Referral Marketing Strategy: Building a Growth Engine in 2021 [Guide]

In this guide, we’re covering how to develop a great referral marketing strategy and how to build a successful program for your business.  

We will define referral marketing and discuss the benefits of referral marketing strategies. We then show you how to measure your progress and which metrics to use.

Then we will show you how to develop your strategy!

We have also included tips to make your referral marketing strategy successful in 2021, using social media and brand affinity.

Referral marketing is one of the most successful ways to reach more relevant customers – using word of mouth and the power of trusted recommendations – from your existing customers.

Sounds simple, right?

However, in practice, it can be time-consuming and difficult to keep track of every referral. Especially for larger businesses and smaller businesses that are growing rapidly.

Running a successful referral marketing program relies on an efficient system and great customer service. As you know, when you have a lot of customers and many links in the chain, it can be very difficult to keep track!

That is where a good referral marketing strategy comes in – when you have a good strategy in place, you have a solid foundation for success.

A great referral marketing strategy doesn’t have to be difficult to develop. In fact, some of the best strategies are the simplest ones. And that is exactly what you’ll learn in this guide!

So, let’s get to it!

    What Is Referral Marketing?

    In the simplest terms, referral marketing is when customers refer their friends or family to a business through word of mouth, rather than the business using traditional advertising to attract customers.

    Referral marketing happens naturally all the time, in many different ways. Word of mouth recommendations, sharing an experience on social media or advising a friend to try a product all fall under the umbrella of referral marketing.

    People are naturally inclined to share their experiences and help others when they’re looking for a solution or a new product.

    In this digital age, we’re more connected to larger networks of people via social media so the reach of referral marketing is even greater than it was in the past.

    Referral Marketing-Mark Zuckerberg
    Image Source: Client Linkt Blog

    A formalized referral marketing strategy harnesses that natural process and adds an incentive for customers to refer their friends.

    Incentives such as a small discount on their next purchase, early access to a sale or access to a higher tier on a loyalty program, reward customers for sharing, and in so doing endorsing, your business to their friends.

    Many referral marketing strategies reward the customer who made the referral and the customer who was referred. They also motivate the new customer to join in get additional benefits when they refer others to the business.

    One of the best examples of a successful referral marketing program is Dropbox. They offer additional storage space when you refer your friends. Neil Patel on YouTube talks about Dropbox’s strategy and other ways to boost growth in this short video here:

    Everyone benefits from referral marketing. Customers are rewarded and receive additional value, new customers are rewarded and included in the program, and the business benefits from happy customers and an ever-growing network of new customers.

    There are many additional benefits to referral marketing for your business, which we explore below:

    7 Benefits of Referral Marketing

    There are many great direct and indirect benefits to referral marketing. These are seven of the most important benefits:

    1. Improved Targeting, Trust, and Credibility

    When customers refer their friends or family, they’re sharing with a circle of people who are similar to them and already within your specific target market.

    This means that your marketing efforts are automatically more focused and targeted towards the people who are more likely to convert. According to a Nielson study cited on HubSpot, customers are 4 times more likely to buy when they’re referred by a friend.

    Referral Marketing Strategy - Graphic Illustrating "people are 4 times more likely to buy when referred by a friend" - Nielsen
    Image Source: Referral Rock

    Tracking through your referral program also allows you to identify which customers are your most loyal, which helps you further target and segment your marketing efforts.   

    People trust people. They trust recommendations and information shared by individuals more than those shared by companies or brands. The level of trust increases when they personally know the person sharing the information.

    Another study by HubSpot found that 90% of respondents trust recommendations made by friends or family and 70% trust recommendations from consumer reviews. In contrast, 75% don’t trust traditional advertisements.

    2. Higher Customer Retention and Customer Lifetime Value

    When customers come to you by referral, they’re more confident in their decision and when you provide a rewarding customer experience, they’re more likely to stay.

    Referral Marketing Graphic illustrating "84% of b2b sales begin with a referral, people are 4 times more likely to buy a product referred by a friend and a referred customer has 16% higher lifetime value"
    Image Source: CustomerGuage

    In fact, referral marketing improves customer retention rates by 37%, according to Deloitte.

    That is a significant number, especially when you consider that the longer a customer stays with your company, the more valuable they become.

