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What Is a Referral Business Model_blog

Affiliate Network Insider — 19 May 2022

What Is a Referral Business Model

Referral Business Model

3 referral statistics

Marketing used to just be a case of a few well-placed adverts in the media and the odd promotional campaign. Since the advent of the digital era, however, things have gotten a lot more complicated. Marketing your business can be a minefield when it comes to deciding where to focus your resources or do SEO work, especially for a small business or startups with a limited budget. 

While the era of digital marketing and ecommerce has brought new challenges such as hybrid working, it has also brought new opportunities, though it can be difficult for business owners to choose what their main marketing channels will be. There’s one form of marketing that has not changed drastically in the modern age and that’s word-of-mouth marketing. Personal recommendations have always been a strong way to expand reach. 

Of course, how that word is spread has changed. Where customer experience used to be something discussed in conversations between friends and family, social media has opened those personal conversations to the world. People now have expectations of seeing online reviews and this is especially true of younger age groups who have mostly grown up with the internet. 

Many businesses now look to referral campaigns to encourage customer loyalty and aim to elevate that loyalty to brand ambassador level, with those happy customers sharing their views as well as your brand’s content. So, just how does this referral marketing strategy work? What are the major benefits customer referral programs offer and how can you switch to using one effectively?

What is a referral business model?

Source (growthagency.co)

At its heart, referral marketing is about leveraging your best customers into brand advocates. In essence, it’s marketing tactics that add lots of new members to your marketing team. By utilizing positive reviews from satisfied customers, you look to expand your customer base and get new business. You may already be involved in relationship marketing and this is a natural relative of that. 

You can look beyond just reviews and include the implementation of user-generated content (such as customers using your product) and any other media they post that is positive about your brand and products. Your ultimate goal is to have loyal customers make the step up to being viewed as brand advocates. You can also offer referral reward schemes for these advocates.

Why choose a referral program?  

Now you know what a referral model means, but why should you choose it? Does it really offer tangible benefits that can have a positive impact on your most important metrics? Consider some of these referral statistics

  • 92% of people will trust a referral if it comes from someone they know.
  • B2B companies who utilize referrals see a 70% higher conversion rate.
  • If a new customer is referred by a friend, they are four times more likely to make a purchase.
  • The LTV (lifetime value) of referred customers is 16% higher than non-referred customers.
  • Referred customers have a 37% higher retention rate. 
  • 83% of online shoppers in the US are influenced by social media posts made by friends.
  • 92% of consumers trust referrals from people they know.
  • Friends’ social media posts influence the purchase decisions of 83% of US online shoppers.

So the numbers back up the theory that referral programs can be of major benefit to businesses. Leading marketing professor, Dr. Jonah Berger (an expert on influence and word of mouth) identified six principles that underpin customer behavior when it comes to the power of influence. Let’s take a look. 

The STEPPS principles

STEPPS Principles
Source (slideshare.net)
  • Social Currency: What people say with social sharing affects the perceptions of those who hear or see them. When people share their know-how and positive stories (and reviews) then the people they know are more likely to share those stories.  
  • Triggers: Word association is not only a psychological phenomenon, it’s also a marketing one. Many people will automatically link words or products with other products, brands, or experiences. The more people that are triggered to consider a product, the likelier they are to talk about it. 
  • Emotion: Humans are emotional creatures. With the advent of social media, you’re more likely to share both positive and negative emotions. When it comes to products and brands, that sharing manifests as reviews (both positive and negative). 
  • Public: We used to talk about ‘Keeping up with the Joneses’ and in many ways, this is still the case. People will (just as many businesses do) imitate or copy their peers. When people post positive experiences about products or brands, others will be motivated to ‘copy’ them. 
  • Practical value: Posting positive reviews is not just about looking good, it often comes from a genuine desire to help others by sharing their own experiences. The more useful a post is, the more likely it will be shared. 
  • Stories: Humans have been sharing stories for tens of thousands of years and social media makes that fireside storytelling easier. People want to talk about their experiences and you can weave these stories into a broader and ongoing narrative. 

