How to Create a Customer Referral Program
- Set Your Goals
- Identify Your Target Audience
- Determine Incentives
- Outline Your Customer Referral Program
- Create Customer Referral Program Materials
- Track Your Results
Developing your small business marketing strategy is an important step in growing your brand and, ultimately, your sales. And an effective part of this overall strategy is word-of-mouth marketing. After all, 83% of consumers trust the recommendations of family and friends over other forms of advertising, according to a Nielson survey. Additionally, referred customers historically convert more often, have a higher lifetime value and retention rate, and are significantly cheaper to acquire than non-referred customers.
In other words, you should make word-of-mouth marketing an important part of your business plan. The best way to do so is with a customer referral program. What is a customer referral program? It’s simply a systematic way of getting current customers to refer others to your business.
In this guide, we’ll provide you with the steps you need to set up a customer referral program. We’ll also show you examples of successful customer referral programs, and hear from business owners on how they implemented a customer referral program for their business. By the end of this guide, you should have all the information you need to create a customer referral program for your business.
How a Customer Referral Program Works
We’ve already established why word-of-mouth marketing matters. Now, it’s important to understand that a customer referral program will only be successful if word-of-mouth marketing is already happening organically. And the only way word-of-mouth marketing happens organically is by selling a product or service that your customers want to tell their friends and family about.
“Your product and/or service has to be great in order for customers to feel comfortable referring it,” says Samantha Kohn, communications manager at the software company Mobials. “So before you create a customer referral program, focus on making your product awesome. If you accomplish that, then any type of referral program will work, because it basically becomes a gentle push to do something the customer would already want to do—share their happiness and success with a friend or colleague.”
If word-of-mouth marketing is already happening organically, a customer referral program provides you with an avenue for systematizing these word-of-mouth marketing efforts. Typically, that system is fairly simple: A happy customer is incentivized to refer others to your business. When the person they referred converts (makes a purchase, signs up, etc.) both the referrer and the new customer receive some kind of reward, as determined by the business.
In the past, managing a customer referral program would have been extremely complex: You’d have to track every new customer and figure out how they learned about your business. Now, though, a customer referral program is normally managed through software that allows you to create resources that can be shared by your customers to generate new leads. For example, you can now send all your customers a unique referral code that they can then share with their network. If someone from their network converts using the referral code, both the referrer and the new customer receive a reward, which is managed and redeemed through the software.
Now that we know what a customer referral program is and how it works, let’s learn how you can set one up for your business.
How to Create a Customer Referral Program in 6 Steps
Creating a customer referral program requires research, planning, and a good understanding of your current customers. Here’s what you need to do to get started:
Step 1: Set Goals
The overall goal of a referral marketing program is to increase word-of-mouth marketing—but what do you want that to lead to? More growth and revenue? Increased customer retention? More trust in your brand? Understanding what you want your customer referral program to do will inform how you approach the rest of the process.
You’ll also want to learn if any new customers are currently being referred to your business, and if so, how. To find out, talk to people within your business who deal with customer relations, and ask them how they’ve approached referrals thus far.
Finally, for budgeting purposes you’ll want to understand how much a new customer is worth to your business, and how many new customers your referral marketing program will have to generate in order to be worth the investment. According to research done by the referral marketing software company FriendBuy, the cost-per-acquisition of a referred customer is between $2 and $10. Consider how much a new customer is worth to your business against how much it will cost to acquire them via referral to determine how much you want to spend on a referral program.
Step 2: Identify Referral Sources and Targets
The next step to set up your customer referral program is to decide which customers you want referring your business, and the types of customers you want them to refer. You may think it makes sense for all your customers to be referring your business to everyone. While this can help, there are some referrals that are more valuable than others.
“Too often, well-meaning marketers will pay good money, discounts, or services for low-end customers,” says Richard Williams, vice president of marketing at Health Lynked. “While it may be an effective strategy to get just anybody in the door, it’s better to ask for referrals for mid- to top-end clients. It’s better to get a buyer in at a high level than have to upsell him or her later.”
Understanding who you want to target with your referral program, and the types of leads you want them to refer, will help you craft a customer referral program that can meet your goals. Keep in mind that the customers you target can be anyone from a weekly regular, to a vendor, to an industry leader.
Step 3: Determine Incentives
Determining incentives for your referrals and the customers who refer them is arguably the most important step in creating a customer referral program, as this motivates customers to advocate on behalf of your business. The incentive could be monetary, but it doesn’t have to be. Ultimately, the kind of incentive you choose depends on the customers you want to target.
“To incentivize your existing sources to make quality referrals, you need to know what they would like in return—be it a credit voucher, free products or an upgrade,” says Ollie Smith, CEO of Energy Seek.
Some business owners, like Charlotte Sparks, owner of public relations firm Initials By Jake, offers different incentives depending on the type of referral: “Clients may get a free month of service for every five new signups that use our services and mention their name. We also have a referral program where clients get discounts on media kits and press releases when they send us new prospects. When our clients leave reviews, we offer prizes, gift cards, and raffles just for them taking the time to share feedback”
Laura Troyani, founder of market research firm PlanBeyond, also advises business owners to keep in mind the idea of “gift equity” when drafting their customer referral program.