    In addition to that, studies have shown that the customer lifetime value (CLV) is 16% percent higher on average when compared to non-referral customers.

    3. Greater Reach and Higher Engagement Online

    When a network of customers refers your company to their network of friends and family, the reach is exponentially greater than the reach you can achieve through traditional marketing.

    The reach grows organically with every new customer participating in the referral program.

    In addition, participating in a referral marketing program keeps your customers engaged with your brand and keeps them coming back to your site.

    This kind of activity increases awareness of what you’re currently offering and often leads to more sales, simply because your customers are there and able to see what you’re offering.  

    4. Increases Brand Awareness and Recognition

    In an ever more socially connected online world, the way word of mouth marketing works has changed. It is no longer limited to the circle of friends we see in person and talk to frequently.

    The daily use of social media and how we participate in different online communities means that we can reach a much greater number of peers, every day.

    When you offer an incentive to refer someone to your company, it is easy for someone on social media to say ‘this company is great, hang on and I will send you a link that will give you a discount (or another reward) too’. They don’t even need to know the other person well!

    When someone shares a recommendation on social media, it is seen by a huge number of people. It is not limited to the sender and receiver. Onlookers and people scrolling past see those comments, reviews, and recommendations too.

    This increases brand awareness, recognition, and credibility.

    We all feel more comfortable with a familiar name and remember a name we have seen frequently or heard our friends talking about. We trust it more and we’re more likely to think of it when need that type of product or service.

    Referral marketing, social selling, and brand advocacy make a potent combination!

    5. Easy Customization and Personalization

    One of the best marketing benefits of a referral program is how easy it makes personalizing your customer experience.

    When you already have someone’s personal information and their personal connection to your brand, it is much easier to make your communication personalized from the get-go.

    Image Source: Sales Force

    The data you gather from your referral program will also enable you to make relevant recommendations to your customers and further improve your purchase rates.

    A recent article from Forbes shows just how important personalization is for developing customer relationships and increasing customer loyalty and sales:  

    • 91% of consumers say they are more likely to shop with brands that provide offers and recommendations that are relevant to them.
    • 80% of consumers are more likely to make a purchase from a brand that provides personalized experiences.
    • 72% of consumers say they only engage with personalized messaging.
    • 80% of companies report seeing an uplift since implementing personalization.

    Personalization is essential for modern marketing and sales, especially knowing a customer’s purchase history and tailoring your recommendations based on those.

    6. Cost-Effective Marketing and great ROI

    Referral marketing is one of the least expensive and most effective forms of marketing. When you use your existing customers to find you new customers, those customers are more likely to buy, more likely to stay, and more likely to have a high customer lifetime value.

    This means the cost of customer acquisition is reduced and the value of the customers acquired is increased.

    It is still important to accurately calculate your referral program’s ROI and tweak your program to make the most of it, but generally, when compared to other forms of marketing and customer acquisition referral marketing comes out on top.

    7. Easy Ongoing Management and Automation

    The joy of a referral marketing strategy is that most of the work is done by your customers. The initial strategy development and setting up the program are the most difficult parts of the process.

    Once that is done, you can use dedicated software solutions to manage the program going forwards, which makes it quite simple. Referral software allows you to implement and track your referral program using a high level of automation, which takes care of most of the heavy lifting.

    They provide analytics and reporting that give you important information to manage and adjust your program for the best results.

    Many also automate personalization and customization, making it even easier to provide the best customer experience for your customers.  

    How to Track and Measure Referral Marketing

    There are many different metrics you can use to track and measure your referral marketing strategy.

    The metrics you choose to pay attention to should be closely linked to the goals and objectives you determine at the start of your program.

    For example, if your main objective is to increase brand awareness, the important metrics won’t be the same as those for increased lead conversions.

    Referral marketing graph - example of metric tracking
    Image Source: Growth Hackers

    With this in mind, let’s look at the five fundamental metrics you should use to measure the success and progress of your referral marketing program:  

    Program Participation Rate

    The average number of monthly users that are taking part in your referral marketing program. This refers to people who have actively engaged with the program in some way.

    It does not necessarily relate to the number of referrals they have sent and can be linked to anything that constitutes a desired action taken. Have they sent a referral? Have they clicked on or copied a link? Any action they have taken that indicates that they have started the process and are on the path towards full participation.

