Referral programs – everything you need to know to build one

Referral programs - blogpost

Usually we talk here about cutting edge digital marketing technologies, and referrals seem to be something straight from the analog world. Word of mouth supported with the right digital marketing tools can do miracles but marketers often underestimate it.

Having your own referral marketing program is a cheap (or even free) way to not only make your potential customers aware of your existence, but to make sure they know your products and services are of superb quality. 

Some companies, like AirBnB, built their whole business on it – in 2009 they were known mostly in the US, with 21 000 guest arrivals per year. Nine years and one good referral program later, in 2018, they reached 164 000 000 guest arrivals per year. 

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Referral programs by numbers

First of all – it works, and it’s not only our opinion, but it’s backed by numbers. 

  • According to Nielsen, 92% of customers trust recommendation from people they know
  • Referrals influence between 20% and 50% purchase-related decision-making
  • Companies with referral programs have a 70% higher conversion rate. 
  • Customers who were referred by a friend, are 4 times more likely to make a purchase.

What to pay attention to

When preparing a referral program, think about the incentives first. What is it that you can offer to your customers, that is valuable for them? Dropbox gave 500 MB of space for the user who referred and the one who used the referral – you could get up to 16 GB of space!

Observe and optimize – monitoring your referral program statistics is essential to know what works and what doesn’t, who referred who, in what time, and so on. 

Make it easy for the customer to refer a friend. Use clear CTAs in the right places – at the checkout if you have an online payment, in the confirmation email, newsletter etc. 

Make the rules clear for the customer – they need to know what they get (the reward), when and what they need to do (give a referral, obviously). 

A multi-tier referral program may be a good idea for some businesses. By a multi-tier program we mean a program in which your reward depends on how many people you refer. For a hairdresser it could be a free head massage for successfully referring one client, free haircut for referring five clients and a full makeover for 10 new customers.   In this case it’s even more important for the users to have a clear explanation of how the program works. 

Good examples

AirBnB’s strategy was to offer both to the recommender and the new user travel credits, that they could use on the platform later. This is similar to a huge referral program that Booking.com launched, but Booking.com went even further – they offered to pay for giving a referal. Once you share a link with someone, both you and the person who uses the link get money back on your account.

Both these cases meant that companies have to pay – in case of AirBnB, the company has to cover the cost of travel credits, Booking.com has to open their pockets and pay hard cash to referrers and new customers. 

And this is a risky move, which means that both companies really had to believe that their service is good enough to turn the new customers into regular customers. (And it’s an important lesson for all of us – work on your product first and then promote it with a referral program) 

Did it work? For AirBnB – definitely yes, for Booking.com – hard to say, as the data from this referral campaign remains confidential. We can just guess that it could contribute to the company’s growth, from $9.22 billion revenue in 2015 to $15.07 billion revenue in 2020. Their growth was big enough to worry the EU who decided to issue a warning against Booking.com dominating european tourist market.

So, do you think this could be you? If you like this idea and need help to build a great referral program, just ping us! Not sure if it’s something for you? We will be happy to give you a free consultation, just click here.