The Best Referral Guide You'll Ever Read
This guide thoroughly explains all the steps needed to build a fantastic referral program that will let you win more customers. Read on to discover how to build a referral strategy, choose program goals, and quickly increase participation rates. You will also learn how to design the referral program landing pages and other frontend elements. Finally, you will see how to track and optimize your referral program strategy in the long run.
What will you find in this referral guide?
- What is a referral program?
- What is the difference between single and double-sided referral programs?
- What are the types of customer referrals?
- What are the benefits and risks of referral programs?
- How to identify potential brand advocates?
- Which referral rewards to use?
- How to personalize your referral program?
- How to use promotion psychology to design your referral strategy?
- How to make your customers join your referral program?
- How to design your promotional messages and advertise the program?
- How to design your website and mobile app UI for referral programs?
- How to measure your referral program ROI?
- How to optimize your referral program strategy?
- Referral program inspirations with a case study from OVO Energy.
What is a referral program?
A referral program (word-of-mouth marketing) is a type of a marketing campaign in which companies reward customers for spreading the word about products or services. Referral programs are an important part of a word-of-mouth strategy that may also include direct referrals, online reviews, or other forms of user-generated content. Referral programs continue to be one of the most effective growth tactics for young brands.
What is the difference between single and double-sided referral programs?
Referral programs can be either single or double-sided, depending on whether you reward only the referrers (advocates) or the referred friends as well (as a welcome incentive, to encourage them to place an order with you). The single-sided referral program can be cheaper to implement than a double-sided one but it may have a lower acquisition (success) rate. If you are wondering whether to launch a single- or double-sided referral program, read our post on double-sided referral programs. The implementation cost depends more on the reward type and value rather than the program type. For instance, instead of offering a $30 gift card to a referring party, you can offer two $15 gift cards to both the advocates and the referred friends.
What are the types of customer referrals?
Customer referral happens when a customer refers your product or brand to their friends or family. There are three common types of referrals:
- Direct referrals – occur naturally as customers are happy with your product and spread the word by themselves, with no incentive offered.
- Reputation referrals – happen thanks to high brand awareness and the company’s reputation (despite the person not being your customer).
- Incentivized referrals – which are the referrals a brand is paying for in a form of incentives, helping to motivate happy customers to spread the word about the company or its products.
What are the pros and cons of referral programs?
Referral programs have many benefits and can be a great marketing tool if implemented right. First of all, word-of-mouth marketing is much more effective than any other marketing tactic. People tend to trust their friends and family much more than advertisements. According to Nielsen’s research, people are four times more likely to buy when referred by a friend.
Second of all, it can be cheaper than traditional, paid advertising, especially if you incentivize only successful referrals. If you only pay (give incentive) if a referred friend places an order, it is much cheaper than traditional advertising, where you pay per view or per click, not per successful transaction.
Other benefits of a referral program include:
- Higher satisfaction of your current customers as they feel appreciated for leaving a good opinion about you.
- Expanded market reach as referral program can help you reach out to audiences you could have not thought of before.
- A customer who refers a friend is likely to visit your website more frequently, for example, to claim their rewards. The more often a customer returns to your site, the more items they tend to purchase, especially if their rewards can only be used on an order (for example, a gift card).
- It is easy to track and see how it performs (as you launch it on your own channels, you can set up any type of analytics). You can measure how many customers participate in the program, how many referrals they made, how many were successful, how much did the referred customers order from you and how much did it cost you. You can easily calculate the ROI of your referral program.
On the other hand, if your referral program does not have extensive limitations in place, it can be susceptible to fraud and abuse. Customers may create fake accounts and invite themselves as referred friends or send referrals to non-existent email addresses. They may place referral codes on coupon aggregators for deal-searchers instead of inviting their friends, which is less cost-effective and attracts the wrong audiences. They may also re-sell or give away their referral incentives. There are lots of ways in which a referral program can be abused, this is why planning the right strategy and implementing various limitations is crucial. You can read more on how to fight referral program fraud in our blog post.
How to identify brand advocates?
You should target specific customers with your referral program, specifically brand advocates or soon-to-be brand advocates. Here are a couple of characteristics that can help you identify them:
- They purchase from your brand regularly.
- They have purchased from you within the last year.
- They have left good reviews on your website or other channels.
- They have had a successfully solved customer complaint (and you know they are satisfied with the resolution).
- They have been your customers for many years (even if they may not have purchased recently).
- They are highly engaged on your forum, social media and other channels.
Which referral rewards to use?
There are various incentives you can offer to your customers in referral programs.
Generally, there are two types of incentives you can offer — monetary and non-monetary. Monetary incentives are usually more attractive but also more expensive and susceptible to fraud. Non-monetary incentives (for example, recognition, experiences, or special treatment) can be less motivating for the general public but they may be just enough to motivate brand advocates, who may be a little less price-sensitive. They are also more fraud-secure and can be cheaper.
