Kyle’s Note: Chris Kilborne has worked with dozens of startups on their marketing. In this post, he shares what he has learned about referral programs and gives you a few reviews for tools to get started on your own program. Over to Chris:
Would you believe me if I told you that the most effective and inexpensive form of marketing strategies ever used is one of the most rare?
Tech giants like Dropbox, Groupon, and Paypal owe much of their success to systems they put in place to encourage customer referrals. No matter what industry you’re in, referral programs have been proven to work for all types and sizes of companies.
The numbers don’t lie- referral marketing works:
65% of new business comes from referrals- New York Times
A direct referral lead is over 36x more valuable than a lead generated by a cold call, 10x more valuable than a trade show lead, and 4x more valuable than a web lead. —Ken Krogue, Co-founder and President, InsideSales.com
92% of customers trust recommendations from people they know and are 4 times more likely to buy afterwards. – Nielsen
These figures aren’t news either.
Many companies already know the power of referral programs. Yet, they haven’t created one.
Tweet This: 83% of consumers are willing to refer after a positive experience—yet only 29% actually do – Texas Tech.
This is because the companies haven’t created a referral marketing system to encourage referrals and build brand advocates. Why? They don’t know how to create a system that hums like a machine.
In this article, I break down the most successful referral marketing program ever to determine why they worked and how you can create a successful program yourself based on those principles.
Additionally, we’ll cover the tools that you may need to use and how to optimize your campaigns over time– following the exact process I use with my own marketing consulting clients.
Breaking down the most successful referral program
Dropbox
In Dropbox’s last round of fundraising, the company raised between $250-400 million dollars. This put the company’s valuation at $10 billion dollars.
Dropbox’s referral program is one of the most famous examples of customer referral programs in history. Shortly after their launch in 2008, Dropbox implemented a referral program with a simple process- invite your friends via a personalised link, social media, or email, and both you and your friend receive extra space in your Dropbox account.
This referral program increased their registered users from 100,000 to 4,000,000 in only 15 months! That’s an increase of 3,900% in just over 1 year. Since then, they’ve seen exponential growth in their business, with referrals generating over 22% of their new users.
The results were impressive! However, Dropbox’s referral program wasn’t original.
But, it worked so well that it’s now famous amongst marketers.
Why did it work so well?
Dual-sided incentives- Reward both the user and their friend for joining. This helps keep the viral loop going!
Simple process- Users don’t have much patience. So, make the referral process extremely simple. Sharing a link after signing up on Dropbox takes only a few seconds.
Many options for sharing- Dropbox offers 3 ways for users to refer their friends: social media, email, and a custom link. This gives them the flexibility to share how they like.
It’s all about the product- Referrals don’t invent demand, they amplify it. Otherwise, why would someone want to recommend your product?
Bake it into the signup process– Promote the referral program right after signup/onboarding process. If you have an ecommerce website, promote the program on the purchase confirmation page.
Now that you’ve seen the most successful referral program, let’s dive into how you can build a program for your company today.
Want more examples of successful referral programs? Check out this epic list of 47 referral programs from ReferralCandy.
4 steps to a successful referral marketing program
Step 1: Identify your value
Be shareworthy
This is the most important point of this article: Have a product or service that is worth sharing.
It seems obvious, but this is the most overlooked point I see companies make when doing marketing, let alone a referral program.
Take a serious look at your company and ask yourself- What makes your business much better than your competitors? How can you make your users ecstatic about what you offer?
Related: Content marketing: setting a purpose and measuring success
A lot of companies are so concerned about “growth hacking”, that they forget about what really matters to their company’s growth- the product.
If your product isn’t much better than what’s already out there, what can you do to change that?
Figure that out before attempting a referral program, or it’s unlikely to get off the ground.
Provide incentive
Once a customer loves your product, give them an exciting incentive to convert them into a passionate advocate. After all, you should reward your them for sharing your brand.
Types of incentives:
Free or discounted product/service
Account upgrades (ex. Dropbox)
Store credit or cash (ex. Paypal’s $20 signup and referral bonuses)
Gamification awards/badges
Entries into giveaway
Access to invitation-only product/service (ex. Blueleaf)
Early access to new features (ex. RobinHood)
If you can afford it, offer a dual-sided incentive. It’ll give your advocate a reason to invite their friends and it’ll give their friends an even stronger reason to join (aside from using your awesome product).
What if you can only afford to reward one party (the advocate or their friend)?
Test it!
Check out this split test that AirBNB ran when they launched their referral program.
In this test, they wanted to offer very different value propositions.
In one offering, they emphasized that you can earn $25 for inviting a friend (self-interested). In the other offering, they emphasized that you are sharing $25 with your friend (altruistic).
In this case, the altruistic value proposition outperformed the self-interested one. Unfortunately, AirBNB is holding the exact numbers of the winning offering’s performance, but it’s an interesting case study nonetheless.
