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How to Build a Customer Referral Program

January 23, 2021
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One of the basic tenets of customer success is using your service to create advocates for your business. A happy army of satisfied customers can do a lot of legwork for you. And when word-of-mouth referrals make up 20-50% of most purchasing decisions (especially for new businesses and in emerging markets) why not take advantage of the opportunity?

But there's a catch: assuming your customers will refer you to their connections simply because you provide exceptional service is idealistic at best. Referrals only happen out of the good of a customer's heart some of the time -- for the rest of it, giving customers a reason to refer will work wonders. As with most things in business, a plan is necessary.

If you're looking to grow your business, retain the customers you already have, and reach your revenue goals, it's time to implement a customer referral program. Simply having one is good business sense, because it reveals two things:

1. That you're confident enough in your services and team to know that a referral program would be a positive investment and

2. You know that despite your good service, some customers might need a push to go out of their way for you.

The reality is, however, that you're effectively asking your customers to stand in place of your marketing and sales departments. And when referrals are the heart of generating new business, operating with tact, consistency, and patience is extremely important.

What Exactly Is a Referral Program?

A referral program is a word-of-mouth marketing tactic that encourages customers to advocate on behalf of your brand. Rather than writing reviews online, or submitting customer feedback surveys, referral programs let customers share their brand experience with partners, colleagues, and friends. 

The purpose of a referral program is to attract new leads to your business. But, you're not just bringing in anyone. By asking customers to think about people who would benefit from your product or service, they'll refer leads that are a good fit for your brand. 

This only makes it easier for your marketing and sales teams to nurture and engage customers because not only are these leads a good match for your business, but they're also familiar with your company and its reputation. Since they've been referred by someone they know, they have a reliable resource telling them that your company is trustworthy and produces a positive customer experience

If you're ready to start leveraging word-of-mouth at your business, read on to the next section for tips on how to create a customer referral program. 

1. Set Your Goals.

Ask yourself: what do you hope to get out of this referral program? Are your goals tied more to growth and revenue? Do you want to add retention to that mix? Are you in an industry that requires an exceptional amount of trust-building?

Once you decide what your goals are and explicitly define them the next steps should lay themselves out for you.

2. Research How Referrals Are Coming to Your Business.

A good place to start is by assessing where and how referrals are coming to your business  — or, if they're coming to your business at all. 

This is where you should involve marketing, sales management, support anyone who would be responsible for building customer relationships and assess how they've been traditionally dealing with referrals. This will give you an idea of where you already are.

You should also know what an existing customer worth. Compared to time spent monitoring and managing onboarding programs, how many referrals do you need to break even? A 10% conversion rate for referrals is, on average, a good starting point (and this, of course, is dependent on your business size and growth goals).

3. Determine What a 'Good Fit' Customer Is for Your Company. 

Before you tell customers to seek out referrals, you should first identify what an ideal customer looks like. That way, your existing customers will refer leads that actually buy from your business, rather than just listing names to collect the program's incentive. 

These descriptions should be placed right at the forefront of your customer referral program. For example, if you have a form that customers fill out, you should describe what a "good fit" customer is right at the top of the form. This will remind participants that you're looking for specific individuals who need your product not just a friend who might be interested in your business.

4. List Your Possible Referral Sources.

We'll call these advocates, and they can be anyone who you're already connected with in the present, or who you have been connected to in the past. Begin listing them out. This list could include current customers, past customers, leads that may not have closed, industry leaders, your vendors, etc. This will give you solid footing to start out with.

5. Identify Channels to Host Your Referral Program

For your referral program to work, you'll need a communication platform that alerts both your business and the referred customer when a referral is submitted. 

Here's an example from Uber, where the customer can share a Facebook message with the person that they want to refer to.

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When this ride credit is sent, not only does the referred customer get the message, but Uber knows the original customer submitted the referral. Uber can now turn to its marketing and sales teams to further engage the referred customer as soon as they sign up using the ride credit. 

While you don't have to offer a $20 discount, your business should provide customers with a way to share their referral. That way, the introduction to your company is through a trusted peer rather than your company contacting them completely out of the blue.

6. Make a Plan to Reach Out.

Now, refine. Narrow down the list of advocates and sources to a list of "inner circle" contacts. These are people who know what value your business has and would refer you without any incentive. Finding your inner circle isn't a process that can be automated you'll get more benefit from this if you pull and segment these contacts manually.

Once you have your inner circle segmented out, you now have two things to take into consideration.

First, timing is everything. Identify appropriate times to ask these inner circle advocates to take part in your referral program. Because they are people you've worked with before, this is a less strenuous process starting out. When you start working with people who will need an incentive (which we talk about below), it's important to consider the relationship. For some companies, depending on the service or product, asking for a referral needs to happen late in the relationship. For others, it could be upon the first sale (think apps, digital interface services).

Then, once you've asked, wait some more. That might require a waiting period of months, or even a year, to remind them about the referral program again.