We recommend researching and testing which incentives perform best for your audience. You can launch campaigns with different incentives to find the best outcome.
Here are some examples of incentives you could offer to your customers in a referral program:
1. Free product or service
You can offer a free product or service for the referrers or referees. This is a very common practice in subscription-based businesses. You could offer one month free of charge for the referrer who successfully refers their friend (they are already users so the incentive will be surely useful) and one month free of charge for the referred friend, which will let them test the service free of charge.
2. Product or service upgrade
This is a great reward for the referrers, who already use your product. You could, for example, give them a free membership upgrade for one month for each successful referral. For example, Trello was giving PRO membership level upgrade for one month for each user who registered from a referral.
3. Amount & percentage discounts
For example, a $10 discount for the next purchase for the successful referral, granted on orders above $30 value, one discount allowed per order. Be careful if your product or service is seasonal or rarely bought, then giving discounts to the referrers may not be the best choice as they do not know when they would place another order. For example, a corrective glasses store, where customers tend to place orders every 3 years, could make more use of another incentive than discount as the referrer may not be planning another purchase for another 3 years and not be too motivated to refer friends with a discount.
4. Loyalty points
This is a relatively cheap incentive you can offer to your loyalty club members for their referrals. They could then exchange the points for the loyalty incentives you offer. It is comparatively cheaper because it can be cashed out in your store and many loyalty points expire before being redeemed.
5. Gift cards
You can offer gift cards, both as a referrer and referee reward. They should have an expiration date (if legal in your country/state, as some do not allow gift cards to expire) to motivate the customers to cash them out quickly and not to collect too much liability on your side. Gift cards are a good incentive as they have to be used towards purchases in your store and therefore bring in additional revenue. You can also set a minimum order value they could be cashed out for, to ensure the customer who uses them will bring you some additional profits. You can also limit the products they can be applied to.
6. Free cash
You can offer cash prizes for referrals. This is a great incentive if you know your referrers may not be shopping with you any time soon (in the case of rarely bought products, imagine corrective glasses, cars, big household appliances, and other goods where the turnaround is slow). Another example is if the referrers are your employees. You can read more on employee referral programs in our blog post.
7. Charitable donations
Some companies offer charitable donations as a referral incentive, especially those whose business is closely related to the environment, society, or charitable causes or whose customers are known for their concern for sustainability.
8. Giveaway entries
Instead of an immediate reward, you can offer a giveaway entry to all people who have referred a friend.
9. Tiered referral program
Whichever incentives you choose to offer, you can make the program tiered, giving different incentives for a different number of friends referred, for example, advocates get $10 off one month of their subscription when the first friend subscribes, $20 off with the next friend, and an additional $30 with the third friend.
How big of a discount or reward to offer?
On average, most businesses offer approximately a 10%-30% off discount or a corresponding dollar off value. In the case of subscription-based businesses, the reward is often one month free or one month upgrade to a higher subscription plan.
It all depends on the CLV referrals bring you and how much is needed to actually motivate the customers to refer their friends. There is no perfect amount that makes sense in all business contexts.
What limits to use in your refer-a-friend program?
There are two types of limitations you can impose on your referral program. First of all, there are referral program limits for both referrers and referees, for example:
- What is considered a successful referral? Do invited friends need to visit a specific link? Place an order? Or perhaps create an account or perform other brand-specific behavior. For example, Uber referral program rewarded only successful first rides booked with a referral code.
- Who can be a referred friend? Only new customers? Do they have to be over 16/18/21 years old? Do they have to come from a certain location?
- Who can refer friends? Anyone? Only active customers? Only loyalty program members?
- How many successful referrals are allowed per referrer in a certain time period?
- For how long is the referral link or code valid from issuing? One month?
Then, there are the rewards (incentive) redemption limits. To protect your marketing budget and optimize your campaigns’ ROI, you should always place additional restrictions on top of your promo offers. You should keep in mind your target market and the goal of the campaign to define which limits to use. Here are some ideas of the reward limitations you could implement in your referral campaigns:
- Can referral rewards be applied to any order or is there a minimum order value required?
- Do the referral discounts sum up?
- What is the expiration date of the rewards?
- What are the POS where the rewards can be used?
- Can the rewards be transferred to another person?
How to personalize your referral program?
You can and you should make the referral message personalized. You should let the referrers add their own notes to the referral messages. You could also add a name and picture of the referrer, especially if they have to be logged in to refer their friends and you can pull this information into the message automatically. You can also use the referrer’s name as the referral code or let them personalize the referral code or link.
Other ways you can personalize your referral program include:
- Inviting only selected customers to the referral program, for example, those who left you a positive review.
