How to Create a Referral Program for Your Business

Written by John Kennedy on July 30, 2020

As a business owner, you likely spend a lot of time, effort, and advertising dollars to win over a new customer. Once they convert, you put even more work into giving them a great experience in hopes that they will come back and do business with you again. Rather than repeat this process over and over to acquire brand new customers, what if you could use your existing customers to do the advertising for you?  

That’s the basis of word of mouth marketing, and it’s one of the most cost-effective ways to acquire new customers. A referral is worth the lifetime value (LTV) of your average customer, plus your average cost of customer acquisition (CAC). That’s a pretty good deal! The question is: how do you convince your customers to spread the word about you to their friends, family, and colleagues? You can’t expect every satisfied customer to do your marketing for you without any incentive. That’s where a referral program comes into play. 

A referral program is a systematic approach to generating customer referrals. Referral programs can utilize a number of tactics to give customers a good reason to shout your name from the hilltops. In this article, we will be discussing how referral programs work and exploring ideas that you can use to start your own program.  

The benefits of creating a customer referral program  

People who aren’t familiar with your business trust your customers more than they trust you. In a previous article, we explained how online reviews play a major role in purchase decisions. If people can be encouraged to buy based on a stranger’s opinion on the internet, think of how influential a recommendation from someone they already know and trust would be. Nielson reports that 92% of consumers trust recommendations from friends and family over all forms of advertising.  

It has also been proven that referred customers spend more initially and stick around longer than customers who were acquired by advertising or by other means. According to a study published in the American Marketing Association’s Journal of Marketing titled “Referral Programs and Customer Value”, the combined increase in margin and retention amounts to a lifetime customer value 16% – 25% greater than the lifetime value of a non-referred customer. 

Even without considering studies and statistics, there are some obvious benefits to encouraging referrals. Having an effective referral program allows your business to: 

Understand your best customers and their desires  

Creating a referral program starts with analyzing your current customer base and identifying the customers who would make the best advocates. These could be the customers who have been doing business with you for years, the ones who spend the most money with you, and the customers who have vocally expressed their satisfaction and enthusiasm for your brand. 

What motivates them to buy from you? What reward could you give them that wouldn’t be too expensive for you but would be valuable enough for them to take action? You can only get when you give, so choosing a valuable referral reward is crucial to the success of your program.  

Choose a valuable reward for referrals  

Some common rewards include:  

• Cash  
• Gift Cards 
• Discount on Next Product/Service   
• Free Product/Service  
• Free first month for subscription services  
• Special Add-Ons 

It’s important to include a reward for both the customer making the referral and the customer who is being referred. The double-incentive makes it worthwhile for everyone.  

One famous example of a wildly successful referral program is that of the leading rideshare app, Uber. Uber’s referral program gives you a unique promo code that you can share with your friends. If one of your friends signs up for Uber and enters your promo code, you both receive credits that can be used to pay for rides. Currently, Uber offers a $5 credit for referrers and referees, but when they were first starting to gain popularity they gave out a whopping $30 in credits for each referral.  

Structure your referral program in a way that makes it easy for customers  

Once you have decided on a valuable reward, you need to create a system for collecting and keeping track of referrals. Your program needs to be as simple and convenient as possible for customers to participate in.  

These are some examples of referral program structures that make it easy to participate:  

• Give out referral promo codes that can be used in-store or on your website  
• Create a social media-shareable link to a referral landing page  
• Add a referral widget to your website where users can enter email addresses  
• Send an email asking customers to join your referral program  
• Ask customers for referrals directly while they are in-store or on the phone with you 

Advertise Your Referral Program and Track Your Results  

Your referral program won’t do you any good if nobody knows about it. Start advertising your program via social media, email, on your website, through your phone sales and customer service representatives, and in-person.  

The next step is one of the most crucial aspects of creating a referral program: tracking. You won’t know how well your program is working if you don’t keep track of the business that comes in as a result of it. Make sure to keep record of: 

• The name of the person who was referred as well as the person who referred them 
• When the referral occurred 
• Whether or not the person who was referred converted into a customer 
• How much they spent when they converted 

It’s also important to say “thank you” to anyone who refers a friend, whether they convert or not. This makes people feel like they are a part of your brand’s community, which leads to increased brand loyalty.  

Get Started Today  

Are you ready to start using your happy customers as vocal advocates for your business? Creating a referral program may sound like easy money, but the process can be a bit complicated, especially if you aren’t all that savvy with web development or online marketing. Thankfully, there are some very helpful and easy-to-use tools like Referral Rock and GetAmbassador.com that make creating, implementing, and tracking a referral program simple for any business owner. You can also turn to the digital marketing experts at Plum to help you brainstorm ideas and get started!