how to start a referral program

When your potential customers look for a business, where do you turn? If they have a friend or family member who recently hired someone, they’re likely to ask them for a recommendation. If they don’t have a large network in your city or town, they might turn to a review site like Angie’s List or Yelp. Sounds like you need to figure out how to start a referral program.

What better way to incentivize your customers to refer you than through a referral program? Let’s cover how to start a referral program.

A referral is a trusted recommendation from another individual. As a business owner, customer engagement specialist, or marketer, you want to ensure that when people are asking about your services, your current customers are quick to recommend you.

Referrals are important for businesses of all sizes and in all industries. Whether you run a hair salon, a software company, or freelance marketing consulting business, you need to build a referral program that provides you with a steady stream of new customers.

Why do referrals matter in marketing?

Referrals matter because people ask each other when they want recommendations on products, services, and experts. Not only do they ask, but they often act on advice from their friends and family.

In fact, a study by Nielsen showed that referrals are the most trusted form of advertising by a large amount. It makes sense– if a friend tells you how great a product is, you’re likely to give it a try.

You probably already spend a healthy amount of advertising and marketing in the hopes that these avenues will drive profits. You may already carefully consider how much it costs to acquire a customer (cost per acquisition, or CPA) through certain channels.

Referrals, however, are often free. By creating an army of happy customers, you’ll be able to spread the word about your business through word of mouth marketing. Customer referrals drive profits at a low price. Plain and simple. Before we can look at how to build a referral program, we need to make sure we know what a referral program is.

What is a referral program?

The best way to get referrals is to offer exceptional products and services. When your offerings impress your customers, they’ll be happy to refer you to others in need.

However, these happy customers might not freely spread the word about your services without a prompt from a colleague, friend, or family member.  If no one asks, they might never tell. So, we need to look at how to create a referral program that helps you spread the word.

A referral program is an organized process in which customers are rewarded for spreading the word.

For example, customers at a gym might get two free personal training sessions for referring a friend. The friend, coming to the gym because of a referral, would get the same deal. Because there is an incentive to refer someone, it further encourages a customer to complete a certain action. In this case, it’s referring a friend to two free personal training sessions. Referral programs prompt customers to refer.

Why do you need a referral program?

A well-organized referral program can help any small or mid-size business get new, loyal customers at a very low price. These programs incentivize happy customers to share their feelings in exchange for a small gift.

But referral programs aren’t just for sharing lovey-dovey feelings. These programs generate substantial and tangible ROI. Yep, referral programs bring in big bucks. Not only that, these referral programs don’t just bring in new customers, they bring in good customers.

A group of researchers at The Harvard Business Review studied 10,000 accounts at a large German bank for three years. The bank offered a simple referral program– they would reward anyone who referred a friend with €25. The researchers found that customers obtained through referrals were both more loyal and more valuable than other customers. In fact, these referred customers were about 18% more likely to stay with the bank. The researchers also found that these referred customers generate about 16% more in profits. At the end of the day, the bank earned a return of 60% from their initial €25.

You need a referral program to encourage your happy customers to tell their friends, so you can acquire more loyal customers who love your brand. Let’s see some ideas on how to make a referral program.

Lesson 1: How to build a referral program that’s effective

  • General tips
  • Provide a good product
  • Make it easy
  • Implement Analytics

Lesson 2: Design your referral program to convert

  • Use catchy headlines
  • Figure out your referral messaging

Lesson 3: Decide on referral program rewards

  • Determine your offer
  • Decide on a reward system
  • Figure out who to reward

Lesson 4: Referral program software tools that can help

  • Referral software
  • Referral program boosting software

Lesson 5: Reviews are also important word of mouth

  • Positive reviews are referrals
  • Empowers word of mouth
  • Plays into your social currency

Lesson 6: Examples of referral programs to inspire your own

  • Harry’s referral program for prelaunch awareness
  • Stitch Fix’s referral program to encourage positive experiences
  • Grasshopper’s referral program fosters community

Lesson 1: How to build a referral  program that’s effective

Now that you understand why referrals and referral programs can help your business, it’s time to get tactical. How can you build an effective referral program that actually works? Well, you need to know the mechanics of referral marketing should run.

General tips on how to start a referral program

All brands are different, how to start a referral program for a clothing retailer is going to look a lot different than the way you build a referral program for a B2B software company.

To figure out what type of referral program will work with your customers, think about what they’d most benefit from. In the case of a cosmetics retailer, customers might like to receive a free product or sample for making a referral. Customers at a software company, however, might prefer a substantial account credit, or the ability to access a paid feature for free. There are a ton of ways to reward your customers and their referrals, just make sure whatever referral program ideas you choose, they fit your company.