- Personalizing the content on the referral program ads or landing pages, for example displaying the products the customer has already purchased on the banners or displaying a personalized message that aims to prompt the user to make a referral.
- Personalizing the incentives, for example offering a discount on the customer’s favorite category in return for the referral.
How to use promotion psychology to design your referral strategy?
You can use promotion psychology when designing your referral program rewards, to make them more attractive. You can learn more about promotion psychology tactics in our free ebook.
How to make your customers join your refer-a-friend program?
If your referral program has low participation rates or you want to set your new referral program for success, there are a couple of ways you can increase your referral participation.
1. Promote your referral program through all touchpoints
First of all, you should make sure that your customers know about your referral program. You should promote your referral program in various places, starting with your own POS and online store. More on where to advertise your referral program in the next section.
2. Engage your sales assistants
Your sales assistants and customer service representatives are the face of your company, the people your clients have the most contact with. They should proactively promote your referral program among satisfied customers or at the POS. You should train your staff and provide them with marketing materials to set them up for success. They should be able to answer all basic questions about how the program works.
3. Make sure it is easy to join your program
Besides promoting your referral program, you should make it as easy as possible to participate. Ask for the minimum information required in the referral sharing form, make the website as fast as possible, give hints to guide referrers through the process, and enable plenty of sharing options to choose from. The easier it is to participate, the more participants you will have.
4. Make the rewards appealing
It may be a hard pill to swallow, but most advocates are motivated by the offered incentives, not by a genuine love for your products. Customers may love your products but they will not necessarily spread the word about it unless offered an incentive or specifically asked for a recommendation. The incentives are an important part of your referral program. You should make them appealing to your target audience. There is no perfect reward – it all depends on your audience’s preferences. You should research what motivates them most and then offer that as a reward, whether it is free shipping, free products, gift cards, discounts, or cash.
5. Offer an incentive for referring, not only successful referrals
You can consider offering an incentive for referrals, regardless of whether they are successful or not. It could be something small, for example, a loyalty points boost, free shipping on their next order, $1 gift card recharge. Just make sure you put limits on your campaign that will protect you from fraud, for example on the number of referrals per month or incentivized referrals per month, to avoid abuse (for example people inviting 100 fake accounts to get a $100 gift card).
How to design referral messages?
You should make sure all your promotional messages are easy to understand. Create catchy headlines and state the incentives straight in the headline or on the main banner. Make sure your terms and conditions are easy to understand.
People often prefer a more altruistic message, for example “give your friends $10 off” or “share the love” than “get $10 off for referring friends”. They feel better referring your business if they see the benefits for their friends as well.
Where to promote your referral program?
There are many channels you can use to promote your referral program. You should investigate where your customers spend the most time and then try those channels. Of course, the preferences will depend on the customer segment so you should use different channels for different customer segments. I have collected some channel ideas for you below:
1. Referral program landing page
You should have a referral program landing page not only to advertise your program but to explain its rules and benefits and inform interested customers on how it all works. It should be your information hub about the referral program and you should direct people in all other advertisements to that place to explain the scheme and answer any questions they may have.
2. Referral widgets
Widgets are a UI component that enables a user to perform a specific action. You can place some referral widgets on your site to improve customer experience and effectiveness of your program. The most popular referral widgets include the main site widget that is placed in the corner of your site allowing users to claim their referral code or share it via multiple channels straight from your site. You can also add post-purchase widgets that show a referral sharing panel immediately after the purchase.
3. Website or mobile app banners
You can place your referral program ad on website banners, especially if you have just launched it.
4. Emails and newsletters
You can inform your customers about your referral program via email. You can send an email when you start your referral program, change the rules of the referral program or upgrade the incentives. You can also send referral program advertising emails automatically, for example to every customer after 1 month since their first purchase. You can consider sending reminders as well, for example, every year to those, who have not yet referred anyone. This requires having access to customer data and having a promotion engine in place that can manage the logic for sending emails and notifications to certain segments, based on their activity.
5. SMS & push notifications
Similar to emails, SMS is a great way to inform chosen customers about a referral program. You should attach a link to the landing page that explains the rules and that lets customers send referrals to their friends. Remember to make the landing page mobile-friendly if you want to advertise your referral program via mobile channels.
6. Social media
You can reach your current followers by posting organically on your feed or in your stories. Paying for ads does not make too much sense as you want to reach out to your current customers unless you set your target audience as your followers. Social media is more for one-time actions like advertising the launch of your referral program, reaching milestones or adding any new incentives to your referral program.
7. Customer account
You can mention the referral program or place the referral form in the customer’s account (profile). This will ensure you keep track of who referred a friend (as they have to be logged in to do so) and also is a great place to advertise your referral program.
