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What’s better: recurring or one-time referral rewards?
This is a common question that comes up when designing your referral program. Often there is a misconception that the more you reward someone, the more they will refer. In some cases, this is true but you need to first understand why people refer in the first place.
Before we dive into the differences between recurring and one time rewards, let’s reiterate why someone would refer. There are three main reasons why someone participates in a referral program:
1. They love your company
Referral marketing isn’t a silver bullet that can save a bad company. It’s a tool to unlock more customers for the best companies.
First and foremost, your customers must love you and want to share. No one, regardless of reward, will share a bad company.
2. They can give their friends/colleagues something of value
People feel good about sharing and providing value to their friends and colleagues. This is true for all referral programs but especially for customer programs.
Just referring a great company makes people feel good because they helped a friend. Even better if they can give their friend an exclusive discount or incentive on top of that. Their friend just got a great deal because they know them … that’s VIP status.
3. They get something in return
Even if someone shares a great company and gives their friend a great deal, they will still want a reward for their efforts. They’re going out of their way to bring you new business and are taking a social risk through their recommendation.
You can reduce their barriers to sharing by making this experience easy but you should also reward them for their help. This is a strong incentive for them to keep referring.
Speaking of Rewards
When determining your reward structure it’s important to understand why people refer. The goal of any reward is to incentivize people to share with their friends and networks. Your job is to understand what it takes to get someone to share and then make it as easy as possible for them to do so.
Offering a reward for bringing in new business is an obvious best practice, but what do you offer? What customer and partner program incentive ideas do you have?
This post won’t get into best practices for picking a reward type (see our post of The Definitive Guide to Referral Incentives and Rewards). Instead, we’ll focus on the pros and cons of recurring or one-time rewards.
Arguments Against Recurring Rewards
In most cases, recurring rewards result in overpaying for referrals. Customer rewards are important but they’re not the only motivation for referring their friends. Your customer either knows someone who could use your products/services or they don’t. You offering a recurring reward doesn’t change that. You need to offer a fair reward to incentivize them but it’s usually less than you think.
Most people think about referral programs as “I do X, I’ll get Y.” Adding recurring rewards can over-complicate things as now people have to calculate their reward. Simplicity and ease of use are critical for running a successful referral program, so “keep it simple, stupid.”
When do recurring rewards make sense?
For most customer referral programs, one-time rewards make more sense but this isn’t the case for all referral programs.
1. If money is the ultimate driver
If the people participating in your referral program are primarily driven by money, such as with an affiliate or a partner program, then a recurring reward might make sense. This is especially true if you don’t have a relationship with the person referring and if you are in a very competitive market that is difficult to differentiate value.
In these scenarios, offering a recurring reward can make sense and work well. People are more likely to shop their influence around to the highest bidder. They’re probably looking to make a business out of referring your leads/customers.
2. If ongoing support/relationship with the customer is necessary
Recurring rewards also make sense if the person doing the referring owns the customer relationship. Or if they are involved in the product/service delivery after the sale is made. In these cases, they are continuing to support your customer. Meaning recurring rewards make sense because the incentive is directly tied to your customer’s success.
Why Use One-Time Rewards?
- Simple to understand
- Meeting the reward condition for people to share
- Easy to manage
- Cost the company less money
Here are a few best practices for offering a higher one-time reward:
- Offer a larger one-time reward based on your customer’s lifetime value
- Give conditional rewards based on time (Reward A when a new customer signs up, Reward B after they’ve been a customer for a certain time period)
- Offer tiered rewards to encourage more sharing without having to pay more
Whatever reward structure you decide, remember to think through the key drivers for why someone is willing to share your company. Don’t just assume that one option is best.
You need to offer fair rewards to make it worth the effort and social risk of bringing you new business but the total compensation isn’t always the main driver (unless it is). In those cases where money is all the matters, recurring rewards are a powerful incentive.