Keep in mind that the best referral programs offer something for the current customer, as well as for the person they refer. If you only offer something to the current customer, the other person will be less likely to take advantage of the connection.

Ask yourself:

  • Who are my current customers? What types of prizes would they most enjoy?
  • Are the rewards for this referral program on brand? Do they make sense for who we are?
  • Am I offering something to the current customer as well as to the new customer that is getting referred?

Provide exceptional product

Providing exceptional products and services is the first step in building a referral program. In fact, if what you offer isn’t exceptional, people won’t recommend you (not how you start a great referral program).

“Believe it or not, I built my entire business through word of mouth referrals,” says Ritika Puri, Founder of Storyhackers, a Silicon Valley-based marketing firm in an interview with Grasshopper.

But Ritika didn’t get these clients because she’s lucky– she got referrals because she does amazing work. “I genuinely love getting to know my clients and love to make them 200% happy,” she said. “I am very passionate about (and completely believe in) the work that my clients are doing. This passion guides me towards amazing projects and people.”

Whether you run a marketing firm or a small, local business, you can learn from Ritika. You must be dedicated to exceptional products and services at all times. Otherwise, it will be hard for a referral program to take off.

Make it easy for existing customers and new ones

The best referral programs make it easy for customers to tell others about your brand. If a customer has to jump through hoops just to refer a friend, they’ll give up on the process early in the game.

“Referral programs should be convenient,” says Vahagn Aydinyan, Digital Marketing Manager at TTAG Systems. “Customers aren’t willing to put too much effort into taking advantage of a referral promotion.”

For example, American Apparel, a popular clothing retailer, sent an email to their subscribers to encourage them to share the brand with their friends. In exchange, the subscriber gets a 20% off coupon, and so does the friend they refer.

American Apparel referral program - how to make a referral program

But the reason American Apparel’s program works isn’t that of this email. Instead, it’s because of how easy it is to refer a friend. If you click on the email, you get directed to the American Apparel website and see the following message:

american apparel referral program sharing - how to run a referral program

American Apparel allows subscribers to share the coupon via email, Facebook, Twitter, or by using a direct link and even provides a pre-filled copy to make it easy to explain the deal. The process is easy as pie, making it easy for everyone to participate.

    Implement analytics and tracking

    In order to see whether a referral program is working, you need to make sure you’ve implemented analytics and tracking systems. This is where referral program software comes in handy, as these solutions come with analytics, referral link distribution and tracking built in.

    If your development team chooses to build a referral program on its own, it’s absolutely essential to implement an analytics and tracking system that will help you understand how many referral links get shared and clicked.

    Google Analytics actually has a special referral section that can help you see where people come from to get to your site. However, this solution is not as comprehensive as a referral software solution.

    Lesson 2: Design your referral program to convert

    Now that you know a little more about the foundation you need in order to build your program. You need to figure out how you want to design your program. The look and feel of your referral program can say a lot about you. This is, after all, an introduction to your referrals. So, you need to make sure it looks, feels, and sounds like you.

    Use catchy headlines

    One of the easiest ways to get a customer to refer you is to get their attention. And one of the easiest ways to convert a referral is to… you guessed it, get their attention.

    Headlines matter – especially when it comes to your referral program. If you haven’t picked this up yet, the headline is what will draw your participants in. A good headline should provide the gist of the program within a single sentence. It should also…

    1. Tell what your program is all about
    2. Explain the benefits of joining
    3. Make them feel invited and valued

    Here are a few examples of headlines that work.

    • Give $20, Get $20
    • Refer a friend and get $15
    • Share a better way of working
    • Spread the word and get free socks for life

    Figure out your referral messaging

    Determining how your participants will ask their friends can make or break for your program. Ideally, making it easy is key.

    By giving your participants a few sharing options you increase the likeliness of them sharing. Fortunately, most software on the market gives you multiple digital options, making sharing easy and convenient.  You can, however,  try the old school way, if you prefer. Handing out printed referral cards to participants can work just as well.

    On top of a way to share, you can kick it up a notch by providing the messaging as well. Prefilled messages make it even easier for your customers to share you with their friends. It’s worth noting that referral program who provide the messaging tend to do better. With that being said, you should have the option for the customer to add their own message or the ability to edit. But, the bulk of the work should be done by you!

    This message will be the referral’s first point of contact with your business. So, the message your participant sends needs to cover a few things…

    • It should tell them who you are
    • The message needs to explain the offer
    • It should also mention what their action should be
    • Make it personal

    To top it all off, when designing your program, you may need to do a little bit of testing. What works well for other referral programs might not work well for you. Always take into consideration what your customers like, and be sure that whatever you do, your program reflects your brand image.

    Lesson 3: Decide on referral program rewards

    The referral program reward is what incentivizes someone to share. It can also be a determining factor of whether or not someone will join your referral program.

