Referral Marketing 101: The Basics of Creating a Successful Referral Program

Referral marketing is a word-of-mouth marketing strategy where existing customers are deliberately encouraged by a brand to reference their products or services to friends, colleagues, or family members. Importantly, referrers, who become part of a referral program, get rewarded for spreading the word, by being offered, for example, a discount coupon or a voucher for future purchases. The referees are also frequently rewarded for signing up according to their friend’s recommendation (dependable on the type of the program). As a result, the company acquires new customers and their sales increase. All parties involved benefit!

Unlike a traditional word-of-mouth strategy which happens organically – referral marketing is initiated and managed by marketers in order to grow a business’ customer base.

Turns out that nothing influences people in a way that a recommendation from a friend does. According to Finances Online, 92% of consumers actually trust the referral or recommendations that they receive from people that they know personally. Accordingly, referral marketing is a beneficial method of promoting your business and gaining new, valuable customers. 

Among others, the benefits of referral marketing include:

• Cost-effectiveness – referral marketing is based on trust, confidence, and loyalty of your customers, and can prove to be an effective method of attracting new customers without spending huge amounts of money on a campaign. The method can be especially effective if only successful referrals are rewarded as you do not pay per click but rather per successful transaction. 
• An opportunity to grow – promoting brands through deploying a referral program is especially valuable for small businesses which want to grow rapidly as they do not have to spend large quantities of money in order to carry out a marketing campaign; instead, such businesses can focus on investing money in development of their services. 
• Increased customer engagement – a successful customer referral marketing program will, among other things, assume offering your referrers, for example, discount coupons or vouchers as referral rewards. This incentivizes your customers to recommend your brands as they will be able to get products they love for a reduced amount. They will be able to simply get themselves a coupon and contribute to their favorite brand’s success. 
• Acquiring more valuable customers – referrals are a great opportunity to make sure that your newly acquired customers – the referees – are the profitable ones and not only leads as they are encouraged to buy products from your brand by friends. You can create various incentives for referees too, such as vouchers and discounts for their first purchase, that will make them love your brand even more.
• Having insight into beneficial customer data – the more people sign up into your ecommerce store, the more you will know about your customers. If your referral perks will be granted to referees only if they sign up to your website, with each of their purchases you will know more about your audience and will be able to tailor the deals according to their needs 

• Make sure the program is easy to join – the easier access your customers will have to your referral program, the more willing they will be to participate in it and recommend your products to their friends and family. Guaranteeing the best customer experience along with an easy user interface is a key to your referral marketing success!
• Promote your referral program – your referral program will be quite useless if no one will know about it. Accordingly, make your referral marketing efforts visible and promote your program via your brands social media, email newsletters, or simply create a pop-up window on your website.  
• Create appealing rewards – referral incentives that you offer should be to die for. Otherwise, your customers may simply not be willing to share their content associated with your brand. In the end, while 83% of existing customers are willing to refer you to others, only 29% actually do. So – incentify them with anything from loyalty points, gift cards, discount coupons, or physical products that they can get for sharing the love for your brand with friends. Learn what types of referral rewards to use and other valuable information about referral marketing in a separate guide.
• Track the progress generated by referral marketing – like any other campaign, referral marketing ones also require proper management. You want to know what is going on and if you are making any progress. The proper referral tracking and distribution will ensure the proper optimization of your referral program. 
• Make sure your referral program is secure – no business owner would like to create a campaign susceptible to fraud which, sadly, can apply to referrals as well. Among other things, customers may be tempted to create fake accounts and refer themselves as future customers in order to gain rewards or distribute referral incentives on public coupon websites. Accordingly, combating referral abuse and fraud should be an inherent element of planning a referral marketing campaign.

You may also wonder how to identify those customers who will be willing to advocate for your brand as targeting them with your referral marketing ads will prove especially effective. Here are a few features that may help you recognize them:

• They make purchases in your store regularly or they have been a long standing customer (even though they do not make purchases very frequently). 
• They have already left good reviews of your products or services on your website or other channels.
• They remain active on forums or your social media channels – they like and share your post, frequently comment, participate in contests and take advantage of special promo offers.
• Their customer complaint has been successfully resolved and the customer was happy with the outcome. 