    This metric is important because it gives you insight into how effective your program is at onboarding your customers. A low participation rate means you need to look at ways to get more people into the program and assess what the barriers to participation may be.

    Is the process too complicated? Are the incentives too small? No matter how great your program is, if people are not getting on board, it can’t be successful.  

    Customer Referral Rate

    The number of referrals being made through the program. This is the overall number of referrals, regardless of if it was one customer making 40 referrals or 40 customers making 1 referral.

    This is an important metric to track as it lets you know many messages are actually being sent out to potential customers. You might have many participants but few referrals and vice versa.

    However, the number of referrals made is the key to understanding how successful your program has the potential to be. If your number of referrals is low, you need to assess why that is and identify how to make your participants send more.

    This can be as simple as a reminder that there are great rewards to be had if they send a referral or a bonus incentive for x number of referrals.

    Impression Rate

    The number of people who have seen your brand or business as a result of the referral program. Tracking referrals sent, clicks on links, or email open rates are some of the ways of measuring this.

    When it comes to social media and advocacy from your customers, it can be a little more tricky to track the number of impressions. Unique hashtags or links are one way to do this and some referral software allows you to track keywords and mentions on social media too.

    This metric is important for assessing reach and brand awareness. If you want to increase the number of impressions, you need to look at ways to make social sharing easier and giving incentives that are geared towards giving customers something worth sharing. Providing customers with something that allows them to brag a little, goes a long way here.

    It is also valuable because it is an important part of measuring the percentage of people who took action after seeing your brand. It allows you to see if responses and actions are high or low, compared to the overall number of people seeing the brand.

    Response Rate

    The number (percentage) of people who took action after seeing your brand as a result of the referral program. This is the number of people who clicked on the referral they saw and took an action like signing up or even just providing an email address. These are people who are now on the way to conversion but haven’t reached the end of the sales funnel yet.

    If your objective was to grow the user base of your program and attract past and present customers, or grow a base of trial or free users for your service, this metric is an important indicator that your strategy is working.

    This metric also gives you a basic number to see how many responses translate into actual conversions, if your objective to increase your number of paying customers.

    Conversion Rate

    The number of new customers, or people who buy your product or pay for your service, as a result of your referral marketing program. This can be measured as a currency value based on purchases or as the number of unique people converted to customers.

    If your objective was to increase sales revenue and grow your customer base, this is possibly the most important metric to track.  It ultimately shows you the value of your referral program for attracting new customers.

    If your conversion rate is low, you need to assess and address why that is. It is important to consider all aspects, not just the referral program.  

    If you have successfully got people to your page but they’re just not buying, one major factor can be user experience (UX) when they reach your site.

    Slow page loading speed, poor optimization for mobile, lack of clear calls to action (CTAs) will all lower your conversion rate. Bad copy and too little useful information on your product or an overly complicated sales process can also factor into the decision to buy or not.

    Referral Marketing Strategy - Graphic showing 5 x higher conversion rate
    Image Source: LinkedIn

    The five factors above are the foundational metrics to track and measure the success of your referral marketing program.

    It is important to look at each one and make adjustments where needed so that the process does not bottleneck at any point in the program.

    As your program grows and matures, you will need to delve deeper into analytics to make the most of your program.

    Consider adding the following metrics to your analysis for a more detailed picture:

    Planning a Referral Marketing Strategy in 7 Simple Steps

    Referral marketing strategies have been around for some time now and have proven, time and again, to be one of the best marketing strategies available.

    They’re one of the least expensive but most effective methods and they’re pretty easy to set up and manage.

    That said, it’s important to make sure you have a winning strategy from the beginning. To do this, you need to have the most essentials of a referral program in place first:

    1. Set Clear Goals and Objectives

    Right from the beginning, you need to know what you’re trying to achieve. This will enable you to plan correctly and determine how you will track and measure your progress and success.

    2. Identify Any Existing Referral Sources

    Identify which customers are already advocating for you. They should be the first ones you contact when you launch your program and are the most likely to be your best brand advocates in the beginning.  

