Complete Guide on Referral Programs for Marketers and eCommerce Managers — by Talkable

What is referral marketing and how do you start your first campaign? A complete guide by Talkable — the leading referral software on the market.

What is referral marketing?

What are referrals? They are probably the best and easiest way to break down the barriers of the unknown that keep your target audience from becoming your customers. What has once been the most ancient type of marketing (word of mouth), has evolved into a manageable and scalable user acquisition tactic, with one of the highest conversion rates among all the channels available to digital-marketers.

Sounds too good to be true? We plan to prove it’s not, while teaching you how to launch your first referral campaigns in this 20-minute read!

Definition of referral marketing

Referral marketing is a way to advertise your product, by providing your existing customer base with an incentive to invite their friends. This results in them trying out the service or product you’re offering.

In other words, a typical referral program is when you ask a client, one who has already completed your goal action (registered, subscribed or made a purchase), to share their personal referral code or a link with their friends or social media followers. Something is promised in return, in the case that their friends becomes your customer as well. Successful referral marketing campaigns, in most cases, also offer a welcome bonus to anyone who comes through using a referral link.

Why referral marketing is so effective

Although the answer to why running referral marketing campaigns is beneficial for businesses seems to be very obvious — after all, you’re giving money away, who wouldn’t love that — there are many other factors that make this marketing strategy even better.

Reasons why referrals work so well:

  • 01
    85% of people trust the recommendations they get from someone they know (according to this Nielsen study ).
  • 02
    Not only do you get new customers, but you also boost the loyalty of existing ones through bonuses, and the fact that they’ve proven themselves as your brand advocates.
  • 03
    Your current and future customers will not only get an incentive, but also an opportunity to broadcast their own values and lifestyle through association with your brand.
  • 04
    Welcome bonuses make it easier for the prospective leads to make a decision on whether or not to try out your services.
  • 05
    Well-built referral campaigns tend to have a viral effect, meaning customer acquisition will snowball after you ge

Referral vs Affiliate programs

Referral and affiliate marketing may seem somewhat similar, but they’re not. What’s common between the two, is that in both cases, you will be offering an incentive in exchange for getting a new customer or a prospect. Other than that, they are very different.

Differences between affiliate and referral programs

Affiliate marketing
Referral marketing

Who are the advocates?

Affiliate marketing
Affiliates are usually independent marketing professionals.
Referral marketing
The referral marketing definition speaks for itself - such programs rely solely on motivating your customers to advocate for your brand.

How do they relate to your brand?

Affiliate marketing
An affiliate will act and advertise your product from the position of a marketing partner, not a customer.
Referral marketing
They recommend your business from the position of a loyal and satisfied customer sharing their own experience.

Incentives

Affiliate marketing
Most often, affiliate programs are based on a CPA or CPL model. This means you’ll be paying your affiliates for every lead that completes an agreed target action, like registering or adding an item to their shopping cart.
Referral marketing
Both advocates and their friends who join the referral program receive an incentive stated in the offer. Often, it's either a discount or store credit.

Incentives

Affiliate marketing
Affiliates don’t know the prospects personally, instead, they often use marketing channels like social media, cold emailing, and PPC ads to bring traffic to your website.
Referral marketing
Brand advocates refer your products and services to people they know personally, or their social media followers who are familiar with their online personas, which positively affects trustworthiness.

Quality of leads

Affiliate marketing
Traffic generated from affiliate campaigns can often show much lower conversion rates and may become a major concern in terms of fraud.
Referral marketing
Generally, the quality of leads and conversion rates you get from referrals will be much higher than you’d typically see with any other marketing channel.

Is it easy to manage?

Affiliate marketing
Affiliate channels are difficult to manage and control, due to the fact that there is little you can do to verify the affiliates. That raises the possibility of industrial fraud.
Referral marketing
Referral programs that are run through referral software are quite easy to integrate, manage, and analyze. Also, your referral offers will have requirements and that minimizes and helps prevent fraud.

