The Mechanics of a Referral Marketing System: How and Why It Works

Why and how does a referral marketing system work? See a few of the top reasons it's a great alternative to do your business's marketing.

Updated July 20, 2020


Giving good customer service and providing all customers with a consistent and stellar experience is a sure fire way to get customers to recommend you to their friends. This is when referral marketing comes in hand. A referral system allows you to have a structured flow of collecting and organizing referrals. With the correct timing and approach (and software), your business will be well primed for referrals to occur.

As it turns out, referrals are a great and inexpensive way to market your brand. Marketing can take a lot of time and it can quickly become expensive. Which is exactly what makes referral marketing great. Let’s go into why and how referral marketing systems work.

What is referral marketing:

social media connections

Chances are you know exactly what it is. But, since we’re discussing the mechanics of referral marketing, we should probably reiterate what the subject is. The basic concept is to encourage customers to share your business with their friends and family. It’s a way to grow by leveraging the business’s network of customers and partners. 

Some people think of referral tracking systems as incentivized word of mouth marketing. Typically, there is an incentive involved, which helps encourage customers to share. It should be noted this is not always the case. You may see the term referral marketing used interchangeably with advocate marketing, brand ambassador, and influencer marketing, but those terms can also have a very different meaning. So when you are planning your referral program make sure you are clearly defining each term.

Referral marketing is like many other marketing channels, where it pays to pay attention to the user experience. Let’s go over why it works and how it works.

Why it works:

It’s a fact that word of mouth is influential. Referrals stem from word of mouth marketing which relates to social selling. Word of mouth is one of the big reasons for its success. A referral marketing system works because people are more likely to be influenced by product recommendations from friends. This has been proven time and time again. A study by Nielsen found that people trust recommendations from friends and family over all other sources. That’s just one of the many studies that have proven why this type of marketing is effective.

Marketing can be difficult, time-consuming and not to mention expensive. As it turns out, a referral tracking system could be the solution to these marketing woes. It takes your already established customers and uses them to market your business.

Aims Closely At Your Target Market

You see when an existing customer refers a friend they are likely to refer someone in your target market. A well-liked business can produce organic referrals on its own. As we mentioned word of mouth is very persuasive and it happens naturally in conversation. Therefore provoking an organic referral.

Referral Marketing and your target market

Typically, customers refer people who they believe will benefit from a particular service. People know what their friends like. Aside from mass sharing (aka posting their referral link on social media…which is another awesome benefit that we will get to), referral clients share with specific friends who are in need of your product or service. We all know how hard it can be to target a specific audience. So you can see the benefit of having customers do this work for you.

Social Media

Another reason marketing programs are so effective is because of social media and mobile devices. Consumers are constantly on social media. So, if you’re using social media with a referral marketing, it’s an easy way to get the word out in a non-invasive manner. This is where people are already hanging out, so a referral marketing system has a way to seamlessly fit into people’s everyday lives.

It’s also easy because it’s a one-click thing. This is a lot easier than the alternative of calling a friend or remembering to see if you can find the business card to share. Many referral marketing software options supply users with easy social sharing options. This increases shares because the user can share and be rewarded with literally the touch of a button.

Social media has made it a lot easier for people to endorse a brand. It allows brands to get in front of a ton of new people at any given time. So when referral programs and social media come together, a few referral links have the potential to be seen by hundreds. You may have seen your favorite online store promote their referral program on social!


Email is also highly effective and many referral system software options try to make it easy for a business by making referral email templates. There is always the impromptu word of mouth types of things. Like friends discussing where they got their haircut, but if you give people the opportunity to share in an easier way, they more than likely will. Email and social media messaging make sharing double sided rewards (both the client and friend earn something) a lot easier than it ever was before. Of course, mobile devices just make sharing that much easier. Everyone is “one-click” or “one-tap” away from sharing an offer or business.

Referral Marketing Leads to Better Customer

Both referring and referred clients tend to be better customers. It’s a fact that referred customers have a higher retention rate. According to a study done Christophe Van den Bulte, a professor at Wharton, referrals are higher quality customers. His findings were similar to many other studies done on referral marketing. It goes to say that referred customers have a higher customer lifetime value and typically produce higher margins than other customers.

