How does a referral program work and how does it affect sales?

It’s challenging to build a successful business, especially in these uncertain times. Business models are being challenged, consumer behaviour is constantly changing, and while research is still ongoing and providing us with guidelines for how to adapt, no one truly knows what lies ahead.

As entrepreneurs, the best way forward is to lead with what we know. What we’ve seen from time and time again is that the customers you have right now can help you grow your business, especially with a referral program.

We’re not just talking about earning repeat business from them. Sure, that is always great. However, what can truly help launch your business into a new success is when your current customers start telling their friends and family about you.

Referral marketing is a crucial component to the success of many businesses. We’ve compiled a detailed breakdown to help you understand what it is, how it can help your marketing efforts, and most importantly, the key components to running a successful referral program.

What is a referral program?

Before we get into how to build a successful referral program to help grow your business, it’s essential to understand what a referral program is.

A referral program is simply a process in which you prime and reward customers for spreading the word about your product or service. At its core, referral marketing is word-of-mouth marketing.

When you think about it, building a referral program makes sense – your customers already know about your products, and this makes them the best advocates for your business. They also most likely have friends or family who share their likes and can also form part of your target market.

Why is word of mouth marketing so effective?

To understand the power of word of mouth marketing, you need to know how consumers make purchasing decisions. 

If a potential customer is interested in buying a new product, they will often ask a family or friend member if they have any recommendations. Why? Because people trust the recommendations they receive from family and friends.

If no one from their social circle can help them make this decision, they might go online and search for reviews from other users. People work hard for their money, and before purchasing, they need to know if the product is worth it.

Word of mouth marketing is useful for many reasons, including:

1. Consumers know your product

There’s no better advocate for your brand than someone who’s bought and used it. They know how it works, and can easily explain some of its benefits to the next person. 

2. It is more cost-effective

Think about the last marketing campaign you had. Whether you focused on social media marketing, Facebook ads, cold calling, etc., there’s a good chance that it cost a lot of money. The best thing about word of mouth marketing is that it often requires a fraction of that cost while helping you reach a broader audience.

3. Word of mouth marketing customers spend more

Studies have shown that customers you acquire through word of mouth marketing spend around 200% more than other customers. They are also likely to make twice as many referrals. What is more, one report by GetVoIP shows that highly-engaged customers buy 90% more often.

There are many more reasons why word of mouth marketing is best for business, including its impact on your branding.

How does a referral marketing program affect your branding effort?

Having a strong brand is more than just about creating a memorable logo. A strong brand helps you increase your business’ value, it improves your employees’ motivation and pride, and it helps to build trust with your current and potential customers which turns into a better customer experience, amongst other things. 

For any business owner, building a strong, easily recognizable, and reliable brand takes time and effort. And referral marketing can help with the process. How? When your current customers speak to your potential customers about your brand, they won’t just be talking about the products you sell. Your customers may include important information, such as how excellent your customer service is, or some of the great charitable causes your business is affiliated with. 

This helps potential customers learn more about your brand story, which is essential for modern consumers. Research has shown that consumers want to align themselves with brands that have a good reputation and positive influence. 

So far, we’ve discussed the importance of referral marketing for the growth and success of any business. Now it’s time to unpack how to build an effective referral marketing campaign for your business.

How to run a referral program effectively

1. Provide a great product

It’s challenging to convince someone to speak positively about a product or service they don’t like. No matter how great your incentives might be, if your product isn’t exceptional, it will be near impossible to get your referral program up and running. 

2. Set goals

What are you trying to achieve with your referral program? Are you trying to increase brand awareness? Would you like to drive customer acquisition? Would you like to focus on customer retention?

Setting clear goals right at the beginning of the campaign will help give you direction. It will also help you monitor your progress during the campaign and see if you need to adjust specific components of the campaign to help you achieve your targets.

3. Choose your incentives

The right incentive is what will help lure your customer in. It should be an offer they can’t resist. There are different types of incentives, such as coupons or discounts. Whatever your choice, it should be relevant to your target audience. 

For instance, Dropbox, a file hosting service, has an incentive for customers who refer a friend – they get 500MB of space for each friend they refer. This world for both the business and their customers. It’s crucial then, to ensure that the incentive you choose aligns with your brand and what’s most valuable to your customers.

4. Pick the right referral program software

The referral program software can be regarded as the backbone of your campaign. There are multiple software programs on the market, each with their unique advantages. When deciding on a solution, your software must allow you to:

  • Build your entire campaign on the system
  • Set up all your marketing materials, such as landing pages and emails
  • Automatically fulfil the transactions and rewards for new and old customers referring

We’re well into the digital age, and setting up automation to help us make referral programs run smoothly is imperative. 

5. Track your program

It’s essential to track every detail of your campaign, such as which customer referred a friend, did the friend convert, has the loyal customer received their reward, and if the potential customer hasn’t converted, how will you nurture that new relationship?

While tracking your program, you’ll also need to have a good look at your metrics. Are you on track of achieving the goals you set out to? Is there room for improvement? All this is essential to helping you stay on top of your program goals.

Referral marketing doesn’t just happen effortlessly

As discussed earlier, referral marketing can be an essential part of your business’ growth. However, it doesn’t happen organically. You need to provide your customers with a great product and service, set goals before the program, create incentives that make sense for your business, and ensure that you choose a software program that will help you automate the system and track your progress. 

Following these simple steps will put you on the right track to creating a successful referral program that will work for both your customers and your business.