Businesses that benefit

Affiliate marketing
This marketing tactic is more often used for acquiring traffic for selling cheap, low-quality products, and mostly works out for businesses that care about pushing their leads into a purchase as fast as they can. They don’t care about customer retention and loyalty.
Referral marketing
Great for the companies that have long-term goals and want to build a brand. Referral programs not only help with customer acquisition, but also raise customer loyalty.

Brand image

Affiliate marketing
You have little control of which images, copy, or traffic sources your affiliates use, therefore you risk brand image.
Referral marketing
You can control everything that happens with your referral campaign and be sure that none of the marketing messages hurt your brand.

Customer Acquisition Costs

Affiliate marketing
While the CAC for affiliate traffic may seem lower than for referral, it may have a lower ROI on the contrary. The only way to scale affiliate campaigns is to increase the offer CPA.
Referral marketing
Another unique trait of referral campaigns is lower CAC, thanks to the higher viral coefficients. The budget you spend on attracting a new customer through referrals will get better ROI over time, because the acquired clients will be more likely to invite their friends, creating a snowball effect.

WOM and referral programs

Starting a referral program is only one part of a successful WOM strategy. Most people think that referral programs = word of mouth marketing, but in reality, it’s just a tool that makes it easier for your loyal customers to share about the positive experience they had with you.
Here are a few things you should keep in mind before starting a referral campaign:

  • Referral programs are most effective for businesses that already benefit from WOM.
  • You shouldn’t take advocacy for granted: if your services are far from perfect, people won’t recommend it to their friends in the first place, or, if you fail to maintain quality, they won’t be recommending it a second time.
  • If word of mouth hasn't been working for you so far, don’t count on referral programs to have magical abilities.

Apart from that, you have to take care of branding, customer satisfaction, and emotional triggers. They will all play a part in your clients’ decisions, when it comes to the question of whether they want to advocate for your product or not.

How to Start a Referral Program

Define your customer base

It’s no longer a secret - before you do anything in terms of marketing, you have to ask yourself who you are doing it for. If you don’t have a clear understanding of who your customers are, and what’s important to them, then it’s time to start asking those questions.
First of all, it’s best to define what target audience you want to address. There are a few standard options to target:

  • Paying customers. If you’re providing a service that satisfies your existing customers, and they’re with you because of its greatness, not because there’s no other service to turn to, this will be the audience most likely to advocate for your brand.
  • Registered users. They might have not given you their money yet, but that doesn’t necessarily mean they’re not ready to share the way they feel about your product.
  • Newbies. Offering an incentive to the prospects, who have yet to connect with your brand, can be a powerful tool in helping those who have just learned about your brand, to make their first move.

Although you have to define and acknowledge the differences between those audience segments, it doesn’t necessarily mean that you have to choose only one. What you have to keep in mind is that, often, referral campaigns are not designed to be one-size-fits-all. The best practice is to separate the campaigns and deliver the unique value at the right time for each customer segment.

Customer portrait

Almost every marketer in the world has done customer profile research at least once. If you have, you know that creating a resemblant customer portrait is impossible without asking yourself and your target audience the following questions:

Geographics

Does it matter to us where they’re from? Can we still provide products or services to people if they are from a different region than most of our customer base? Will their behaviors or needs change depending on where they are in the world? Are there any specifics to the region where they’re from?

Lifestyle

What are their attitudes and beliefs towards life, what’s their personality like, what communities do they belong to, and which attributes do they choose to promote their lifestyle?

Emotional

What makes you relatable to them on an emotional level? Is it the message you send out, or the feeling they get when they make a purchase from you? Do they associate themselves with your brand and what makes them feel that way?

Demographics

Is our product made specifically for people of a certain race, gender, ethnicity, or background?

Socioeconomics

What’s the average income of our customers, how do they tend to distribute their household budget, and how does their education or current occupation affect their consumer behavior?

Rational

What benefits can you provide that would be valuable and meaningful to them? What are the rational reasons they’d choose your company over any other?

Personas

Once you find answers to all those questions, it should be easy for you to picture a person who represents your perfect customer and is the essence of what your target audience is. A great tactic that helps not only you, but also future generations of marketers who will be working for your brand, to visualize customers and understand what kind of people they are.

