learn more about the program both before and after you make it accessible. The way you decide to promote your referral program depends heavily on how you typically reach your best customers. You might include an announcement in your monthly newsletter, or you might create a drip campaign that generates excitement for the upcoming initiative. You could also pin a tweet or Facebook post to the top of the applicable social media page that points your followers toward your referral program’s landing page. You’ll also want to include numerous mentions and calls-to-action relating to the program on your website.
Once you’ve gotten your customer to at least check out what your referral program has to offer, you want to be as thorough as possible.
In the above example, Hubstaff does three important things:
- Explains exactly what’s required of the referrer
- Explains what the referrer will receive in return
- Makes a point of mentioning that referrers should only recommend the service to those who would actually be interested in using it
Additionally, Hubstaff provides customers the option of gathering further information about the program before they begin recommending others. Maximize the chances of a referrer recommending your services to a high-quality lead (rather than just anyone in their network). Since your customers (probably) aren’t marketing specialists, though, you’ll need to provide guidance as to how to do this.
You might choose to highlight your brand’s main services within your ask (“Do you know someone who needs X, Y, and Z?”), allowing referrers to narrow their scope. Or, you might provide them with a case study or testimonial, and again ask them if they know anyone in their network who the story reminds them of. Or, you might simply ask them to share one of your blog posts or other content on their social media page, then reach out to anyone who engages with the post to make a referral. Now, you don’t want to force your potential referrers to jump through hoops or do more work than they care to; again, this could turn them off to your brand completely. But you definitely want to provide as much assistance as you can to those who are interested in making quality recommendations to their network.
It’s worth noting that customers may be willing to put more effort into making quality recommendations if the reward is worth doing so. For example, All Day Chemist’s referral program continues to reward referrers for as long as their referred customer stays on board.
By onboarding your most valuable customers as evangelists of your brand, you inherently heighten your bond with them in the process. While the extrinsic rewards you provide may act as “bait” for these individuals to become referrers, the intrinsic reward of becoming a more active member of your organization’s community is what will keep them onboard for some time to come.
As time goes on, you’ll gain a better idea of what is and isn’t working with your referral program. Let’s go over the main areas you’ll want to keep an eye on moving forward. First, you want to know how the program is affecting your bottom line. Are you attaining the goals you had set from the beginning? Has your CAC decreased substantially? Are you generating an ROI that’s worth not just the monetary investment, but also the time and energy it takes to maintain the program? If the answers to these questions are positive overall, you can then ask questions regarding how effective the program has been.
With regard to referred individuals, you want to assess the probability of them becoming full-paying customers (i.e., their overall conversion rate), and also the LTV of those that do become customers. With a better understanding of these data points, you’ll be able to tell whether your referrers are targeting the right individuals within their network (and whether or not you’re doing an effective job of helping them do so).
When examining your referring customers, look at any changes to your NPS, as well as to your actual referral numbers, since you implemented your referral program. Again, you want your NPS to be as close to an actual representation of your referral numbers as possible – not just a sign of potential gains.
Finally, be sure to reach out to both your referring and referred customers from time to time with surveys and other questionnaires regarding their experiences with your referral program – as well as with your brand as a whole. As with all other aspects of your service, the more your referral program meets the expectations of your most valuable customers, the more likely they are to continue doing business with your company.