What makes a referral program great? Is it the reward, how you share referrals, or is a referral program effective at all?
The best way to illustrate what makes a referral program effective is to start with an amazing example. Dropbox went from 100,000 users to 4 million in 15 months with a referral program. Let’s take a look at what makes Dropbox’s program great!
Why Dropbox’s Referral Program is Great
- Non-cash rewards: Dropbox offers additional space instead of dollars
- Both parties are rewarded: I get 500 MB and my friend gets 500 MB too!
- Email & social media invites are available: I can send the referral to my email contacts or to my social network, and I can do it from the referral page
- Visual representation of what I have earned: The ship moves forward when my referral signs up
Dropbox is the poster child for referral programs. The company went from using search-engine marketing, resulting in very high acquisition costs, to no traditional ad expenditure. Starting in 2008, Dropbox had just 100,000 users. After 15 months with a referral program, their user base soared to 4 million.
Why Should I use a Referral Program?
According to Nielsen’s trust in advertising report, referrals are the most trustworthy form of advertising available to you—especially compared to other forms of online marketing.
For example, your customer is nearly 50% more likely to trust a referral than trust a mobile phone ad. The same holds true for many popular online marketing techniques. Your customer is over 30% more likely to trust a referral over banner ads, social network ads, and even search engine marketing.
Referrals are trustworthy because they come from someone you know, such as a friend, coworker or family member. You trust these people to not lead you astray. If they recommend a product or service to you, it is because they have had a good experience and enjoy the product. We trust they are not pushing products for a personal financial gain.
It is important to remember why referrals are trustworthy when creating an effective program, but we will get to that later.
How Do I Structure My Referral Program?
There are many types of referral programs out there but I am going to focus on the formats that are most relevant to ecommerce merchants:
- Customer referral programs
- Ambassador referral programs
- Affiliate referral programs
The program format you choose will depend on your target market and trends specific to your industry.
Customer referral programs are the most popular format for online merchants. They work by incentivising existing shoppers to bring others to your site, either with points, discounts, or other perks. It is widely accepted as the most trustworthy and personal type referral since it often comes from a family or friend.
Ambassador.com has a blog post that explains the difference between customer and affiliate referral programs, and an added bonus it is in pictures.
In contrast, affiliate referral programs are not personal. Middlemen, or affiliates, send traffic to your site and are given a cut of the profit if a referred user purchases. These referral programs are very effective for certain types of products and services, such as Amazon.com.
These programs are often used by product reviewers in order to drive revenue. Take a look at a review, and you will find affiliate links throughout the post. Affiliate programs remain important sources of revenue for creators, but aren't right for every industry.
A new type of referral emerged in recent years thanks to social media. Ambassador, or influencer, referrals are from someone you don’t know personally, but that you see as an expert. This has become very popular on YouTube, especially in the beauty and personal hygiene industry. Customers search “how to do my makeup for a wedding” and find a video that explains how to do it. You go out and buy the makeup that was used in the video because you know it works. No one told you to buy it but you were effectively referred to it by an internet personality.
You can take advantage of these types of referrals by finding influencers in your industry and sending them products. Be careful about paying these influencers to push your product though. If they are paid, this type of referral becomes more like an affiliate program and the viewers will quickly see it for what it is.
Should I Track Referrals Using a Code or URL?
This is a topic that is debated pretty consistently in our office and amongst our clients. There are benefits and drawbacks to each, however what could be considered a drawback for one referral program is actually an advantage in another. Let me explain.
The main reason many people do not like a referral code is because it has to be manually entered into a field for the referral process to begin. People see this as an added step in an industry where streamlining your processes is vital to survival. The referred user has to either remember the code, or copy and paste it to the referral field. This adds an unneeded step to the process and is the main reason people prefer a unique URL over a code.
Retailers that use codes are generally selling some sort of luxury good, or their business model is centered around exclusivity or prestige. Codes feel more personal than sending a friend a URL. When a code is sent, the recipient tends to view the code as a key to unlocking an exclusive offer.
As we stated before referrals are about trust. The problem with a referral URL is it can appear less polished than a code: “Get 10% off at website.com using the referral link website.com/ref=?fdaskFSD”
Realistically, most people will simply click the link without thinking too much about how it looks, and personalized referral links are making this less of an issue overall.
URLs make up for their small weakness with speed and tracking. A referral URL is great at accelerating a customer through signing up for a referral program. Contrary to referral codes, unique URLs will take users right to the sign-up page. The combinination of the streamlined approach and the analytical benefits of URLs delivers a match made in heaven for many retailers.
Social Media or Email Referrals?
The short answer is you should allow them to do both. Allowing the customer to choose how they want to send out referrals provides flexibility. However, this is once again dependent on the nature of your business and your knowledge of your customer. There are benefits to both email and social media:
Social Media Delivers Maximum Brand Exposure
Your customer is sharing with everyone in their network which is likely quite large. The increased exposure is great but the power of referral trustworthiness may be damaged. If someone is referring everyone in their network, it loses its intimacy and is viewed more like an advertisement than a referral.
Email is Much More Personal
A customer will choose who they want to share with, giving you less brand exposure but keeps the effectiveness of the referral in tact. If the customer is shy, they may want to send this out to a select few friends over email.
What About Offline Referrals?
Word-of-mouth referrals are the best type of referral you can get. In fact, 2 out of 3 marketers say that word-of-mouth is more powerful than any form of paid marketing. Word-of-mouth is incredibly effective and comes from your brand's ability to convey value to your customer.
Customers will spread the word when you provide an amazing experience—whether that's by great customer service, speedy delivery, product selection, or just about anything else.
Unfortunately, it's quite hard to track and measure. Word-of-mouth referrals happen naturally but can be supplemented with other offline tactics. KissMetrics has a post about converting offline marketing into online data. If you are considering adding an offline component to your referral program, I would recommend giving it a read.
What Do I Give My Customers for a Referral?
The old way of thinking was to award what you can afford. This is not the case anymore, a University of Chicago study found that non-cash incentives are 24% more effective at boosting performance than cash incentives. Cash rewards would also include discounts or percentages off.
If cash rewards are not as effective, what do you offer instead?
The answer is be creative! Dropbox had major success rewarding referrals with additional storage space, while online games like World of Warcraft gained successful referrals by awarding in-game perks. Mobile games implement a similar strategy: if your friend joins you get points faster, level up sooner or gain access to exclusive levels.
Here at Smile.io we use points instead of cash to reward successful referrals. Some of the best referral programs we see combine non-cash rewards, offer an exclusive privilege, and award both parties involved in the referral.