Referral Programs: What Makes One Great?

October 3, 2014
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What makes a referral program great? Is it the reward you give, 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!

Dropbox:referral program dropbox referral

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 SEM and having very high acquisition costs to no traditional ad expenditure. In 2008 Dropbox had 100,000 users and in 15 month with a referral program that number soared to 4 million.

 

Why Should I use a Referral Program?

Referrals are Trustworthy!

Referrals are the most trustworthy form of advertising available to you, according to Nielsen’s trust in advertising report. This is a sigh of relief for ecommerce merchants, because many forms of online advertising are towards the bottom of the trustworthiness report. For example, your customer is almost 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.

referral program trust level scaleReferrals 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 are recommending a product/service to you it is because they have had a good experience and like the product as well. We trust that 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?

Now that we have discovered why referral programs are so effective, we must look at how to best utilize one. Below are tips and tricks to implement an online referral program.

Customer, Affiliate, or Influencer Referral Program?

There are many types of referral programs out there but I am going to focus on the ones that are most relevant to ecommerce merchants. Those are customer referral programs, ambassador referral programs, and affiliate referral programs. The one you choose will depend on what you are selling but some programs are replacing others in general.

Customer Referral

Customer referral programs are the most popular for online merchants. You should be using this type of referral program if you are looking to encourage existing shoppers/users to bring others to your site. These programs are the focus of many online tools and applications, and for good reason. Customer referrals are true trustworthy referrals. Customer referrals are seen as much more valuable than other types of referrals. Ambassador.com has a blog post that explains the difference between customer and affiliate referral programs, and an added bonus it is in pictures.

Affiliate Referral

In contrast affiliate referral programs are not personal. These referrals are done by middlemen who are compensated financially for sending you to a particular product. These referral programs are very effective for certain types of products and has been very successful for Amazon.com. However, recently Amazon changed the name from affiliate to associate program in response to the negative stigma the word affiliate holds.

Influencer Referral

With the rise of social media a new type of referral has been born, which I call ambassador or influencer referrals. These are referrals from someone out there that you don’t know personally but you see them 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 product. 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.

Referral Code:

Disadvantage

The main reason many people do not like a referral code is because it has to manually be 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 person who is being referred has to either remember the code or copy and paste it to the referral sheet. This adds an unneeded step to the process and is the main reason people prefer a unique url over a code.

Advantage

Some of our clients at Smile.io do prefer a code over a url for their referral program. Clients that use codes are generally selling some sort of luxury good, or their business model is centered around exclusivity or prestige. Codes just seem a bit more personal than sending a friend a url. When a code is sent the person receiving it tends to view the code as key to unlocking what the referrer has found.

Referral URL:

Disadvantage

As we stated before referrals are about trust. The problem with a referral url to share with your friends is that it sometimes can seem sketchy. “Get 10% off at website.com using the referral link website.com/ref=?fdaskFSD”. Sometimes this doesn’t seem as authentic as receiving a code.

Advantage

What a referral code lacks above it makes up for in speed and tracking. A referral url is great at accelerating a customer through signing up for a referral program. The added step of a code is removed and the link will take them right to the sign-up page that can have info already filled in for them. Combined the streamlined approach with the added analytical benefits of tracking the urls and you have a match made in heaven for many retailers.

In summary, there are advantages and disadvantages to each method and there is still not a clear winner in our minds. The correct choice comes down to the nature of your business as well as what you are trying to achieve. Try using both to start and see which one performs better, agh A/B testing.

Should I Encourage My Customer to Refer Over Email or Social Media?

The short answer is you should allow them to do both. However, this is once again dependent on the nature of your business and your knowledge of your customer.

Your referral program should allow customers to send an email or social update directly from your web page. Allowing the customer to choose how they want to send out referrals provides flexibility. If the customer is shy they may want to send this out to a select few friends over email. If the customer is a very social person they may want to tweet out their find to everyone they know.

Obviously there are benefits to both email and social media. Social media will get your brand maximum 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 is damaged. If someone is referring everyone it loses its intimacy and is viewed more like an advertisement than a referral. Email on the other hand 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.

What About Offline Referrals?… Are They Not Important?

Quite the opposite actually, 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 paid marketing they do. Word of Mouth is incredibly effective and comes from your site/brands ability to convey value to your customer. Customers will spread the word when you are providing an amazing experience to them. This could be  customer service, speedy delivery, product selection, or just about anything else.

The problem, it is pretty well impossible 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. So if cash rewards are not as effective what do I offer my customers for a referral?

The answer to what to award is …. be creative! Drop Box had major success rewarding referrals with additional storage space, many online games such as World of Warcraft gain 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. Our clients see great success with boosting referrals through points due to similar findings as the University of Chicago. Some of the best referral programs we see combine non-cash rewards, offer some sort of exclusive privilege for referring and award both parties involved in the referral.