What is Referral Marketing and How Marketers Succeed by Tapping Into It?

Referral marketing strongly connects to word-of-mouth marketing. With referral marketing, your existing customers and brand advocates promote your products. In many ways, this has to be the ultimate in marketing practice. Why pay strangers to promote a product they have no feeling or passion towards when a brand already has people who love its products, and who are happy to tell the world their positive thoughts about the brand?

Source: nielsen.com

According to Nielsen research, 92% of consumers trust referrals from people they know. They are four times more likely to buy when referred by a friend. According to the New York Times, 65% of all new business comes from referrals. It is a type of marketing that you shouldn't overlook.

What is Referral Marketing:

What is Referral Marketing?

As its name suggests, referral marketing involves somebody referring a product or service they like to their friends and family. It works because consumers trust the opinions of real people far more than they do those of the brands themselves.

Probably the most common type of referral marketing is when a business's existing customers spread the word about a favorite product or service. 

Word of mouth marketing, where people share the news about a business, for example, on their social sites, is also considered to be a part of referral marketing. 

The main difference between referral marketing and word of mouth marketing is that referral marketing is more "deliberate." A business intentionally begins a referral marketing campaign. Firms engaging in referral marketing deliberately encourage their customers to tell their friends about the company. Word of mouth marketing can be more spontaneous, often being started by happy customers, rather than from any deliberate attempt by the brand.

Quite a few brands set up formal referral marketing programs. Brands that engage in referral marketing usually provide some form of incentive to people to give referrals. Dropbox, for instance, offers its customers additional storage if they refer a friend. PayPal was even prepared to pay cash for referrals.

Why Does Referral Marketing Work?

If you grew up in the days when paid adverts on television, radio, and the press ruled, you might wonder why referral marketing garners such publicity nowadays. Well, you can’t ignore the statistics quoted above. Marketers have a wide range of tools in their arsenal, and it makes sense they use those that bring the best ROI. 

You can’t get away from the importance of trust in decision making. The modern consumer, Millenials, and Generation Z, in particular, trust the views and recommendations of their friends and family. They also believe other people they have learned to respect, for example, influencers. But they don’t trust brands. They also distrust formal advertising – particularly the kind of old-style “in your face” loud ads that dominated our screens for many years. They use technology to screen these ads. They avoid scheduled television, preferring to follow a generally ad-free streaming experience. They don't read newspapers and magazines in the way we once did, so they can avoid display ads there. And they can minimize the online advertising they endure thanks to their ad blockers.

All of this means that modern consumers shield themselves from anything that resembles a traditional ad. Instead, they rely on recommendations from people they trust to make their purchasing decisions.

Marketers now understand the importance of trust and have upped their game accordingly. As consumers trust opinions from ‘real people' over generic ads, marketers have now discovered how to amplify the views of real people via referral marketing.

The marketers also understand that for this to succeed, they need to improve their targeting. You can't generate trust if you amplify your message to a mass market. This can sometimes be a problem with celebrity marketing. Sure, a lot of people may see the news shared by the celebrity, but they don't feel any empathy – the celebrity's life is too different from their own. Instead, marketers have found it is far better to laser target the delivery of their messages. Referral marketing recognizes that most people have relatively similar tastes to their friends, so it uses these friends to deliver marketing messages to their social circle.

Referral marketing also recognizes that people are inherently social. People naturally talk to their friends; they tell them both good experiences and bad. It's easy to forget the "social" in social media. Facebook, Instagram, Twitter, and the like are all designed to encourage people to be social over a longer distance and to a more extensive network than they can in their everyday local lives.

Types of Businesses that Engage in Referral Marketing

There is a wide range of businesses that engage in referral marketing. Referral Candy provides a list of 79 referral programs. These cover across a variety of industries including fashion, beauty & grooming, electronics & gadgets, food, beverages & supplements, e-Cigarettes & vaporizers, home & pets, education & toys, software & digital goods, and services.

Referral marketing is particularly useful for online businesses, presumably because people who buy goods online are more comfortable at sharing on social and other digital channels. 

There has been quite an uptake of referral marketing by non-profit organizations. They have found that their supporters are often very willing to promote their preferred charities to their friends and family.

The Most Common Referral Channels

Referral marketing can use a surprisingly wide range of channels. Even influencer marketing is technically an example of referral marketing – influencers refer their support for a product to their followers.