Referral marketing campaigns come in different shapes and sizes. Should you reward only a referent or a referee as well? What types of rewards should you offer? What counts as a successful referral? When a friend of your advocate places an order? How much money should they spend at least? The answers to all of those questions depend on the needs of your business and the goals that you want to meet by means of referral marketing. 

Here are the most popular types of referral marketing programs:

1. Single-sided referral program – offers a reward for a successful referral to referrers (advocates) only.
2. Double-sided referral program – rewards both, the referrer (advocate) and the referee (invited friend).

A double-sided referral program can be aimed at influencers as both those advertising and those influenced will be rewarded. Learn more about influencers referrals here.

Here are other popular forms of referral marketing campaigns:

1. Multi-tiered referral program – offers referrers various different rewards based on the number of people that they have referred successfully. 
2. Referral program with subscription as reward – a type of a double-sided referral program offering subscription prolongation as a reward for both an advocate and a friend.
3. Referral program with loyalty points as reward – rewards your referrers and referees by giving them loyalty points.
4. Referral program with a giveaway entry – offers a giveaway entry for each successful referral.

Dropbox referral program

Dropbox is a file hosting service where users can store and share data but also collaborate with others. Through introducing a referral program, the company increased their signups rate by 60% by simply adding a referral program to their onboarding tour. Consequently, Dropbox increased its conversion rates by 3900% in only 15 months! 

A successful referral for a customer with a Dropbox basic account assumes 500 MB of additional storage space for each referred friend (up to 16 extra GB through referrals). Dropbox Plus, Family or Professional accounts allow for earning 1GB for each successful referral (up to 32 extra GB through referrals). 

In order to carry on a successful referral, Dropbox customers need to invite their friends from the company’s referrals page. Both the referrer and the referee will be rewarded if the friend accepts the invitation sent via the referral page, installs Dropbox desktop up, signs up there and confirms their email address. The instructions are clear and simple; therefore customers are encouraged to participate. 

Airbnb referrals

Similarly to Dropbox, Airbnb achieved tremendous growth with their referral marketing efforts. Airbnb is a company operating an online marketplace for short-term homestays. Although their referral program got discontinued in 2021, the story of their success is worth sharing – Airbnb has been able to attract 1 million new customers in 190 countries due to referral marketing efforts.

The Airbnb approach was straightforward. Existing participants were sent email invitations encouraging to participate in a referral program. The offer assumed referrers receiving a $25 travel credit when their friends – new customers – booked their accommodation via Airbnb for the first time (maximum $5,000 of travel credit in Qualifying Home Reservations). A $75 travel credit was granted to referrers when referees would host a guest for the first time (maximum $2,000 in Qualifying Experience Reservations). Learn more about the Airbnb referral program.

Paypal word of mouth marketing

PayPal is an online payment system that makes all paying online as well as money transfers safe and secure. The company’s original referral program was so successful that it helped PayPal grow from 1 million to over 100 million users in just 5 years!

Currently, in order to carry out a successful referral, according to PayPal, 4 steps need to be taken: a referent receives a unique referral link, then this link needs to be shared with a potential referee. The referee must then sign up to PayPal via the link and receive international payments of at least $100 within 45 days of creating an account. If those conditions are met, both the advocate and the friend receive a PayPal voucher for $10. For each referred friend, a PayPal’s customer can receive up to $100 annually.

Tesla referral program

Another story of a successful referral marketing campaign comes from Tesla – a multinational automotive, artificial intelligence, and clean energy company. Their referral program allowed for 40x ROI growth while their advertising budget amounted to $0. How did they do it? Well, Tesla took advantage of the fact that Tesla car owners were already recommending the environmentally-friendly cars to their friends and colleagues. 

Accordingly, their referral marketing program assumed $1,000 credit being granted to their already existing customer who referred a new buyer. This was a double-sided deal as the referee would also get $1,000 off the price of a brand new luxurious car (first purchase). 

