September 21 2017
We’ve said it before, and we’ll say it again:
Brand evangelism is the Holy Grail of customer retention.
First of all, if your customers are so satisfied with the service you provide that they’re willing to recommend your brand to their friends, family members, and colleagues, it’s safe to say those customers plan on sticking with your company for some time.
Second of all, peer referrals and recommendations are incredibly effective: a whopping 92% of consumers say they trust these recommendations more than the typical advertising or marketing campaign.
Lastly, peer recommendations are insanely valuable to a company. According to data collected by Kapost, a single brand evangelist is responsible for an average of three new customer acquisitions. Furthermore, referred customers provide an average 16% higher lifetime value than non-referred customers.
(Source / Case in point: Influitive’s referral stats.)
Unfortunately, the vast majority of consumers won’t take it upon themselves to recommend a product or service to their peers. According to research conducted by Texas Tech, only 29% of satisfied customers will recommend a product or service, despite the fact that 83% of these same customers claimed they would.
In other words: even if you’ve done everything you can to earn a recommendation from a customer, it still doesn’t mean the customer will actually make the recommendation.
For this reason, many companies develop referral programs that provide incentives to customers in exchange for spreading the good word about the company’s top-notch services.
However, incentivizing referrals isn’t a foolproof strategy. For a number of reasons, many incentive-focused referral programs fail to bring in new customers, and they actually end up alienating current ones.
We’ll break down some of the major reasons providing incentives for recommendations can backfire – and share how to avoid these issues as you develop your customer referral program.
Let’s get started.
The Dos and Don’ts of Incentivizing Brand Evangelism
Incentives in exchange for referrals might seem straightforward: Customers tell their friends how awesome your company is, and you give them a reward as a “thank you.”
Of course, it’s not nearly as simple as that.
We’ll discuss four major aspects of incentivizing evangelism:
- Making an investment
- Providing value
- Advocating for the right recommendation
Let’s start with the most important factor to consider when providing referral incentives: the cost of doing so.
Don’t Overspend; Make a Proper Investment
The entire point of focusing on referrals and recommendations in the first place is to decrease your overall customer acquisition costs.
So it wouldn’t make sense to throw more money at your incentive initiatives than they’re actually worth, right?
Let’s put it this way:
If the cost of providing incentives to referrers is about the same as the cost of acquiring new customers through non-referral means, you’re certainly not getting maximum value out of your referral program.
Implementing these incentives (and a referral program as a whole) costs your company in non-monetary ways (e.g., time and manpower), as well. So, even if you’re more than breaking even on ROI after doling out incentives, you still might not be getting as much as you could be from your referral program.
The good news, though, is that you don’t need to spend an insane amount of money on rewards and incentives for your referrers. As reported by the American Marketing Association, the size of the reward or incentive you provide doesn’t really matter to potential evangelists; it’s the act of offering a reward in the first place that inspires action.
At any rate, the point is:
Don’t simply throw money or other rewards at referrers because you assume the results will come out in your favor. As with customer acquisition initiatives, consider the costs (both upfront and ongoing) of including an incentive to determine how effective it will be for your business.
Don’t Offer Just Any Incentive; Offer Valuable Rewards
Okay, we might have stretched the truth a bit at one point in the last section.
Though we said that any incentive is better than no incentive at all, what we really meant was:
Any valuable incentive is better than no incentive at all.
Offering a referral reward that lacks value for the referring customer is at best meaningless, and at worst downright insulting.
Case in point: a cloud storage company (that we won’t name here) once offered referrers 50 extra megabytes of storage for every new user they brought on board. At the time of this “promotion,” the reward for referring a new customer translated to a measly eighty cents worth of cloud storage. Needless to say, this negligible reward was laughable in the eyes of high-end users who use thousands of times that amount in as little as one month’s time.
In contrast to this rather poor offering, here’s what Dropbox has offered for both referring and referred customers in the past:
(Source / For each referred customer, both parties would receive 500 free MB of storage (ten times what the previously-discussed company offered).
And… Surprise, surprise, it worked. Dropbox’s referral program alone was responsible for a 60% increase in signups within months of its introduction in early 2010.
But there’s more to why this program worked than the fact that Dropbox gave away more storage space than the other company. Dropbox gave away a substantial amount of storage space – enough to make a noticeable difference to the company’s average user. The company’s incentive proved to its users that Dropbox not only understands them, but respects them enough to give them something they’ll actually use.
One other thing to consider is how your incentive relates to how customers do business with your company.
Let’s consider two hypothetical companies: a subscription box company and a car dealership.
The subscription box business could offer referrers $10 off the price of their next month – but this wouldn’t work so well for the dealership (“$1,000 off your next automobile purchase – whenever that is!”).
On the flip side, receiving $10 cash from the subscription service doesn’t have the same draw as receiving $10 off the following month’s cost. But anyone would appreciate $1,000 cash for referring a friend.
These incentives also act as a carrot on a stick, even to satisfied referrers. Offering referrers $10 off their next month’s subscription all but ensures these customers will renew their subscription. And, the next time a referrer is ready to purchase a new vehicle, they’ll almost certainly think of the dealership that gave them $1,000 years ago before considering other dealerships.
The takeaway here is: don’t arbitrarily pick a referral incentive and hope it works out.
Take a good look at your customer base. Think about what they’d actually appreciate and what they’ll find valuable. And, on your end, make sure the gift also incentivizes your customer to continue doing business with your company in the future.
A Quick Note on Extrinsic and Intrinsic Incentives
Think back to Dropbox’s reward. They didn’t give away money, and they didn’t offer a discounted price for their services. They just provided referrers with more of what the company offers in the first place: cloud storage space.
Now, this isn’t exactly an intrinsic reward in the cheesy, after school special sense (“Your reward is the happiness you felt after spreading the word about our services!” Yuck…). But it’s intrinsic in the sense that users can operate the service to a higher potential.
On the other hand, the other examples we discussed (e.g., discounted services, cold hard cash) are extrinsic rewards – incentives that don’t necessarily relate to how customers use the service.
There really is no “right” way to go about incentivizing evangelism (in this respect, at least). Just remember to always consider your customers when defining your incentives.
Don’t Buy Referrals; Advocate for Legitimate Recommendations
One of the biggest problems with referral reward programs is that it’s not easy to tell if a customer recommends your business because they truly love the service – or if they just want a reward.
You need to develop your referral reward system in a way that minimizes its potential.
You might develop a progressive system that gifts rewards based on specific actions. For example, you give referrers a $5 coupon for each referred person who signs up for your mailing list, and back up that offer with a free gift after one of those individuals makes a purchase.
Or, you might provide ongoing rewards based on referred customers’ longevity. AllDayChemist’s referral program, for example, handles rewards in the following manner:
- Annie refers Barbara. Annie receives 5% commission on all of Barbara’s future purchases.
- Barbara refers Carol. Barbara receives the same 5% commission on Carol’s purchases.
- Because Annie is indirectly responsible for Carol becoming a customer, Annie also gets 2% commission on all of Carol’s purchases.
In this case, Annie’s reward is directly proportional to how often Barbara does business with AllDayChemist. Knowing this, it wouldn’t make sense for Annie to recommend the service to just anyone; she’d want to recommend it to the people she knows would use it – and use it often.
On the business owner’s end, such a strategy mitigates instances of customers “gaming the system” by getting dozens of acquaintances to make small purchases while they sit back and reap the rewards.
But there’s an even more important factor that comes into play here that’s rather easy to overlook.
The fact is, consumers are nearly two times more likely to tell others about a poor experience than they are to talk about an excellent one.