A few things that an awesome buyer’s persona should have:

  • Image. Choose a photograph of a real person that fits into the idea of how your typical customer might look.
  • Name. Make them as human as possible. Nothing helps marketers and product managers more than the realization that their customers are real people, and real people have names!
  • Bio. Who they are, where they’re from, how old they are, what they do for a living, and whether or not they have family — tell their story and include everything that really matters.
  • Personality. What do they believe in, what routines do they have, and how can your brand fit into their image of the world they live in.
  • Goals and challenges. This part should represent their rational reasons to choose you over anyone else.

Loyalty and customer satisfaction

While referral programs show incredible results for pretty much any digital business out there, the brands who have the easiest time starting with their first campaigns are the ones whose customers show the highest levels of customer satisfaction and loyalty.

What helps a lot is knowing where you are at the moment on those KPIs. The approaches that can help you learn about the true state of affairs can be either passive or pro-active.

For instance, we understand the passive approach as analyzing the data you already have, without taking any additional steps. The metrics you can rely on in this case would be:

  • Retention and churn rates
  • Repurchase ratio
  • Net Promoter Score
  • Active Engagement Rate
  • The actual customers’ feedback

All of these metrics can show you whether it is a good idea to start a referral program at this point, or if you should work on improving your business frameworks first.

The pro-active approach, on the contrary, means that you have to ask for feedback on the specific parts of your operations that you are not so sure about. After that, you’ll want to do some in-depth customer interviews with open questions about everything that may be a concern for you.

There are pros and cons to both methods of gathering and processing data on customer satisfaction and loyalty. For example, if you only rely on numbers and data analytics, you may not learn about the exact things that serve as dealbreakers for your existing customers and leads. When it comes to personal interviews, you might fall into the arms of false assumptions and focus on things that don’t matter on a bigger scale, while ignoring the real weak spots.

Of course, the logical solution would be to stick to both hard data and personal interviews. They give you a chance to hear what your actual living and breathing customers have to say, without disregarding the analytics.

Brand advocates

Brand advocates are the people who are loyal to your product or service and feel confident about recommending it to a friend.

On average, only 10% of your most loyal customers will become active brand advocates, ready to spread the word, even if you don’t offer incentives. They are your most valuable players, and here are some stats that will make you truly believe this statement:

  • 18% of all referral purchases are made through the TOP 1% of brand advocates.
  • 10-15% of all referral purchases are, on average, brought by the TOP-10 referrers.

Naturally, you have to understand that in order to keep your most active brand ambassadors motivated and excited, you have to show them a little appreciation. That’s why, in the long run, it’s best to set up full-fledged loyalty programs instead of simple referral campaigns.

This approach also opens up an opportunity to spice up your referral game, using leaderboard campaigns and profile dashboards, where the engaged advocates can keep score of their shares, referrals, earned bonuses, and ratings.

Design a referral strategy

You already know that referral programs will work best for business that take care of customer loyalty and satisfaction. Similarly, WOM will not be as effective if you do a lousy job designing referral campaigns. Luckily for you, after over 9 years of experience building, customizing, and improving referral programs for our clients, we at Talkable have narrowed down the ingredients of successful referral marketing to just a few simple steps. The results will provide killer campaigns, and we will guide you through the entire process!

Find the right incentive

There are a few different types of incentives you can choose from:

  • Discounts

    Who doesn’t love discounts and special offers? Well, maybe your target audience doesn’t. The rule of thumb for choosing discounts over points or store credit, and vice versa, is to go with whichever number looks more significant. But you know what’s even better? A/B testing!

  • Gifts

    This could be anything depending on what kind of products or services you’re selling - starting from an awesome branded sticker pack or t-shirt, to sample kits or free products. This incentive is not as popular, compared to ones that are directly related to your AOV, store credit, or discounts, because they tend to have lower performance and engagement.

  • Added value

    You can offer free delivery or any additional service that your clients want, but might hesitate to spend money on. This approach can also help you upsell those services too, so make sure to deliver the same quality as you would for money. Just like with gifts, you have to be careful with this type of incentive. If your results are not positive, we recommended experimenting with your offers and observing what effect that has.