Website and mobile pop-ups are a very visible placement to use for your referral program. They may be considered intrusive but they are an effective way of communicating the scheme, especially when it has just launched.
You can place information about your referral program on any POS materials (banners, leaflets, etc.).
Whatever channels you decide to use, keep in mind that people strive for a genuinely omnichannel experience these days. It means they want a seamless journey when changing from online to offline mode. You should ensure the same referral program is valid across all channels and that the visuals and the rules across all channels are the same.
How to design your website and mobile app UI for referral programs?
We have collected the referral program’s UX/UI best practices together with examples from top brands in a separate guie. It is a long read but if you need to design your website and mobile app to accommodate a referral program, we highly recommend it. It contains not only UX/UI advice but also advice on how to design your referral program messages and which channels to offer for sending the referrals.
How to measure your referral program ROI?
There are a couple of measurements you should implement to measure the success of your referral programs.
1. Track referral codes redemptions and referral incentives redemptions
Redemption is, in other words, an application of your incentive to a specific order. There are two types of redemptions you should measure – referral code redemptions (done by the invited friends) and the incentive redemptions (done by the referrers, the incentives are assigned once the referral code or link was used successfully).
Each referral code or incentive redemption should be tracked and include the following details:
- The incentive type and amount.
- Whether the referral code or incentive redemption was successful or failed.
- Customer who redeemed the incentive or referral code, who was the referrer.
- Date and time.
- Referral campaign associated.
- Redemption channel (where did the customer place the order using the incentive or a referral code).
- Order details (cart contents, delivery method, etc.).
2. Customer detailed view
It is very insightful to have a 360-degree customer overview. You should be able to see all purchase history, referrals sent, referrals successful, earned, expired, used, and outstanding incentives as well as any other valid promotions, gift cards, or loyalty points per customer.
3. Distribution reports
To see how your channels are performing when it comes to your referral program promotion, you should be able to access distribution reports with open rates (OR) and click-through rates (CTR) as well as which channel brought you the most referrals.
It would be also insightful to see which channels the referrers are using to refer their friends. If your landing page offers various channels for referral submissions, you could track which ones were used the most and use this information for your other promotional activities or for re-arranging the landing page buttons/links.
4. Referral campaign overview
You should be able to see the referral campaign details at a glance, including the number of referrals done, referrals successful, top referrers, earned incentives, incentives redemption rates, and the timeframe of the campaign. It would be also helpful to see the average basket value and volume from all purchases in this campaign done by the referred customers. You should also be able to track changes made to the referral campaigns (especially important if multiple people can access the promotion management software).
How to optimize your referral program strategy?
There are a couple of ways to optimize your referral program strategy. Most of them are based on trial and error and require you to measure the results, so implementing tracking is the basis for it. There are two main approaches to optimizing referral campaigns:
1. Launching smaller campaign experiments
Doing a test run with smaller segments can help you determine which strategies are the most effective. This can also help to keep you from offering a referral incentive that is too big and cuts into your profits.
In the beginning, you could run small referral campaigns with diversified parameters, such as single- versus double-sided, varying the incentives and limits. You must be patient and aware that it will take some time and numerous experiments to figure out what works best for your business.
2. A/B testing
This one is more complicated as it requires dedicated software that would show different referral program rules to different people in a randomized manner and that would send the data of the A/B split to Voucherify to segment the customers and apply those different rules to them. It is complex but possible. The results of such a test are more straightforward and obtained in a more reliable way than if you were just launching small experiments. If you have or can pay for software that allows you to A/B test your content and collects data about which user/customer was shown which content, we believe this is the best way to optimize your campaigns.
For more information, check out this referral tracking and optimization guide.
Referral program inspirations
You can find more referral program inspirations, together with best practices and tips in our Inspirations Library.
Case study from OVO Energy
An example of a company that has implemented a successful referral program is OVO Energy, an energy retailer. They opened a new branch in Spain and were struggling with the acquisition of new customers in an established market with strong competition and seemingly difficult switch, which has stopped many people from changing their energy provider.
They have decided to launch a referral program. They wanted an out-of-the-box, flexible, and affordable referral management tool that could be used by their marketing team without bothering developers, as their IT team was fully booked. They used Voucherify as their promotion engine for referral management. They have integrated it in one sprint and within two months from signing the contract, they have launched their first referral program, which brought a 7-9% customer base increase within one quarter from the launch. You can read the full case study here.
A great referral program strategy requires a comprehensive promotion management system that can be connected with various data sources and distribution channels. It should also enable launching referral programs at scale.
The promotion management software is the basis for launching effective referral programs. You should start with planning your requirements, finding the right software, and then launching and optimizing your referral campaigns. I hope this referral guide helped you go through all the phases from planning to implementation of your next (hopefully successful) refer-a-friend program.
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