At a base level, the most common referral channel is friends and family – and that can be achieved in multiple ways, such as in-person, by telephone, texting, emailing, by social media; indeed by any communications means used by everyday people.

You will sometimes see more formal examples of referral marketing in news publications – particularly if the brand has done something newsworthy that is likely to attract the eye of the general population. This would include some of the flow-on effects of sponsorship. For example, a firm may pay for naming rights at a particular sports stadium. Metlife’s sponsorship deal for the naming rights to MetLife Stadium, the home of the New Giants and New York Jets, may not be referral marketing in its conventional sense. But every time the stadium receives a mention in the press, Metlife is effectively gaining additional brand recognition.

One of the most visible channels for referral marketing is customer reviews and opinions. The modern consumer takes tremendous creedence from online reviews when they make purchasing decisions. 

They also make testimonials for their favorite brands that those firms use in their marketing. You will see online testimonials across thousands of websites, as firms try to emphasize their trust to help woo potential customers.

Influencer marketing is a variant of referral marketing; therefore, all the usual influencer channels are also referral channels. Depending on the influencer, these might be popular blogs or all of the leading social media sites, including video sites like YouTube, Twitch, and Mixer.

Key Steps to Launching a Successful Referral Program

As we have referred to above, there are many types of referral marketing. These include everything from highly formalized influencer marketing campaigns, down to off-the-cuff reviews made by happy consumers without any incentive or prompting.

For this section, we will look at somewhere between those two extremes, and assume that a brand is looking at organizing a customer referral scheme. 

Provide Incentives

While many people think about giving positive referrals to the firms with whom they have had a good experience, human nature is such that most don’t bother. Life moves on, and people get busy. 

Therefore you will gain better results if you provide some incentive to your customers for a positive referral.

There are many positive incentives you could consider. As we said above, PayPal paid fans for referrals. DropBox gave additional data storage. Tesla offered $1,000 to both their advocates and their friend -sellers of high-priced goods can, of course, provide higher value referral incentives.

Publicize Your Referral Program with Your Customers

A firm with a quality product will get many positive referrals for free. The customers happily spread the word about a product they like. However, if you have chosen to encourage this process and set up a referral scheme, then you should probably give it a little nudge, to improve the number of referrals people give you.

There is little point in having a referral scheme and not publicizing it to your potential customers; it is supposed to incentivize a customer to take action, after all.

Promote your referral program across all of your other marketing channels, much as you would your product itself.

Keep Your Referral Program Simple

Some firms seem scared that a referral program may be too successful, and they place awkward limitations and conditions on it, limiting their liability. Other firms run a legitimate referral program, but make it too complicated for many customers, who then find it easiest to ignore the referral program when they buy the product – even if they like the product and would happily recommend it.

Successful referral programs are simple to understand for all customers. People may like your product, but not enough to take half an hour out of their busy schedules to fill in forms and meet your administrative requirements.

Make Your Product Experiences Easily Shareable

As well as making your referral programs simple to understand, make it easy for customers to share their experiences of using your product. 

You can do this in many ways. For example, you can package your product in such a way that it makes for an interesting unboxing video.  You can also create a distinct brand personality that encourages people to discuss your product.

You should design a page on your website dedicated to your referral program, and include all the details people need to know about joining your program. Ideally, you should include a button they can use to link people back to your website (and which acts as proof for any potential referral payments).

Ensure All Your Stakeholders Know About Your Referral Program

It's best to think of a referral program like an additional product in your product line – one where the brand pays the customer for a service, rather than vice versa. This can be quite different to everything else that a firm sells, so it's essential that every relevant person understands how the scheme works.

This is particularly important for the firm's employees. They need to be educated on how the referral scheme operates, so they can explain it to customers as easily as they can explain the benefits of the firm's product range.

Offer Impeccable Customer Service

No matter how good a referral program you may create, it will never succeed if you don’t give your customers a pleasant experience. You need to step up your customer service to a level where clients feel they can genuinely sing your praises. People want you to hear them, and they want you to solve their problems. Make sure that your customer support staff is always responsive, authentic, and consistent when communicating with your customers.

About the Author
The Influencer Marketing Hub Team brings together a diverse group of experts with a passion for influencer marketing, digital trends, and social media strategies. Each piece of content crafted by this team is researched and written to provide valuable insights, tips, and updates for our readers. Our authors are dedicated to delivering high-quality, informative, and engaging articles that help businesses and influencers thrive in this rapidly changing digital world.