  • Bonus points

    For businesses who want to combine referral campaigns with already existing or up and coming loyalty programs, adding bonus points, that can later be used by clients for purchases, can be a great idea.

  • Money (store credit)

    One of the most popular incentives used for referral campaigns, and it’s that way for a reason. We want to emphasize that offering discounts and store credit incentives work in a very similar way. For the best results, we recommend split-testing the two offers before settling with one.

  • Overall, the best incentives on average tend to follow this rule:

Offer a 20% discount off of your AOV in a $ format with no minimum purchase required for the advocate. For example, if your average order value is $100, we would recommend that you test $20 as your advocate reward.

Pro tip: Double-sided rewards

Double-sided rewards offer incentives for both brand advocates, and their friends that join the referral program. Most businesses are well-aware of these rewards and actively take advantage of them, as they lead to an increase in conversions. What is much less known is that offering bigger friend rewards actually raises the advocacy rate.

Write a clear message

It should be easy to understand the conditions of your referral program. It’s best to keep copy short, but if you find it reasonable to write a longer passage explaining the conditions of participation — go for it! Anyone who’s been in digital marketing long enough would tell you that there isn’t one single solution that works well in all cases.

You already know what we’re about to say next, don’t you? You guessed it:

If you're not sure - A/B test!

To get you started here are the 5 most popular headlines for referral programs:

  • Get offer by sharing brand with friends
  • Give referred offer , get advocate offer
  • Refer a friend. Earn advocate offer
  • Give and get a free offer
  • Get offer offer off your next purchase

Spread the message

Spreading the message about your new or ongoing referral program shouldn’t be limited to outbound traffic sources. The most effective ways to engage with your customers is to use on-site resources. Just think about it - referral revenue might increase by 100% just by adding more placements for your referral offer.

A few sweet spots to place your referral campaign banners can be these:

Standalone landing pages — the most effective placements that drive up to a 16% advocacy rate. Compared to the average 8-10% advocacy rate, it makes standalone campaign placements at least 60% more effective.
Post-purchase pages or pop-ups
Banners or referral program dashboards on user profile pages
Homepage menu or pop-ups that appear once a visitor enters your website
Banners or promo-copy with CTAs on product pages
Floating widgets sitewide

Here are a few ideas on which media you can use:

  • Email marketing. This channel of communication can be a life and money saver for strong brands with huge mailing lists. If you consider your company to be a part of the lucky club, you can also use your customer database for building custom audiences. This can then be used for the next channel on our list.
  • Organic social media. Use your business pages to remind your followers on Twitter, Instagram, Facebook, and other social networks about your referral program.
  • Influencers. This approach can be especially effective for launch campaigns and referral programs that haven’t gained their first highly engaged brand advocates. Bloggers and celebrities often become trusted opinion leaders for their communities. They can help you send out powerful messages, especially if your branding game is on point.
  • Paid advertising. Don’t consider this to be a must-have channel for your referral marketing campaign promo. However, if you represent a bigger brand, or simply have a budget for some digital advertising, paid traffic can be a nice touch to your referral marketing strategy. Whether it’s old-fashioned TV ads or incredibly versatile Facebook or Google ads, paid advertising can help you raise awareness and engage your first advocates. Considering the additional costs, though, this tactic is more often used by worldwide brands that enter new markets.

As you might have noticed, these are all the traditional channels. What’s unique about spreading the message about referral programs, is that it’s wise to use the placements that aren’t available to any other advertisers but you - your own website or app.

Make your referrals easy to share

Your referral program has to be easy to understand, but it should also be easy to use with no extra steps required. Referral software like Talkable makes recommendations to friends effortless for customers, and it's easy for your team to implement and maintain.

An alternative to using an existing software solution would be developing the referral program modules from scratch. However, even in the long term, a decision like this is questionable. This is due to the significant challenges that businesses face when deciding to develop a referral program in-house:

  • Initial cost of development. To calculate the budget for adding capabilities, in order to support a versatile referral program from scratch, you have to include not only the cost of hiring software engineers, but also product managers and business analysts that will make sure new features don’t affect the existing code.
  • Quality assurance. You will have to hire new QA engineers or implement automated testing to provide quality service to your customers. Cost of maintenance. Expenses don’t end once the new features are designed and implemented.
  • Product marketing management. Instead of taking advantage of the existing expertise of your referral software provider, you will have to grow in-house experts, which is not only difficult, but also expensive.
  • Time-inefficient. All these challenges are, of course, manageable, but what you’re losing forever is not even money (there is still going to be a return on investment of some sort), it’s time. This is because the approach of building an in-house referral software from scratch takes time. A lot more time than implementing a turnkey solution.

