Referral Marketing (The Ultimate Guide for 2021)

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Who do you trust more, a marketing ad or your friend from college who swears by a product? Of course, you will trust your family, friends, or even a stranger more than you would trust brands and their advertisements. This shows just how essential referral marketing can be for your company.

We are all influenced by customer reviews, social chatter, testimonials, recommendations, and most essentially, referrals. If you use referral marketing effectively, it will help you stand out from your competitors.

Want to learn more about referral marketing? Keep reading!

What is Referral Marketing?

Referral marketing is an amazing marketing technique that uses word-of-mouth to increase your customer base. In easy words, it is a marketing technique in which you get your biggest fans to spread the word about your company.

If a customer raves about you in front of their friends, it is a win-win situation for everyone involved. You get free marketing, the customer gets social validation for a solid recommendation, and the friend gets useful information from a trusted source.

Referral marketing is not only cost-effective but is used by people all around the world. Your brand advocates could share their reviews online apart from personally referring your products to their friends.

What Are the Different Types of Referral Marketing?

When it comes to referral marketing, there are three main types. Let’s briefly take a look at them so that you can select the one that suits the needs of your business.

Experience Based Referrals

This is the first type of referral and is the most effective. Experience-based referrals come from those people who have had buying experience with your products.  

Make sure that you treat your existing happy customers with the utmost respect, care, and build a strong customer relationship. This will make them more likely to recommend you to other people.

Maintain high standards of exceptional customer service and see how the recommendation help you create a successful customer referral program.  

Reputation-Based Referrals

Some professionals and industry leaders may not have worked with you directly, but still respect your brand and believe that you are a solid company. They are also likely to refer you to their family, friends, colleagues, etc.

To improve your reputation-based business referrals, ensure that you are connected with key people in your industry. You can attend networking events, use branded apparel, send out promotional items, etc. to leave a positive impression with people.

Build awareness so that even those people who don’t use your services, respect and hold your company in high esteem. Use this form of marketing to organically grow your customer list.

Specialization-Based Referrals

Some people may know about your company even if they lack real knowledge about your services.

Even though these referrals are less likely as compared to the other two options, these referrals can still create awareness. They will put you out in front of the desired audience and target market. 

Make sure that you ask new leads where they heard about you so that you can focus on making that source a part of your referral marketing strategy.

How Do You Measure the Success of a Referral Marketing Program?

Before you make referral marketing a part of your referral strategy, you need to know how you will measure whether your marketing efforts are going in the right direction or not. There are some things you can keep an eye on to determine how referral marketing is impacting your bottom line.

Let’s take a look at some steps that will help you figure out the costs associated with your referral campaign so that you can compare the numbers against the expected return on investment.

Compare the Cost of the Program Against New Customer Revenue

This is a very easy step and is the most important calculation. The goal is to simply add up all the costs associated with your referral programs, from a cash incentive to company resources spent.

Then check the revenue your successful referral program is generating in terms of bringing in new satisfied customers who use your services and buy your products. Add up the total revenue and divide it by the total cost to generate a basic ROI.

Factor in the Average Customer Lifetime Value as Well

Even though calculating the ROI is pretty effective, most companies base the ROI on a single purchase. When you do this, you are leaving a very important variable out of the equation – the lifetime customer value.

When a referred customer buys something from you, they tend to buy more products from you over time. Moreover, they are very likely to refer your services to others as well. Therefore, you need to keep an eye on the average person’s lifetime value metric as well while doing a cost-benefit analysis of referral marketing.

Recommendations from people influence the buying habits of others and it is a truth that you can’t ignore while you design your marketing plan.

Compare the Referral ROI with Other Marketing Strategies

While the two steps that we have mentioned above will give you an idea of how your referral marketing program is doing, you need to compare the entire process with other customer acquisition channels as well to see how well it is performing.

Doing this is easy. Take the ROI numbers of other marketing channels like email campaign marketing, direct mailing, paid advertising etc., and compare them with numbers from referral marketing.

Many of you might have heard about the success of the Dollar Shave Club. It was a subscription-based grooming company whose CEO uploaded a humorous and cheeky 90-second video on YouTube. The video got over 25 million views, over 12,000 people signed up for their delivery service, and by the end of the week, they had over 25,000 new customers.

How did this happen? The existing customers loved the ad so much that they referred it to their friends and it got viral. 5 years later, the company was sold to Unilever for $1 billion dollars!

Ideas for Extra Incentives for Referrals

People need a helpful nudge to do something. If you give cash rewards to people for referring your brand to others, they will be happy to share your useful services with their family, friends, colleagues, etc.

From cash referral codes to discount coupon codes and a free monthly subscription to your services, you can go with a variety of referral incentives to create loyal customers who refer your company to others!

Social Gifting

This is a very unique business marketing idea in which you give a gift to the friend of your existing customer. The referrer will get the satisfaction of giving something to their close friends and you will get the opportunity to convert someone into a loyal customer.

Enhance the customer experience through gifts, so that will have a positive experience and bring in referrals.

Mystery Gifts

Who doesn’t like mystery gifts?

As a referral reward, you can send something unique and personal to your customers, from candles to bath bombs, or anything else that you think they will love. You can send out a free sample of your upcoming products as well as branded promotional items.

Charity Donation

For every referral, you donate some money or food items to a local charity. People are more likely to be motivated when they think they are working for a cause instead of a reward for themselves.

‍There are various benefits of referral marketing.

Even though there are many other effective modern marketing techniques out there, nothing tops word-of-mouth and online referral marketing. Hopefully, you would have learned some useful techniques from our article.

Final Words About Referral Marketing

So, as you can see referral marketing is well worth the effort. It can bring you many, many more potential customers knocking on your door.

You are not alone – Tesla was a simple startup that became the biggest global electric car manufacturer thanks to referral marketing. From Shopify and Airbnb to Uber and Dollar Shave Club, companies all around the world use referral marketing as an effective tool.

So, now that you know what referral marketing is and how to use it – make a change in your company by implementing it!