What are the actual benefits of a referral program?

Referral Program
Source (pixabay.com)

You may already be partnering with other brands using a program such as Affise Reach, so you know that referrals can be helpful in marketing campaigns, but what are the actual benefits customer referrals offer to your organization?

1. Standardizes sharing

Of course, if you don’t offer great products or services, then referrals will not be of much help. Assuming you do, then you want a sharing process that goes beyond the old friend and family model. You want your loyal customers singing your praises to all. To achieve that, you want to encourage as much sharing as possible. 

This is where rewards enter the equation. By standardizing the way your customers share, and by offering an incentive program with clearly stated rewards, your loyal customers are more likely to share experiences and reviews. Sharing their reviews is something they may not always do, even when they are happy with your brand. The sort of rewards you can offer includes:

  • Discounts on future purchases. People love savings and you can make discounts offered incremental according to how often people share and refer. 
  • Cash or cashback. By offering cash for referrals and signups, PayPal grew an incredible 1,650 percent.
  • Credit. Similar to discounts, you can offer customers account credit. 
  • Free things. People love freebies and you can use this to create promotional items that both keep customers happy and further promote your brand. 
  • Gift cards. Customers can choose to use these themself or to pass them onto a friend or family member. One advantage of this reward is that gift cards usually have expiration dates.
  • Free subscriptions: If any part of your business operates on a subscription model, this can be a good incentive. It can also mean that, if happy with the service, they may pay to extend the subscription at the end of the free period. 
  • Donations: Corporate social responsibility (CSR) has increased in importance in recent years. Offering donations to your chosen CSR charities not only helps those organizations but also provides the customer with a feel-good factor. 


2. Lower CAC (customer acquisition costs)

Customer Acquisition
Source (firstpagesage.com)

You want new customers but you don’t want to incur high CAC. With a referral program, you can bring new customers on board without breaking your budget. While there may be the price of rewards to consider, these are performance-based costs so are therefore much lower than traditional marketing costs. 

When you consider that referred customers have higher LTVs (lifetime values) than traditionally acquired customers, this represents a win-win cost-effective situation for your business. You’re spending less to acquire those customers and they also spend more. 

3. Better quality customers

As mentioned, referred customers tend to spend more than their non-referred counterparts. You’re also more likely to retain these potential customers. That not only represents better value for your organization as a whole, it also means you can repeat the cycle and move these acquired customers towards being referrers and brand advocates themselves. 

How does a referral program work? 

You may already be benefiting from partnering with other brands and businesses, so you can see that a referral model can be of immense benefit to your business. It can have a tangible effect on those all-important metrics such as customer retention, conversions & sales, LTV, and CAC. How do you go from liking the idea to creating one for your business? 

How to create a referral program: preparation

Referral Process
Source (pixabay.com)

1. Self-audit 

Before you even consider what to do with your customers, take some time to examine your business. Are you offering quality goods and services with pricing that customers like? Are you already receiving positive reviews from previous or current customers? If the answer to both of those questions is “yes”, then you’re ready to consider creating a referral program.

Having your business offer high-quality products and services as well as high customer satisfaction is an essential foundation of any referral program. If your business makes a positive impact with your customers (and that can include things such as customer support), then they’re likely to positively promote your business, especially when that promotion is incentivized. 

2. Prioritize your customers 

If you’re going to create a referral program, you need to be sure that your customers are at the core of it. That means ensuring that not only are your products exceptional, but that other aspects of your customer relations are of similar quality. The two most important areas in this regard are communication and customer experience. 

Ensure that you can have good conversations with them. That could be via various communication channels such as social media from Facebook to Linkedin or direct emails. You also need to be sure that you can optimize the customer experience and this includes great customer service, an optimized and accessible website, eliminating any pain points, and offering an omnichannel experience. 

3. Establish clear goals

The final part of preparing to create a referral program is to establish why you’re doing so and what your goals are. The most obvious goal is increased sales and revenue, but most referral programs look beyond those metrics and have additional goals identified. These can include:

  • Increased customer retention and loyalty.
  • The number of referrals.
  • Creating brand ambassadors. 
  • Driving an increase in custom acquisition. 
  • Increased reach and brand awareness.