“There’s a desire to see that both sides are getting a fair deal,” she explains. “Referrers want to give their friends something, but they want to get an equal something in return. For instance, if sending a referral means you can give a friend $20 off a purchase, referrers want to also get $20, often in store credit, if their friend converts. In general, we all want to see ourselves as being treated fairly.”
Examples of incentives could be a small discount, a free product, a ticket for a raffle, or a customer’s name on your store’s wall. Square Cash, for example, offers a $5 referral bonus to both parties when a current user refers a new user.
Keep in mind, though, that you want to set parameters around your incentives. For example, if you offer a $5 credit to the referrer, you may want to set a lifetime max of, say, $100 in credits.
Step 4: Outline Your Program
Now that you know what your goals are, who you are targeting, and what the incentives will be, it’s time to fill in the details. Explain how the program will work, what customers must do, and how they must do it in order to get their reward. There can be quite a few gray areas when it comes to customer referral programs, so it doesn’t hurt to have a business lawyer get involved.
“Have your lawyer review any offers before putting them out to make sure they’re revocable without notice and that you can terminate a referrer’s bonus,” says Mark Catania, founder of Promotion Code. “If your referral program does get away from you, you don’t want to be on the hook for tens or hundreds of thousands of dollars of payments.”
Step 5: Create Referral Program Materials
Now that you have your customer referral program mapped out, it’s time to build out the interactive elements so that customers can use it. Some resources you might consider using include:
- Emails to your customers informing them of your referral program and how it works, including what kind of referrals you are looking for.
- A referral code that customers can share with others that links to a signup page.
- A landing page on your website or during checkout that prompts the customer to provide an email for referral.
- A script for your sales team to use to prompt a customer to provide a referral.
- Promotional materials (case studies, testimonials) that can be leveraged by customers to promote your business to others.
The approach you decide to use depends on your business and the type of customers you want to target. You might even make different materials for different customer segments. Then you need to promote your new customer referral program. Send out a newsletter or make a blog post. Add a banner to your website or put a sign in your business’s window. For all your work to be worth it, the world needs to be aware that your customer referral program exists.
If you need help building out and managing your customer referral program, there are a variety of software products that can help. According to the customer review site Capterra, here are some of the most popular referral marketing platforms on the market:
Step 6: Track Your Results
To understand if your referral marketing program is working, you need to track it carefully. Things you should pay attention to include who is referring whom, when were they referred, how many of your referrals are converting, and how much it’s costing you per referral. If you use referral marketing software, some of these metrics are automatically captured for you.
According to FriendBuy, there are some benchmarks to aim for with your referral marketing efforts. Generally, a customer referral program with a sharing rate of 15% is considered good. Each share should also result in at least two site visits, and the conversion rate on referrals should be around 10%.
Furthermore, you also need to keep an eye out for scammers. For example, if you use referral codes in your program, make sure every code is unique. You should also police websites like Reddit to see if your referral information is being posted there.
“People are going to search for ‘Your Brand Promo Code,’ which means you’re paying the referral bonus on every client,” says Catania. “That’s a perfectly fine marketing tool, particularly in the early stages, but it’s only perfectly fine if that’s how you expect the plan to work. If you’re looking for good-faith referrals because people want to share your product, you might get them, but you’ll also get tons of promotion code spam and sales where you’re paying the referral fee for no good reason.”
Customer Referral Program Ideas
Now that you know how to set up your own customer referral program, here are some examples of popular customer referral programs to give you inspiration:
Photo credit: Dropbox
Dropbox has a very simple customer referral program. When logged into your account, simply select the “Invite a Friend,” option. Dropbox will then send your friend an email. For every friend the referrer signs up, they will get an extra 500MB of storage on their account, up to 16GB.
Photo credit: Airbnb
Like Dropbox, Airbnb allows you to refer friends via a unique link that can be shared via email or on social media. If a friend converts from that link, your referral will receive up to $40 off their first trip, and you’ll get $15 for every person who completes a qualifying stay and $10 for every person who goes on a qualifying experience.
Photo credit: Evernote
Evernote has a landing page where you can put in friends’ email addresses to refer them. You can also post a custom referral link on social media or in an email. If your referral creates an Evernote account, you’ll earn 10 points for up to three referrals. Afterwards, you’ll earn five points per referral. The points can be redeemed to use Evernote Premium. Every person you refer will also get one free month of Evernote Premium.
Creating a Customer Referral Program: The Bottom Line
A customer referral program systematizes your business’s word-of-mouth marketing efforts in order to increase revenue and build a stronger, more loyal customer base. To create a successful customer referral program you need to set goals, target a customer segment, determine appropriate incentives, outline your program, create referral materials, and scrutinize your results.
You already have a great business. Now it’s time to leverage all the goodwill you’ve built up to take your business to new heights.
- Nielsen.com. “Recommendations From Friends Remain Most Credible Form of Advertising Among Consumers; Branded Websites are the Second-Highest-Rated Form“
- FriendBuy.com. “Referral Marketing Benchmarks“
- MaximizingMoney.com. “Square Cash App $5 Referral Bonus for Both Parties“
- Capterra.com. “Referral Software“