Additionally, you should also be picky with your advocates (even your inner circle ones). Identify people who you think could market your brand the way that it should be marketed. Within that inner circle, who do you have a stellar, standout relationship with? Or do you have an existing customer that came from a referral and worked out? And remember: Watch out for referral fatigue, and make sure you're not overburdening your contacts.

7. Identify Your Incentives.

There are two options for a referral program: an incentive and a non-incentive program. A University of Chicago study found that non-cash incentives are 24% more effective at boosting performance than cash incentives. During this step, you should break your contacts out by levels and decide which ones can receive which offer.

And don't forget the referrer -- make sure they get something out of the deal, too. Take Airbnb for example: when a customer refers a friend, they get $20 credit -- and when a customer first signs up, they get a credit towards their first trip over a certain amount.

8. Create Resources to Alert Your Customers.

Once you have a referral program, create resources you think would work well, and alert your customers. Then, promote, promote, promote. And consider multiple avenues of promotion beyond the time-limited email campaign to remind your customers of the program's existence. Those might look like:

  • Newsletters
  • Blogs
  • CTAs & Email Signatures
  • Product updates

Once you have the referral programs outlined, you'll have an idea of what resources you need for each one. I've listed out a few resources you might need below:

  • Emails for each type of contact telling them about your referral program
  • A message explaining what types of customers fit well with your business. You need to paint a picture in their minds of your ideal customer
  • A workflow that leads your contacts through the program and alerts your sales team when to call
  • A landing page that provides a place for your contacts to give you their friend's information
  • Scripts for your sales and customer support teams to follow when explaining your referral programs
  • A referral kit filled with resources for your contacts to share with their friends: this can include case studies, testimonials, eBooks, videos, anything that gives insight into working with your business

Whatever your medium, make sure it's consistent, persistent (though not over-the-top) and in line with your program's revenue, growth, and retention goals.

9. Set Up Tracking.

Regardless of the size of your company (though this is especially relevant if your company has a larger customer base) you need to have tracking set in place. This will ensure that you don't miss one detail for referred accounts especially. You should be tracking:

  • Who was referred and who referred them
  • When they were referred
  • Whether or not they converted or were sold
  • How you're going to nurture and follow up with them, etc.

If you don't already invest in a CRM (customer relationship management) system, then now is a great time to become familiar! Keeping track of customer relationships is a huge component of customer success -- the ability to individualize each account or relationship makes each customer feel like they're a unique part of your base.

10. Say "Thank You."

Thank the referrer for helping you out (this is where incentives might work, but also consider messaging that thanks them specifically as well) and thank the referred for joining. Then, get to work -- you've got happy customers to prove right.

11. Follow Up on Your Referrals Quickly.

When you do land a solid lead, be sure to take advantage of it right away. Don't let your referrals sit around for too long or you might miss the opportunity to secure these new customers. 

Remember, while your customer may have referred this person to your business, they may have referred them to other companies as well. What's more, you don't know what research the referred customer has done on their own, and you may have to swing them away from going with a competitor that they've been considering for some time. At the end of the day, the sooner you can make your impression, the more likely you'll be to close the deal. 

12. Improve Your Referral Program. 

As we mentioned earlier, there's no universal blueprint for creating a perfect customer referral program. The best program for your business will be unique and potentially quite different from your competitors depending on how you assess customer needs and preferences.

The important takeaway here is that it may take some time to figure out what works and what doesn't  — and that's perfectly normal. You should be testing your program regularly to see what you're doing well and where you can stand to improve. Try sending your customers feedback surveys to see what they think about your program and be sure to apply that feedback moving forward. After all, the better your referral program is, the more leads it will generate for your marketing and sales teams. 

Now that we've explained how to create a referral program, let's explore some ways you can put this plan into action. 

1. Contests or Giveaways

Contests or giveaways can incentivize customers to refer new leads. For example, you can host a contest where customers are only entered if they refer a certain number of leads to your business. This can mean providing a list of emails or getting signups for a free trial or membership. 

The one risk that you run with contests is the quality of leads. If customers are randomly selecting their peers', you might not obtain leads who are interested in your business. This will cost your marketing and sales team time as they sort contacts who aren't a good fit for your company. 

Be sure to create contests that encourage customers to refer high-quality leads. You can do this by basing your entry fees on conversions rather than referrals. If a customer wants to be entered into the contest, they need to get people to sign up for or purchase your product, rather than simply providing an email. This will ensure that you're rewarding customers for providing high-quality leads to your business. 

2. Social Gifting

It's easier to motivate customers if they don't feel like you're trying to manipulate them. When you send out a coupon that says, "refer five people and get 25% off," customers know that you're trying to get something from them and are more dubious of your offer. 

Instead, you can leverage social gifting as a way to encourage referrals without directly asking for them. Take the example below. 