Later on a new rule was introduced: in each region – USA, Europe, and Asia – the referrer with the most amount of referrals made received an extremely high-end price: a new Tesla P90 model S, a home car charger, and an exclusive invitation to the grand opening of Tesla’s Gigafactory in Nevada. 

Uber referrals

Uber is a company providing mobility – car rides – as services. Even though their referral marketing program got discontinued in 2020 due to financial difficulties associated with covid, it is already back again and in full mode in 2023 – see how to create an Uber referral program in 2023. 

The basic model of referrals made within the Uber app is as follows:

1. Each user can find and invite code within their app.
2. Then, when friends – referees – sign up, the existing customer can track their progress in their app.
3. The reward is earned, if the referee completes a certain number of trips and meets all other conditions (both vary by city).
4. When the friend completes the given number of trips and all other requirements are satisfied, the referent will see a reward (for example, a free Uber ride) added to their account. It will also be visible in their statement in the following week. 

When you have a relatively small customer base, it is probably possible to manage your referral program manually by using a spreadsheet. However, when your customer base grows to, let’s say, 10,000 clients, it might be difficult to manage so many referrers along with referees at the same time. The solution to this problem using the right referral software.

Referral marketing software will help you manage your referral program by automating the rewards send-out, tracking down your most active referrers, and providing you with critical insights into your referral program performance – how many customers participate, how many referrals were actually successful, and how much the referred customer ordered from you. Additionally, a referral marketing software allows you to customize your referral programs and protect the entire campaign from fraud. 

Some of the things you need to consider while choosing a referral software for your business are, for instance, integration ability, deployment options, and audit logs. Attention-worthy may also be product assortment of the referral software so you are able to choose the option or plan that is most suitable for you and your business’ needs, as well as team management – various options will allow a particular number of members of your marketing team to collaboratively take care and manage your referral program.

With plenty of referral software tools on the market you can find yourself stuck in the mire of RFPs and vendor comparisons. To make matters easier, we have prepared a comprehensive comparison guide with the most popular referral vendors in 2023 – check the guide here.

‍Voucherify is an API-first headless promotion engine allowing for creating and managing referral marketing programs, loyalty programs, gift cards, voucher and coupon campaigns and many more. You can run various promotional campaigns by using just one software – no other tools necessary!

Learn how to create your own referral program with Voucherify – Getting Started with Referral Programs.

See how to create API-based referral marketing programs with Voucherify and our partners:

• How to Create Referral Programs in commercetools?
• Create Perfect Referral Programs with Voucherify and Braze – A Quick Guide
• How to Fast-track a Referral Program with Voucherify, Segment, Braze, and Branch?

With Voucherify, you get to:

• Dcide what referrals mean to your brand – choose any type of a referral campaign (including a white-labled referral program) and a given target. Decide whether you want to reward only successful referrals or maybe certain purchases or customer engagement (reviews left, social media interactions, etc). 
• You choose the suitable referral incentives – surprise your customers with relevant incentives and creative rewards that will be just perfect for their needs. You can also decide to reward both sides – the advocates and the invited friends or family members. You can opt for anything from percentage or unit discounts, free shipping or product rewards to loyalty points.
• You make a decision via what marketing channel you want to distribute your referral codes – our software will deliver right messages to the right segment at the right time! Your rewards will be automatically delivered via various marketing channels: broadcast and automated emails, sms and push notifications, in-app messages, livechat and chatbot and many more. Check out what integrations you are able to use here. 
• You control and manage every detail of your referral campaign – our software allows you to be in charge of your campaign from the moment of its launching. You can track and maintain your customers’ referral activities, along with their purchases and personal attributes.
• You and your customers’ sensitive data are protected – our anti-fraud mechanisms will ensure your business and personal data safety. Moreover, your referral program will be protected due to, for example, validation rules and expiration dates set for referral codes and rewards. 
• You save your time – because of our adjustable API and complex, well-prepared documentation, your referral program can be up and running within the matter of weeks and not months. The easy integration also means that you can gradually incorporate more features into your referral program, depending on your business needs.