How it works:

How does referral marketing work? It works by the basics of word of mouth. The main idea is to provide a happy customer a simple way for them to share the business with their friends. The customer tells their friends about the business, and the business gains new customers.  A referral tracking system helps with automating many of these steps, like setting up default email messages with the business brand, one-click social media sharing and even reward fulfillment.

By nature, people want to help other people. Happy customers like to help businesses, just as good friends like to help each other. Do you see where we are going with this?

Many people who meet a small business (or any business for that matter) that they really like, want to help them succeed. Whether there is an incentive or not. When a business taps into this ‘help from customers’ many great things can happen. One of the easiest ways to get this into motion is to provide customers with a trusted way to track the referral experience. An easy and quick way to establish this trust is to have a proper program put in place.

Use Software Services

This is where referral software comes in. Having a legitimate program makes the customer feel secure, as they are sharing some of their personal information and providing you with their friend’s information. You see why the whole “fill in your friend’s name” on a piece of paper can be a bit of a turn-off. There are multiple reasons why that doesn’t work. First, they aren’t actually sure what a business is going to do with their information or whether the information will be secure. They also don’t want to add their friend to a list that causes them to get called by multiple salespeople. Established referral system, is a much less invasive process. Plus, it helps the business keep track of the process while allowing the customer to see how they are actually helping the business.

Not only does having a constant online presence for your program allow you to have a reputable program, but automation makes life easier. Between automated reward payouts and easy social sharing, your referral campaign promotion is easier. It also so much easier to track a successful referral.

Make Referral Marketing a Part of Your Strategy

making a referral marketing strategy

By now you probably realize a referral program fits right in with your existing marketing processes and strategies. You can see how increasing word of mouth marketing through referrals, can be automated to fit your processes that are already put in place. Automation and software allow for consistency as well as make it incredibly easy to run a referral marketing program like a boss.

So why does referral marketing work, you ask? Well, it strengthens your customer relationships, it incentivizes sharing, and you can sprinkle it into your existing processes. But this does take a little work. To make things easier, come up with a strategy, here’s a little example.

Have A Strategy In Place

First, as you develop your program, remember to test! Test and get feedback. Referral marketing works really well, but it needs a solid start – so if your program is rough around the edges, it could hurt you.

Then craft the perfect invite. Paving the way for customers to refer is one thing, getting them to the point of actually referring is another. And it might take some encouragement.

Finally, think of how participants will enter your program. Are you going to send out a link to a landing page? Will you use a CTA in one of your newsletters? Or are you going to just a menu option?

Most importantly, bake in your promotion techniques! Once you have all the rest of it figure out, you’ll have to promote. A referral program might not do well on its own. So, if you want to make referral marketing work… bake it in. Here are a few ways how…

  1. Adding it to drip campaigns
  2. Using your email – signature, newsletter, confirmation emails
  3. Rotate on your social media profiles.

Test the Referral Marketing Waters

If you’re not sure about plunging right into a referral program, it’s okay. There are a few ways you can determine if you’re ready for a referral program. Trust us, if your business isn’t in the right position for a referral program – hold off until you’re ready. There is nothing more frustrating than putting effort towards something that just isn’t going to work.

referral marketing system and net promoter scores

A good way to see if you should use a referral system is to calculate the desire to share. How can you do this? Utilizing a Net Promoter Score (NPS) can help you measure how willing your customers are to refer. If they proclaim they are willing… go for it. This can also help you create the initial invitation list. The ones who reply to your survey stating that they are highly likely to recommend, are the ones to invite first. This is just one indicator of referral program success.

Whether you ask via email, in person, or on the phone. Calculating the likeliness will assure that people want to be involved. You could also ask what factors would be the most motivating so that you can craft a referral program that makes your customers want to participate. Referral incentives are not necessary, but they can create a great engagement boost.

Need some motivation? Check out these awesome referral program ideas and referral examples.

Watch referrals roll in automatically instead of hoping they magically appearFind out how
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