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Instead of rewarding customers for providing a certain number of referrals, this offer rewards them for sharing a coupon with their peers. This way, the customer not only gets to give a gift to a friend but is also rewarded each time their referrals redeem the coupon. That provides them with extra incentive to reach out to as many people as possible. 

3. Fundraisers

Fundraisers are a great way to connect with your customers' values in a way that doesn't involve your product or service. By getting involved with a cause that your customers care about, you're demonstrating that you understand more than just their buying habits. You recognize their personal values as well as what they are looking for from your business. 

Additionally, fundraisers present a referral opportunity as well. It's easy for customers to share fundraisers with their peers, and as more people donate and participate, your team will build a database of leads who share the same values as your company. This makes it more natural for your business to follow up with these new leads and shift the conversation towards your products and services. 

4. Customer Loyalty Tiers

So far, we've discussed referral program ideas that encourage one-time referrals. While these are certainly effective, it's tough to host a daily contest or start a fundraiser every other week. Instead, it's more efficient to have a referral program that motivates customers to refer multiple people over a long period of time. 

To accomplish this, you can create customer loyalty tiers that reward people as they continue to refer leads. Each tier has it's own unique benefits and when customers refer a specific number of leads, they're promoted into the next loyalty tier. With this setup, customers are constantly motivated to refer new leads even if you're not hosting a contest or promotion. 

5. Seasonal Campaigns

Seasonal campaigns are always a timely way to draw in new customers. You can promote holiday discounts, annual sales, and long-term deals that can be used every year. And, if you execute these campaigns consistently, your customers will look forward to them year-round. 

6. Exclusive Events

Customers like to feel like they're a part of a community, especially if it's exclusive. By hosting events that are reserved for members of your customer loyalty program, you can capitalize on customer advocacy and attract new leads. 

For example, you can provide extra tickets to an event so customers can invite their peers and introduce them to your brand through a casual setting. Rather than bringing them into one of your stores, leads can attend a company outing or event where there's no pressure to close a deal. 

7. Referral Discounts

If your customers are looking for a more direct return on their referrals, you can also offer them discounts based on how many leads they bring to your business. Remember, acquiring a new customer is much more expensive than retaining an existing one, so the money you lose on the discount will be made up for with the leads that you convert.

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8. Product or Service Upgrades

Product or service upgrades are excellent incentives for customer referral programs because they both attract new leads and they encourage existing customers to continue using your products. 

If you don't have an upgraded product or service to offer, you can instead ungate customers to beta features, products, and services that the rest of your customer base doesn't have. Not only will this "wow" customers with what your product development team has been working on, but it will also make them feel like part of an exclusive group that has VIP access to these special features. 

With this approach, you're not just offering an incentive in return for new leads. You're encouraging customers to share positive feedback while simultaneously adding value to their customer experience over time

If you're still not sure how to use these strategies, let's look at a few companies that have successfully executed these customer referral ideas. 

Customer Referral Program Examples

1. Dropbox

Dropbox offers free products or services in exchange for users referring new customers: You can earn more cloud storage space in exchange for referring a friend.

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2. Acorns

When you refer a friend to Acorns, an online micro-investing service, you get $5 deposited in your account when they start investing. It's called Acorns because it's all about investing small amounts of money to accumulate wealth, so $5 goes a long way.

Sometimes, people just want money -- but especially if they're already using a money management app.

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3. Stitch Fix

When you refer a friend to Stitch Fix, an online styling and shopping service, you get a $25 credit toward your next order -- which covers the $20 fee paid toward your stylist and then some, meaning you only have to pay for the clothes you keep. Plus, your link allows your friend to skip the $20 styling fee, too.

It's an easy step to go from telling someone where you got your outfit to sending them a link to try it themselves, so pairing that with a compelling credit or discount makes this program successful.

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4. Evernote

Cloud-based note-taking app Evernote encourages referrals by offering reward points in exchange -- points that can be accumulated and used for to upgrade to Evernote Premium, the paid version.

This program also gives the referred person a free month of Evernote Premium -- giving them a taste of the paid version to incentivize them to start referring friends, too.

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5. Glossier

Makeup and skincare brand Glossier's referral program is similar to Stitch Fix's, but is helpful to encourage first-time or one-time purchases, too. Glossier offers mutual rewards for referring friends that gifts both people with credits toward their next haul.

It even has a nifty button that lets you gently remind your friend about the offer three days later.

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6. Healthy Paws

Healthy Paws pet insurance has a referral program that gives the recipient a discount on their first month of coverage -- and gives the referrer an Amazon gift card in exchange.

This program is smart to offer rewards, like an Amazon gift card, for their loyal customers -- because as any pet owner knows, Amazon offers any and every food item, toy, leash, or outfit your pet could ever need (or not need), and they probably shop there for their pets already.

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To learn more, read about how customer success managers can influence customer acquisition and retention.

Source: How to Build a Customer Referral Program


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