Measure and improve

Ground level benchmarks

To understand the real effect of your referral program, it’s best to set benchmarks on some of the basic marketing and user acquisition KPIs.

Of course, you’ll always be able to make side by side comparisons of CAC, ROI, conversion rates, and all the other metrics for different channels (e.g. Referral vs Organic or Referral vs PPC). What you might discover is that starting a referral program will affect your overall user acquisition and marketing performance across different channels, due to the growing viral coefficient.ё

Referral funnel

Just like any other traditional marketing channel, a referral campaign’s analysis and management can be visualized through a funnel. Let’s take a closer look at a typical referral funnel and average referral program metrics that you should be aiming for with your own campaigns:

Advocacy

Advocacy is a percentage of customers who have decided to share the offer after viewing it.

Advocacy =
Number of sharers Number of times offer was shown

The average Advocacy level is 8-10%.

Advocacy is considered to be the top of the funnel in referral marketing campaigns, and a few ways to fix weak advocacy are:

  • Test different placements across your website or app and choose the winning ones.
  • Add more placements and test the best combinations.
  • A/B test copy of the offer, banner, and CTA buttons.
  • A/B test the designs and layout of banners, pop-ups, and pages related to the offer.
  • If you’re running a long-term ongoing referral program, try out different incentives for the advocates.
  • Promote the referral program across all of the touchpoints where customers can see it, including external platforms, in order to increase the number of customers aware of your program.

Share Rate

A Share rate is the number of times your advocates share the offer. Meaning, if an advocate has shared an offer with 2 email addresses, or shared their link on Facebook and sent it in a text, their share rate will be equal. Note that sharing a link on social media still counts as a single share, even if the number of friends who’ve clicked on it and joined the program was higher.

Share Rate =
Number of sharers Number of Advocates

Average share rate is 1.2 shares per advocate.

There are two practices that we use at Talkable to increase a client’s share rate:

  • 01
    Emphasize the right channels. To do this, you will need to analyze the performance reports for your referrals using the software provided by your referral partner. You will have to choose the traffic source that has the highest conversion level for your brand. It’s also best to separate data on mobile and desktop traffic, in order to see if there are any differences. Once you determine the winning traffic channels for both mobile and desktop, customize your promo copy and offer design layouts that emphasize the winning traffic source. Here’s an example of offer pages used by our clients:
Facebook share emphasis
Email share emphasis
  • 02
    Leaderboard campaigns. Leaderboard campaigns are short-term referral contests that, on average, last 2-3 weeks and increase the number of shares your advocates make, while competing for a prize. For leaderboard campaigns, we recommend to:
  • a.
    Encourage advocates to share by running a sweepstakes campaign.
  • b.
    Use the same incentives as you do for your evergreen campaign.
  • c.
    Offer a prize of at least $500 to the 1st person on the leaderboard.
  • c.
    Run such campaigns once every 3-4 months.

Clicks

Clicks are the percentage of links that have been clicked on after they were shared by an advocate. This also may be referred to as CTR, or click-through-rate.

CTR =
Number of sharers Number of link clicks

The average CTR for referral campaigns is 35-40%, but it varies based on traffic channels as well. Usually, the referral program benchmarks have the following multipliers based on the platforms used:

Share Channel Benchmark CTR
Email 0.4x
Facebook (Wall Post) 10x
Link 3.4-4.5x
Facebook Messenger 1.5-2x
SMS 1-1.5x

The best way to increase the CTR for a referral campaign is to, first of all, test the incentives offered to join the program. By increasing the offer, you will get the main question out of the way.
- if people don’t opt in, is it because they are not motivated enough?