    3. Plan How You Will Let People Know About Your Program

    Make sure it is very visible for your new customers and that they see it at the right time (i.e. not right before you ask them for money). Personalize the communication for existing customers. Reward loyal customers from the outset.

    There are many ways to optimize your communication when you’re recruiting your first circle of customers into the referral program. A broadcast email won’t do it – you need to make sure it is customized, personalized, and well-timed.   

    4. Determine Your Referral Incentives and Structure

    There are many different kinds of incentives to offer besides cash and discounts. It is important to think carefully about what your customers will value most and what they can do with their rewards.

    Look for rewards and incentives that will drive repeat purchases. Reward both the referrer and the recipient of the referral, and look for rewards that will drive further participation.

    A tiered structure is particularly good for this and it doubles as another type of incentive you can offer by allowing referrers to move up a tier as a reward.

    Whatever way you choose to incentivize and structure your program, it needs to be clear and easy to understand.

    The incentives you choose must be aligned with your customer’s values and provide something they will personally value. Cash and discounts don’t always work best, especially for higher-end products or services.

    Some customers will value a sense of exclusivity more. You can cater to this by offering perks like exclusive access to events, early access to sales or product launches, or access to VIP rewards programs.  

    Sometimes learning which incentives get the most traction is a trial and error process so keep an eye on your metrics and see what works best.  

    5. Plan How You Will Run and Manage Your Program  

    Choose the software you will use and select the people you want to manage it. This can be done in-house or by an external agency, depending on your needs. It is important to have this in place from the beginning so that you can plan how to scale it as the program grows.

    6. Inform Your Customers and Get Them Onboard

    When you’re ready to get customers on board, you need to inform them of the program and how they can benefit from it. This is implementing what you planned in step 3. Make sure you do this part well to make the most of this initial interest and get the momentum going.   

    7. Start Tracking and Measuring Your Referral Program

    To run a successful referral marketing program, you need to keep track of it closely. Referral software solutions will help you do this, based on the five foundational metrics we detailed above, and your specific objectives and metrics.

    These are the bare essentials. If you have this framework in place, you have a solid foundation on which to build your referral marketing strategy.

    However, there are some very important aspects to consider and incorporate into your referral strategy.

    6 Tips to Build a Really Successful Referral Marketing Strategy

    These six tips are the secret to referral marketing success. Every program is unique to its brand and company but certain aspects are universally applicable to referral marketing success in 2021.

    To make the most out of your unique program, these are things you can leverage:   

    Tip No 1: Build Strong Customer Relationships

    When you ask a customer to refer a friend, you’re asking them to personally vouch for you. Their reputation is on the line here.

    Make sure you have a strong relationship with them that they trust you and are confident in your company. Make sure they know exactly what you’re asking for, what it will mean for them and for the person they refer.

    Choose the timing of your request well. Make sure your request comes with a reassuring incentive, something that affirms their value to your company.

    Offering access to a VIP club or a higher level on your loyalty program or referral program is a good way to do this. It shows them that they’re valuable to you, not just for their referral. This offering should be as customized and personalized as possible too.

    Tip No 2: Build Brand Affinity

    Customers participating in a referral program are choosing to endorse your brand. They’re putting themselves alongside your brand and asking people to look. It’s important that doing so makes them look good to their peers.

    Brand affinity is what happens when your company’s values and those of your customers line up. They feel like you share their world view and you represent what their core values are all about.

    This often has less to do with the product you make and more to do with why you make it. Highlight what your brand stands for and your company values in a way that makes your customers look good.

    If you’re an environmentally conscious company and making donations or planting trees on your customer’s behalf, make sure that is sharable information!

    It is important here to be transparent and authentic. Let your customers know exactly what your company is all about. You can highlight the aspects that speak to them personally but keep it real. People know when you’re not being authentic and only telling them what you think they want to hear.   

    Tip No 3: Make it Easy and Make Everything Sharable

    To be successful you have to make it easy for customers to participate. Signing up, referring friends, and claiming rewards has to be simple if you want people to do it!

    Seeing their rewards and what the next reward they can get should also be clear and simple. Make it as easy as possible to see exactly what to do next and how it will benefit them.

    Your website, your social media pages, and your referral program pages must be easily accessible and quick to use. No multi-step processes, no long forms, no slow loading pages.

