A well-run referral program will not experience diminished profit margins. As the program scales, it will naturally become cost-effective.
Customer referral programs are simple to launch, but extremely difficult to successfully maintain.
However, despite this truth, thousands of businesses launch their own programs each year—subconsciously knowing that they’re destined for failure.
But why do they keep trying? It’s because they know the rewards that are waiting if they finally get it right.
What You Need to Know About Starting a Referral Marketing Program
Before digging into the finer details of referral programs, it’s important to understand one thing: referral programs are not the same as affiliate programs. Though they share some similarities, they are unique in their own rights. Whereas a referral program directly rewards customers, an affiliate program offers rewards to third parties when they’re able to successfully bring you a new customer.
Affiliate programs can be helpful and rewarding, but that’s not what’s being discussed here; this article is about true referral marketing programs, in which your business rewards existing customers for bringing in new customers.
Additionally, you need to understand whether or not you can afford to start a referral marketing program. Depending on how you plan to advertise your program, and how many of your existing customers you’re targeting, some upfront capital may be required. Furthermore, if your program involves cash incentives, your profit margins could take a slight hit.
However, all things considered, a well-run referral program never has to worry about upfront capital or diminished profit margins. As the program scales, it will naturally become cost-effective and worth your time.
Top Reasons Referral Marketing Programs Fail
Why do so many referral marketing programs fail to gain traction? The benefits are obvious, yet few companies know how to get it right. Here are a few of the top reasons why programs fail:
- Not enough focus on rollout. A lot of referral programs have good intentions, but they focus too heavily on the program itself and not enough on the rollout. The actual terms and conditions of the program are easy to develop, but the marketing of the program is where businesses come up short—and a weak rollout almost always leads to an underperforming program.
- Very little continuity. Many programs fail because there isn’t any cohesion among the business’ various departments and teams. Executives often delegate it to the marketing department, or sales department, or customer service department—but very rarely do they assign the responsibility to all three groups. This is a grave mistake and results in biased programs that don’t take important aspects into account.
- Ignoring customer segmentation. More isn’t always better when it comes to referrals. It’s much better to have a handful of quality referrals than hundreds of questionable ones. Despite this, many programs go after any and all customers, resulting in weak prospects and wasted time.
- Not offering strong enough incentives. Finally, Jason Wei, co-founder of Taggler, says that “programs often fail because there isn’t enough incentive for customers to pursue referrals. In other words, the time and energy spent finding new customers isn’t worth what they receive in return. That’s why we offer $20 in real cash for every new customer brought in with no limit to how much they can earn.” On the other hand, Papertrail, for example, gives customers 50MB of extra storage for referring new customers. As one company calculated, that’s 82 cents off a monthly bill. Don’t run a program like that.
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Four Tips for an Effective Program
Okay, enough of the negative. How do you actually develop a program that sticks? Well, if you ask the experts, here are some helpful things to remember:
- Cash may not be king. You’d think cash (which includes discounts and percentages off) would be the ideal reward from a customer’s perspective—but you’d be wrong. According to a study by the University of Chicago, non-cash incentives are 24 percent more effective at boosting performance than cash rewards. This is likely due to the fact that cash rewards are easily identifiable, whereas perks are difficult to accurately monetize and, thereby, seem like they’re worth more. In other words, a $5 credit may seem small, while a free month’s supply of X can seem big (even if it’s really only worth $2).
- Target your best customers. As mentioned in the previous section, many companies mess up by not segmenting. Don’t make this mistake. If you know who your best and most loyal customers are, go after them. Not only are they more likely to tell their friends and acquaintances about your brand, but also they’re more prone to couple that email referral with positive word of mouth. This almost always results in better quality leads.
- Reward both parties. Double-sided referral marketing programs are almost always more effective than single-sided ones. By rewarding both the referrer and the referred, you can greatly increase program conversion rates. This gives the referrer incentive to refer, while simultaneously encouraging the referred to take action (because they know there’s a tangible reward for them). Uber does this well, giving both sides a $20 credit.
- Say “thanks.” The simplest thing you can do is to say “thanks.” In the beginning stages, you should send a personal “thank you” message to each customer that conveys your enthusiasm and appreciation for their referral. Later on, if your program really takes off, you may need to streamline this with automated emails. Regardless of whether the “thank you” is personal or automated, it’s important that you let them know their efforts are well received.
Take Your Time
Remember, a referral program takes time to develop. Whatever you do, don’t rush it. You’ll end up with a lousy program that offers no real value. Instead, be patient and use these tips to make your program the best it can be. Who knows? Maybe your company could become the next Dropbox or Airbnb!