There’s a lot more to running a successful referral program than many people might think.
While, on the surface, it may seem deceptively simple: a brand just asks a satisfied present or past customer to refer someone to the brand, with the promise that if the referred-in person completes a valuable action (purchasing a good or services, subscribing, upgrading, downloading an app and starting a free trial etc.), and if the brand can track that action back to the efforts of the referrer using codes or referral links, then the referrer will get a reward and the friend will get an incentive. But the sad reality is that many referral programs don’t work or don’t fulfil their potential, and the main reason for that is, as we set out in our analysis of referral success factors, due to a lack of marketing to promote the program. And that’s all the more ironic when you consider that most referral programs are launched and run by marketers!
And that’s such a shame when you consider the mega-businesses that were built on the back of referral, the fact that eight out ten people want to refer their favorite brands (although research from Texas Tech back in 2018 found that while 83% of satisfied customers say they will refer a brand only 29% of customers actually do), 95% of people have referred at least one friend in the past year, and recent research from UC San Diego and the University of Pennsylvania found that referred-in customers are not only more valuable due to the fact that they spend more and stay longer, but also because they’re more likely themselves to refer in new customers.
A successful referral program needs active promotion, regular refreshing and the use of smart psychology to get people to refer, not just once, but again and again. And it needs attractive rewards and incentives. If you want to know how to avoid the pitfalls of referral, you can read our blog article or listen to our podcast series on YouTube.
But, as you can see above, we’ve written plenty to evidence that referred-in customers are more valuable than those acquired from other channels. But just why are they more valuable?
Why referred-in customers are more valuable?
Back in 2019, Christophe Van den Bulte, Emanuel Bayer, Bend Skiera and Philipp Schmitt at the Keller Center for Research at Baylor University published research to explain just why referrals work so well. In short, it all boils down to two specific factors:
- Better matching; and
- Social enrichment
They explained these concepts as:
Better matching
At its base this pertains to a referred-in customers’ tendency to match a brand and its offerings better than non-referred customers do.
It comes from passive matching, which is due to people’s tendency to connect with people like themselves, and active matching, where referrers actively look through their networks for people they know or suspect would like the brands offerings.
Which all makes a lot of sense. We all tend to associate with people who share our tastes, interests, values and demographics. For example, if you have children, you’re likely to know other people with children of the same age. If you’re looking to buy your first home, you’ll likely have friends and family in the same boat. If you go to church, you’ll know other churchgoers, and so on. And these demographic similarities, values and shared, deeply personal connections between the referrer and referee mean than when a referrer is an ideal customer, the people that he or she can refer are also likely to be perfect customers. In fact, you could say that it’s the ultimate personalized marketing.
So what about social enrichment?
The other factor that the author’s identified as being behind the higher value of referred-in customers was social enrichment, or the fact that the referrer not only knows his or her friends very well, but also has first hand knowledge of the brand and it’s products and services. This means that the recommendations made can be very targeted to the needs of the referred-in friend, ensuring that the brand is a good fit and that the friend will also have a good experience. Which in turn means that referred-in customers are themselves more likely to become referrers.
But there is a caveat. If the referrer suddenly leaves the brand or stops buying their products or services, then the benefit of that relationship is lost. And it can even go a step further – if the referrer or referred-in subsequently has a bad expeerience and customer abandons the brand, then they can actually encourage others to follow suit.
So what’s next?
If you want to learn more, don’t hesitate to reach out to us. We’re more than happy to discuss what we’ve learned working with over 350 enterprise clients across 27 countries.