    Determine your offer

    First, you need to figure out what kind of reward you are going to offer. Not all programs will work with a monetary reward, so you may need to get creative.

    Some options include:

    • cash
    • gift cards
    • coupons
    • freebies
    • points towards a reward
    • charity donations

    Decide on a reward system

    Next, you’ll have to determine how you want to set up the reward system. You may choose to reward for each referral or you may try a tier or stage system.

    • Tiers – Rewards change based on the number of referrals. For example, a participant may earn $10 for the first 3 referrals and then $20 for each referral after that.
    • Stages – This works well with a multi-step sales process. For example, a participant might earn $5 when a referral schedules a consultation, another $5 if that referral books a service, and then a final $20 when the referral pays their invoice.

    Figure out who to reward

    Lastly, you need to determine who you’ll reward. Will you reward just the customer, just the referral, or both?

    • Double-sided – (or two-way incentive)These type of rewards tend to have the best engagement since both people are incentivized to participate. Think of “Give $20, Get $20”.
    • One-sided – (to either the customer/participant or the referral) If the reward is only on the participant’s end it can make the invite seem self-serving. If the reward is only on the referral’s end, it might not intrigue the participant to refer in the first place.
    • No incentive – This can be the hardest one to get people to participate. Even if your business and product are well-loved, the incentive or lack-there-of may be the deciding factor on whether or not someone will actually refer. People usually have the “what’s in it for me” attitude.

    Lesson 4: Referral program software tools that can help

    There are a number of software solutions that make it easy to set up a referral program. Be careful, you’ll see a lot of rewards software out there, like affiliate or rewards program software. Those are not the same.  You’ll see that we have two categories of software listed. The first group is referral marketing software. The second group is great complementary software, that can be useful for running a program, but not necessary. Here are some of the best. Learning how to start a referral program with software is probably the easiest way to go since they have a team who can help you along the way.

    Referral marketing software

    • Referral RockReferral Rock’s software helps all businesses (not just eCommerce sites) design, track and manage referrals online.
    • Campaign Monitor – Campaign Monitor is easy to use email marketing service that can help you spread the word and effectively market a referral program.
    • AdvocateHub by InfluitiveThe AdvocateHub by Influitive helps B2B companies capture customer enthusiasm to turbocharge marketing and sales efforts.
    • ReferralCandy – ReferralCandy helps you easily create, run, and manage a referral marketing program.
    • AmbassadorAmbassador offers referral marketing software, as well as affiliate marketing software.
    • FriendbuyFriendbuy specializes in customer referral programs for ecommerce businesses.

    Referral program bonus software

    • HubSpot or MarketoMarketing automation systems such as HubSpot and Marketo are excellent complements to any referral program.
    • Google AnalyticsGoogle Analytics can help you track which websites and social media sites refer new customers to your business. It can also help you track the success of a referral program.

    If none of these fit your needs, check out our comprehensive list of plug and play referral software solutions.

    Quick tip: Remember to promote your referral program by featuring it prominently on your website. “Too many companies hide the refer feature in a sub-menu,” said Rob Edell, Founder of Servy, a tech startup that crowdsources mystery dining. “Meanwhile, referrals are one of the most important growth drivers for most apps.”  (Note: there are a ton of ways to promote your program, so go ahead and make your program discoverable.)

    Lesson 5: Reviews are also important for referral marketing

    Referral Marketing is an underutilized channel. Which is unfortunate since it can provide awesome ROI for the right business. Online reviews can lend to brand credibility along with loyalty. Not to mention, customers love other customers and prefer their insight on a product rather than a sales pitch from you.

    All of which is why your online reviews and reputation are huge factors in referral marketing. But, fortunately, there are plenty of review tools that can help boost your referrals.

    Here’s why reviews are important in referral marketing.

    1. Positive reviews are a form of referrals.

    So are celebrity endorsements and social shares. These types of things have a good influence on people and can make even a stranger a believer in your brand.

    Wow, Pixar exhibit at @museumofscience is a must. Check it out!    — Dan Allred (@dgallred) December 31, 2015

    You can create a referral program that rewards customers for positive shares on social media, or you can simply reach out to them and thank them when you see their glowing reviews.

    Interacting with these happy customers will help keep them happy so that they’ll continue to share positive sentiment on and offline.

    2. Empowers word of mouth to occur

    Word of mouth marketing helps create a buzz around your business. Referral marketing takes that strategy and amps it up a notch, and reviews funnel into this system.

    Because a review is someone blatantly telling about their first-hand experience, you can imagine how much of an impact that can be to a lead, referral, or any new customer coming in. In fact, most people read reviews before making a decision on a product or service. Meaning that these leads are depending on the reviews they read to steer them in the ‘right’ direction.

