3 Reasons Why Referral Programs Acquire New Customers

referral program acquires new customers

Referral marketing is a tactic which does exactly what your subscription company needs: generate more revenue from the customers you already have.

Referral Marketing is Customer Generation

Sometimes they compare referral marketing programs to lead generation, but let’s be clear, referrals generate customers, instead of only leads. While lead generation brings you interesting contacts, those take time to cultivate as customers. Instead of your business acting as a consumer educator, referral marketing uses your pre-existing customers to promote your brand, which ultimately results in their friends becoming your new customers.

Utilizing your customers as brand educators is extremely important because you’ve already built a trusting relationship with them. Nielsen found that referral marketing is the most trusted advertising source, and 84% of people said that they trust personal recommendations.

In examining 52 weeks of customer referral data, NYU Stern Professors Mazime Cohen and Anindya Ghose found that the experience of the customer is closely linked to the quality of referrals — the bigger experience of customers sharing the offer, the higher quality of referrals coming.

The probability of a customer making a referral in a given week decreases with the experience level, increases with the current usage intensity, and decreases with the length of the inactivity period.

Customers are the bread and butter of a subscription business. Since subscription services need new customers to scale up their businesses, you will achieve success by focusing on customer retention and acquisition. You can also increase retention and acquisition in e-commerce by using various pricing strategies. It’s one of the most underlooked areas of online shopping but that’s another topic for another post.

Why Referrals Get the Best Subscribers

  • Referred Customers are Less Likely to Turnover

To grow your subscription company, you must retain your customers. By reducing subscriber/customer turnover rate, you’ll boost revenue. Customers produced by referral marketing are more loyal and less likely to churn.

A study by the Wharton School found that rewarded referrals had a much lower turnover than referrals which were not rewarded. Furthermore, the referral customer churn rate was 18% lower in comparison to other types of customers. Referred customer retention was not only higher but also more resilient. In fact, after 33 months, referred customers had an 82% probability of still being active customers.

Another study found that referred customers are more loyal to the brand much more quickly. The State of Referral Marketing said 78% of surveyed respondents said that referred customers are more loyal than any other customers acquired from different marketing channels.

Customer loyalty and retention are two imperatives that help customers stick to a brand. For subscription services, loyal and active customers are key to your current and future success. Referral marketing has the ability to bring you more loyal customers, which makes it the perfect marketing technique for the subscription industry.

  • Referred Customers have a Lower Customer Acquisition Cost (CAC)

Referral marketing creates high-quality customers at a lower cost. CAC is defined as how much money it takes to obtain a new customer. Unlike digital channels that charge you based on the number of impressions, clicks, or conversions, referral marketing costs are fixed.

Not so long ago, Click Through Rate — CTR or % of people who clicked on an add when they saw it — was utmost the main metric. Marketers were racking their brains to optimize the ad in such a way it would get the highest maximum number of clicks. From flashy designed images to scammy copy, they were doing a vast amount of things to play an A-game. 

In 2019 the average CTR price for paid advertising continues to slowly descend comparing to Q4 2018 when the numbers were fifteen times lower than usual. Paid advertising helps your brand gain awareness while referral program minimizes CAC cost, which is an ongoing mission for any big or small business, and maximizes ROI, which allows businesses to move ahead faster. That can be explained by a simple mechanism: old customers bring new customers. The cost of these new customers is usually low. 

Referral marketing program spending is generally tied to your customer referral technology, reward costs, and your employee headcount dedicated to the referral channel. With Talkable, however, you have the option to work with our Customer Success Team who can create, test, optimize, and manage your referral campaigns.

Thus, the better the performance of your referral program, the lower your CAC will be. Suppose, for example, that you buy a referral platform that costs $2,500 per month. If your campaign generates 100 customers in the first month, your cost per customer is $25. The next month, however, you optimize your campaign and gain 500 referred customers. As a result, your cost per customer decreases to $5.

  • Referred Customers Have a Higher Customer Lifetime Value (CLV)

Referral consumers have a 16% higher lifetime value. Referred customers are highly valuable to subscription services due to their low cost, high engagement, and many repeat purchases. Referral marketing works because your current customers are vetting your future customers. When your customers share your brand, they’re thinking about who they know that will like your product or service. As a result, your company generates better-quality leads.

Ultimately, referral marketing greatly help your subscription business. Referred customers are cheaper to acquire, more loyal, and have a higher lifetime value. Overall, referred customers are 25% more valuable than non-referred ones. Referral marketing can also help businesses grow revenue by 86% more over a two-year timespan. Customer referral marketing is a phenomenal strategy for subscription companies, especially due to the fact that only 30% of companies are using referral marketing today.

If you’re interested in starting your own subscription referral program, tell us here.