Once you find the perfect incentive that gets you the most referrals for the least amount of money, other ways to increase the CTR are: A/B test copy, design and CTAs of promotional materials, referral campaign messages, and emails that people get when they’ve recommended your product.

Visits

Typically, when a user clicks on the referral link shared by an advocate, they will get to the claim page, where they'll have to get through an email gate, in order to claim their coupon and enter your website. Therefore, the number of visits is the percentage of people who made it to your website after they clicked on a link.

Visits =
Number of sharers Number of website visitors

On average, the visits percentage is between 30-35%.

To increase visits, you should minimize the friction that users face once they click on the link. This can be done by removing any gates on the claim page. One way to do this is to only show a notification welcome-message that says a coupon will be automatically applied to the person’s order. Here’s an example of how one of our clients, Native, executed a page like this:

Conversion

Conversion is the share of visitors who have made a purchase from you.

Conversion =
Number of website visitors Number of purchases

On top of the typical conversion optimization tactics, you get a few other techniques that may help you increase the conversion rate with referral traffic.

First of all, you should once again try adjusting the friend offer. For example, you can try offering your leads a discount percentage, instead of a monetary amount, lower a minimum required order, or emphasize the time limit for which the offer will remain active.

Another way to increase conversions and referral revenue is to add a widget or a pop-up with a reminder to claim the offer and complete their first purchase. If you acquired their email address during earlier stages, you can send such reminders via email as well.

Beware of fraud

Referral programs that are built without keeping the possibility of fraud in mind, risk becoming a target. The most typical scams that involve referral programs are:

  • Broadcasting

    Sharing referral links through public channels, instead of personal ones, and choosing platforms that are not approved by the business that initiated the campaign.

  • Exploitation

    Using referral programs for personal financial gains.

  • Account cycling

    Often seen among subscription services, this type of fraud implies that accounts get canceled as soon as the offer runs out, and they never come back to make a purchase.

  • Self-referral

    The most common type of fraud for referral campaigns involves advocates, who create fake accounts to take advantage of the offer incentive, without actually sharing the links with anyone else.

There are many ways to distinguish and prevent fraud using technology that will save you money. While it’s possible to execute them with the help of your in-house developers, we recommend finding a software solution for referral programs that would be capable of fraud-prevention. Talkable is the perfect solution, since it’s often a faster and more financially efficient way to fight fraudsters.

Here is a diagram of the most common indicators Talkable uses to identify and prevent fraud:

How much does it cost to start a referral program?

There are many factors that impact the cost of starting a referral program. The cost of starting and running your own referral marketing campaigns depends on the size of your company, how big your customer base is, what traffic loads you have, and whether you decide to develop your own solution or use an available software.

To help you calculate the budget needed to launch, here’s a list of things you have to account for:

  • Paying customers. You will have to either hire a freelance writer, who could charge you on a per project basis, or delegate this task to someone in-house. When writing copy for emails, advocate and friend offers, ads, banners, and on-site placements, don’t forget to request at least 2 different copies to A/B test.
  • Design. Your designer will have to partner up with a copywriter to work on the tasks with them.
  • A/B testing. You won’t get far without A/B testing. It’s the holy grail of a successful referral campaign and should never be ignored. In order to do it right, you will either need a professional, who could design and run split testing, or choose a software provider that supports A/B testing features.
  • Advertorial budgets for promotions. Remember, the more people that get to see your referral offers — the more successful your campaigns will be.
  • Cost of discounts. Cost of discounts is another expense that you have to include in your budget and keep in mind when counting ROI.
  • Developers. Even if you decide to go with a turnkey solution, you will still need developers to integrate the software into your system, but you won’t need them as much as you would if you decided to develop the system from scratch.
  • Cost of software. In most cases, it will vary depending on the size of your company and what features you want to have. If you want to know the exact number, request pricing from Talkable; we will calculate an estimated referral program cost for your business.

Referral Revenue

The question that worries every marketer and business owner the most is, of course - what do we get out of it?

The same goes for referral marketing, despite all the magical abilities we told you about. We get it! That’s why we created the referral revenue calculator to help you with approximate estimations. Want to know how much money you can make off referrals?