Your goals may be any combination of those listed and will depend on your own priorities. The crucial thing is to have them listed so you have a clear idea of the route you’re taking. It also means you can analyze results and see if there is progress towards the goals you have set. Using software with robust integration and analytics abilities allows for analysis of your various metrics and can let you tweak aspects of your program where needed. 

How to create a referral program: action

Referral action
Source (pixabay.com)

By now, you should have a clear idea of what you want to achieve and whether your current business model will support the creation of a referral program. You can now start building the framework of your referral program. 

1. Design a program that suits your business goals 

Even what your program looks like visually will be a factor in its success. While for some, your referral program may be the first time they’ve encountered your company, many will already know your brand. Keep messaging clearly aligned with your goals and keep the overall feel and design elements tied to your existing media. 

2. Attract attention

You want people to notice your program so use catchy headlines and posts that attract their attention. Think of those headlines as saying what your program does in one sentence and what it offers for a successful referral. People should see what benefits are open to them as a new referral if they join your program and they should want to know more. Good headline examples are:

  • Refer a friend and get $25. 
  • Share and get 10% discount. 
  • Spread the message and get free sunglasses. 
  • For every three friends referred, we will donate $20 to [XXX]. 

3. Make the referral process simple

The more people that share, the more successful your program. That means you want to make the processes of joining the program and sharing content as easy as possible. Offer them as many ways to share as possible as this will increase the likelihood of them sharing content. 

Most software options can help with this; they usually offer different ways of sharing such as social media or email. One important factor is to include a simple one-click referral link that lets people copy and paste with ease. 

4. Make your referral messaging clear

As well as making sharing as simple as possible, you want any messaging to be clear and consistent, so those people your customer refers you to can easily understand your messaging. A template can be helpful at this stage as it cuts down on any work by your team. However, make any messaging editable in case the referrer wants to add some text of their own.  Consider these factors when it comes to your messaging:

  • Make the benefits of referral clear and transparent. 
  • Have a clear CTA (call-to-action) as to what people have to do.
  • Make all messaging and terms understandable. 
  • Personalize as much as possible. 

5. Analyze and adjust 

Source (affise.com)

It’s rare to get things right the first time. This means you need good analytics to track progress and see how your program affects your specified metrics. Analyze what works and what doesn’t and adjust as needed. Good software can help with this just as it can with exploratory testing techniques. Such software often comes with integrated analytics, referral tracking, A/B testing, and referral link distribution options. 

Moving forward 

Once you have set up your referral program, then you are ready for action. As you move forward, there are some ongoing factors to consider.

Letting people know

You want your existing customers to join the program, but how do you let them know? The best two methods for this are:

  • Personalized emails: Let all the customers on your email list know about your new program by sending them a personalized email inviting them to join. 
  • Social media: Your customers will likely be part of your social media network so posts across your various platforms can inform them of the new initiative. 
  • Website: Add referral request forms to your checkout process or in thank-you emails. You can also create banners on your homepage or any landing page. 

Determine your reward tiers

You’re not going to hand out the same reward to everyone. Decide on how you will distribute rewards and what the qualification criteria are. You also need to decide who gets any reward. There are two main types of incentive:

  • One-sided incentive: This only rewards one of the two parties; the referee or the referred person. However, this type of reward is one-sided so may not be hugely successful. 
  • Two-sided incentive: By far the better option, this rewards both parties. By rewarding both, you will likely see higher levels of engagement as well as, hopefully, acquiring new clients.  

The takeaway 

Affise Referral
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Grace Lau - Director of Growth Content, Dialpad

Written by

Grace Lau is the Director of Growth Content at Dialpad, an AI-powered cloud communication platform for better and easier team collaboration. She has over 10 years of experience in content writing and strategy. Currently, she is responsible for leading branded and editorial content strategies, partnering with SEO and Ops teams to build and nurture content. Here is her LinkedIn.

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