    3. Plays into your social currency

    Think of it like this… By asking someone to refer a friend.  That person is giving up something.  It’s called social currency.

    Though it’s much easier to get someone to spend a little bit of their social currency on you in this day of age where mobile and social media rule. It still needs to be earned and positioned properly. The reviews you receive can either build or break your credibility. And once you start losing your credibility, it will cost your customers a lot more of their social currency to spend on you… which can be difficult to do.

    But, if you have a lot of good reviews, that on top of an incentive can be great ways for people to spend their social currency on you.

    No one wants to refer a friend to an illegitimate and poorly liked business.

    Lesson 6: Examples of referral programs to inspire your own

    When you’re creating your own referral program, it’s helpful to see successful examples of other brands. Here are three effective referral program examples to inspire you:

    Example #1: Harry’s uses a referral program to create awareness before a launch

    Sometimes, referral programs are the catalyst that makes a brand a household name. For example, Harry’s Shave Club offered a referral program before they even launched. Jeff Raider, Co-Founder, and Co-CEO of Harry’s described the process on the Four-Hour Work Week blog:

    “First, users entered their email addresses on a splash page. This first step was essential since we wanted to capture emails both for our list and so that we could use it as an identifier for tracking referrals.

    Referral Program Example Harry's

    The second page was where the referral mechanisms lived. It contained a shareable link to the splash page coded specifically to the user. Below the link were buttons to share the link through email, Facebook, and Twitter with the click of a mouse. By sharing the link with friends, users had the opportunity to earn free product. The more friends who signed up using your unique referral link, the bigger the prize you earned.”

    Harry's Referral Program Page

    This referral program worked wonders for Harry’s. In one week, they were able to gather almost 100,000 email addresses. Today, Harry’s owns the German factory that makes its blades, and its products can be found in J. Crew, Bloomingdales, and many other retailers across the country.  Referral Marketing seems to really work well as part of their overall marketing strategy.

    Example #2: Stitch Fix uses a referral program to encourage women to share positive experiences

    Stitch Fix is a subscription service that sends out fashionable clothing to help women find stylish pieces to add to their closet. The company, which was founded in 2011, is now valued at $300 million and continues to grow. Part of their secret sauce is a referral program.

    Stitch Fix capitalizes on customer happiness, encouraging customers to share their positive experiences in exchange for a reward. Each customer gets a unique referral link to share with friends. For each friend who signs up and orders a shipment, the customer gets $25 in Stitch Fix credit. The more friends they refer, the more credit they get.

    Stitch Fix referral sharing - how to start a referral program

    This referral model has helped Stitch Fix spread like wildfire, especially on social media sites like Facebook. Happy customers all over the country share their personal referral link with their Facebook friends, in hopes that they can spread the word and get their friends to sign up.

    Referral Program Social Media Idea

    Example #3: Grasshopper fosters community through ‘Refer an Entrepreneur’ referral program

    Grasshopper, a virtual phone system for entrepreneurs, sells to small business owners rather than consumers. The company has built a referral program to capture this audience– it’s called Refer an Entrepreneur.

    Example of how to build a Referral Program

    Unlike Stitch Fix, Grasshopper grants the reward to the customer who makes the referral and to the new customer. In Grasshopper’s model, the happy customer gets a $25 credit and so does anyone they refer.

    This referral program works because it incentivizes new users to take advantage of their referral. They’re not just rewarding their friend when they sign up– they’re also getting a deal themselves.

    Summary: How to start a referral program that works for you

    Referrals can come from anywhere– a happy customer, a friend or family member, or even a celebrity endorsement. The key is to harness these referrals in a well-designed program so that you can encourage all your customers to refer you. That is how to run a referral program.

    Joni Holderman, Founder of Thrive! Resumes get  82% of new business from referrals. “I offer clients a free resume update when they refer a colleague who purchases a resume. It’s a win/win. I get great new clients who are an excellent fit, get to stay in touch with valued clients, and the costs are about the same as I would pay in marketing to acquire a new customer.”

    When you design a referral marketing program, make sure to come up with something that works for your brand. Get to know your customers so that you understand what they’ll share, and so you can offer rewards that they want. You’ll also want to make the process of referring very easy, so you may consider testing out a software that creates referral codes for you. Which will make it easy for you to track, and easy for customers to refer.

    Referral marketing programs have the power to take your business to the next level, working as an engine that brings new customers directly to your door. It’s in your best interest as a small business owner, marketing, or customer engagement specialist to give them a try.

    Posted by Megan Mosley

    Megan Mosley is a writer for Referral Rock. You can find her poking around online or tweeting about marketing, small businesses, SEO, or even sharing funny memes. She is addicted to coffee and uses it as a fuel to keep her going through the day.