    Make sure that referrals and reviews are sharable on social media. Social sharing is now a huge part of daily life. Making sure that your program is easy to share on social media is essential! Be sure to include attractive visual content for customers to share too.

    Another great way to maximize social media sharing is to offer your customers personalized items to share on their pages. Things that make them look good. A certificate acknowledging the donation you made on their behalf to a charity is a great example of this.

    Giving them something to share, that makes them look good and has your branding on it, is an incentive too!

    Tip No. 4: Align Your Referral Strategy with Influencer Marketing

    When you’re aiming to make your customers look and feel good, while advocating for you through your referral program, influencers can make a huge impact!

    Using an influencer, big or small, positions your customers alongside them when they’re sharing on social media. A respected and celebrated person who is also advocating for the brand makes your customers look good and will encourage them to share as publicly as possible!

    Tip No. 5: Keep it Fresh and Fun

    Referral marketing programs are voluntary. Making it interesting and fun, as well as rewarding, will go a long way to encouraging participation.

    Use relevant themes, switch up the incentives now and again (without losing value to the customer) or create challenges or give special prizes to dedicated participants.

    You can also gamify the process and allow users to compete for points on a leader board, with better prizes or incentives for those who make the most referrals in a given timeframe.

    Regardless of how you do it, remember that the aim is to keep customers engaged and having fun. The methods you use should not make it harder to participate or harder to earn rewards.

    Tip No. 6: Make it About Them and Make it Personal

    One of the most important referral marketing strategies is to make things personal. When a customer is engaging with your brand or company often, it is vital to make sure that they feel they are recognized and valued by the company.

    Customer relationships need to progress like any other relationship – use your referral marketing data to keep that personal connection with your customers and build the relationship.

    Personalized communication, product recommendations, birthday messages and gifts, congratulations on an anniversary with the company or a milestone achieved – these are all small ways that you can connect with a customer and let them know that you recognize them as an individual and value their loyalty.

    Wrapping Up

    In this guide, we have covered everything you need to know about referral marketing strategies so you can get started on your successful program today!

    We discussed the benefits of referral marketing and set out the essential steps to take when developing your referral marketing strategy.

    We then showed you which metrics to use and how to measure your progress and tweak your strategy accordingly.

    Lastly, we included some important tips to make the most of your referral marketing efforts in 2021. Social media and peer to peer marketing have never been more relevant than they are today, so these tips are especially important for success in 2021 and beyond.

    Frequently Asked Questions

    What is referral marketing?

    Referral marketing is when customers refer their friends or family to a business through word of mouth, rather than the business using traditional advertising to attract customers. A formalized referral marketing strategy harnesses that natural process and adds incentive for customers to refer their friends. Incentives such as a small discount on their next purchase, early access to a sale or access to a higher tier on a loyalty program, reward customers for sharing, and in so doing endorsing, your business to their friends. Check out the full guide for more detail on what referral marketing is and how it works.

    What are the benefits of a referral marketing strategy?

    There are many benefits of referral marketing, including:
    - Improved Targeting, Trust, and Credibility
    - Higher Customer Retention and Customer Lifetime Value
    - Greater Reach and Higher Engagement Online
    - Increased Brand Awareness and Recognition
    - Easy Customization and Personalization
    - Cost-Effective Marketing and great ROI
    - Easy Ongoing Management and Automation
    Check out the full guide for more detail on the great benefits of referral marketing.

    How do you measure a referral marketing strategy?

    There are loads of metrics to use to measure the progress and results of your referral marketing strategy. Five essential metrics to track are:
    1. Program Participation Rate
    2. Customer Referral Rate
    3. Impression Rate
    4. Response Rate
    5. Conversion Rate
    Check out the full guide to learn more about measuring these metrics and other useful metrics to use.

    References and Useful Resources

    Ambassador: How the Best Referral Programs Calculate Success

    Forbes: 50 Stats Showing The Power Of Personalization

    HubSpot: How to Build a Customer Referral Program

    Medium: 5 Causes of Low Conversion Rates and How to Improve Them With UX Techniques

    ReferralCandy: How to Measure and Improve ROI on Referral Programs

    Talkable: 6 Reasons Referral Marketing is The Most Cost-Effective Customer Acquisition Strategy

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