92% of consumers trust word of mouth over any other form of advertising, making referral marketing one of the most powerful word of mouth marketing tools.
Referral marketing is a strategy that is becoming increasingly popular nowadays. And that’s because there are countless statistics that show how effective it is.
For example, 83% of consumers say word of mouth has an influence on their purchasing decisions.
Word of mouth is the concept behind referral marketing. Basically, it means brand recommendations (referrals) from people to their network. These recommendations can happen online or offline.
Referral marketing is a way of incentivizing word of mouth recommendations through a rewards program.
But why is referral marketing so effective?
That’s what we will answer in this article. In addition, we will also talk about how to start a successful referral program.
What is referral marketing?
Let’s start with the basics, what is referral marketing?
Referral marketing is a strategy to encourage and incentivize customers to recommend a brand to family and friends. This is achieved through a program in which the brand offers rewards in exchange for referrals.
It’s one of the best word of mouth marketing methods to drive real conversions — from app downloads, new customer sign ups, sales, email collection, and more.
Referral marketing works because people have pre-established relationships and trust between their friends and family.
And as we mentioned before, people trust people they know when it comes to brand recommendations.
Here is an example of a typical referral program from Stich Fix.
Why you need referral marketing
We have briefly talked about some of the benefits of implementing a referral marketing strategy. Here, we will go into detail about the things that make this type of strategy so effective.
Referral marketing is trusted
People trust their friends and family, and they’re more likely to be receptive to a recommendation from their inner circle than from an ad they see on a billboard or on Instagram, for example.
That is a fact.
Traditional advertising suffers from so many cases of false advertising. People have grown skeptical of ads to the point that only 25% of consumers accept them as truth.In the same study, it is concluded that people even trust strangers more than ads.
Consumers want to know more about real people’s experiences with a product.
To consumers, it’s more valuable that a person with first-hand experience tells them about a product they liked than a brand talking positively about themselves.
This is because generally, people start by being impartial to the success of the company. Through experience, they discovered they really like the products or services.
And while there is a reward component to referral programs, people participate because they like the brand in the first place.
No one will want to recommend a product just to get a discount on something they don’t even like.
This way, referrals are coming from loyal customers who already recommend your products but now they have an incentive to do it more often.
In other words, people will trust word of mouth recommendations even if the people get a reward.
Referral marketing leads to customers that spend more
When your brand is introduced to a potential new customer by someone they know, there is already a sense of trust established. As we mentioned in the previous point.
So they trust the brand is good, but does that translate into sales?
The answer is yes.
Customers acquired through word of mouth spend 2x more and make 2x as many referrals themselves. Referred customers convert 30% better than non-referred customers, and have a 16% higher lifetime value.
As you can see, referrals convert better and end up spending more than non-referred customers. But not only that, those referrals bring in more people themselves.
Referral marketing is cost effective
If a customer loves your product, they’re likely to refer you to their friends and family with little to no incentive. They’re intrinsically motivated by their love for your brand.
So getting rewards encourages these recommendations even more, attracting more sales.
Fortunately, these rewards aren’t as expensive considering the amount of new business resulting from the program.
We have demonstrated that referral marketing increases brand trust and customer spend, making it an extremely cost effective customer acquisition strategy.
Below, we will talk more about the rewards your brand can offer in a referral program.
How to build a referral program
Building out a successful referral program means understanding your marketing objective, creating engaging incentives, and making the process extremely user-friendly.
Make sure to have a clear, ideal customer journey process mapped out before beginning any work on the program itself.
Here are some helpful tips for building a referral marketing program for your brand:
Create concise messaging
Be sure to explain all the benefits of joining the program.
Create a clear call to action with steps on how to get there while making it personalized and easy to understand.
Oftentimes, when customers share a referral to others, the person receiving the referral does not know about your brand, so messaging needs to be in clear alignment with your brand guidelines.
Establish easy sharing capabilities
Give customers a variety of ways to refer for maximum likelihood of effective sharing.
Encourage referrals across multiple social media accounts, through email or text, or even physical flyers if your business is more locally focused.
Make a point to outline proper messaging when referring, or have something that customers can simply copy, paste, and send to make the process even more seamless.
Choose the right rewards
Rewards can be one-sided or two-sided.
One-sided meaning the benefit goes to either the referrer or the referee, two-sided meaning it goes to both.
Think about whether your budget can stretch for either option.
These are some of the most common incentives/rewards you can offer in your referral program:
- Store credit or points
- Company merchandise
- Gift Cards
- Charitable donations
- Discounts on product and/or orders
Recommended: 5 Tips to Boost Customer Referrals
Final thoughts on referral marketing
Referral marketing is a proven method to gain brand trust, awareness, and obviously, referrals.
But it is not all about those things. Referral marketing is also about a brand’s relationship with their customers.
There are many benefits for improving and building an emotionally connected community.
Just think about it. This strategy works thanks to people who love your brand. And there is a big gap between liking a brand and loving it.
The only way to have those connections is through community building and genuinely caring about customers.
Word of mouth marketing strategies are effective because they actually take into account people and their relationship with the brand.
After all, every company is in the people business.