Calculate what you can afford
When choosing an incentive, be sure to calculate how much you can afford. It may be worth having a referral program that has a negative ROI (at least initially) if the long-term gain outweighs the short term loss. I recommend calculating the Lifetime Value (“LTV”) of your average customer using this calculator. Or you can follow the process that KISSmetrics uses in their graphic below.
(See the full graphic here)
Step 2: Pick your poison (tools)
Tracking your advocate’s referrals and payouts can become a monstrous task without the right software.
If you have an offline business (such as a restaurant, bike shop, etc.), online referral tracking software can be as simple as creating referral cards with incentives like the example below.
However, if you do business online or want a more robust system for your offline business, I recommend one of these tools (assuming you don’t have a team to build a custom system).
Ambassador is arguably the most powerful application available to automate your referral program. You can use Ambassador to easily create, track, and manage your incentives that drive referrals and evangelize your users.
Pros:
Flexibility to run multiple types of campaigns at the same time, rather than just offering a single program.
Assigns a dedicated rep to works with you one-on-one to set up your campaigns and ensure they run smoothly.
Easily customize your assets such as landing pages, signup widgets, emails, and ambassador portal to fit your brand.
Allows for tracking across multiple browsers and devices for referrals. Other companies use cookie-based tracking, which is less accurate.
Offers a totally open API for even more customization and integration with your company’s tools.
Cons:
Pricing on the monthly subscription is significantly higher than competitors.
The company requires your monthly subscription to be paid annually.
No free trial without talking to a sales rep
Overall, if your company is serious about starting a referral program and has the budget, I recommend Ambassador. If you’re a brand new company or are just looking to test the waters with a referral program, I recommend looking into the next companies I review below.
ReferralCandy is one of the most simple referral program tools available. Just set up offers for new customers and rewards for your advocates, customize your templates, and paste the code on your website.
Pros:
Affordable pricing
Simple setup
Unlimited advocates for all plans
Fraud monitoring
Billing is month to month
Free 30 day trial
Cons:
Limited to one referral program
Limited features compared to more expensive platforms like Ambassador
Pricing takes a cut of referral sales for all subscription levels
If you’re just wanting to test the waters or want a very simple referral program for your business, ReferralCandy is a good choice.
Friendbuy has the same basic features as other referral program tools such as customizing templates, easy implementation, referral tracking, split testing and reporting.
Here’s how they’re different from others:
Pros:
Low and straightforward pricing
Ability to A/B test your campaign elements
Fraud prevention
30 day free friend
Billing is month-to-month
Cons:
Limited support to electronic communication unless you have an enterprise account.
Template design doesn’t look good, in my opinion.
Tracking is limited to cookies
Similarly to ReferralCandy, I recommend Friendbuy for companies that are just wanting to test the waters or want a very simple referral program.
Referral SaaSquatch is a newcomer to the referral software arena, but that doesn’t mean that their tool isn’t up to par with the big guys.
Pros:
Design for widgets and emails look amazing
The company analyses the best programs of their customers and share the best practices across all of their customers
Free 30 day trial
Their team will help with implementation and can be hired for advanced implementations
Cons:
Semi annual billing, on the basic plan.
Packages limited by members, like Ambassador
Less established, meaning that your program could become lost if they go out of business.
Step 3: Spread the word
Now that you have your system in place, it’s time to get the word out.
Referral programs need high visibility to gain traction.
Home page graphic- Home page sliders (typically on WordPress sites), a Hello Bar at the top of your website, pop ups, and buttons on the home page are all good places to promote your referral program. Just be sure to make it visible without being too distracting. Here’s an example of a button I placed on a client of mine’s home page:
Post purchase– After your customer signs up for your service or purchases product, direct them to a thank you/confirmation page that suggests that they also recommend your product to their friends.
Shipped cards to include with order– If you ship product to customers, include a card promoting your referral program inside the package. The online print shop Moo.com will let you create individualizes cards with unique codes on each one at a price that is likely cheaper than local printing shops.
Notify all existing customers and subscribers- Use an email marketing service and social media to announce your current customers and email subscribers of your new referral program. Make it fun and create interesting graphics. Perhaps you can create a temporary bonus for your first advocates? Get creative!
Mention in employee signatures- How many emails does your team send out every day. Every one of these emails is an opportunity to tell the world about your referral program. Include a short mention of it with a link in your employee’s signatures.
Step 4: Experiment and scale
Congrats! Now your program is set up and you’ve started to acquire advocates. The fun doesn’t stop there. It’s time to experiment.
Similarly to the AirBNB experiment mentioned earlier in this article, you should split test different elements of your referral program. This could include:
Types of incentives
Web copy on your refer-a-friend page
Design of your refer-a-friend page
Copy on your promotional communication
Once your program starts getting traction and is generating a positive return, start funneling your marketing budget into advertising and promoted posts on social media to build your program. Based on the virality of your program (learn how to calculate your viral coefficient here), you may not need to use advertising to scale your program. In that case, congrats! You’ve created a viral referral program.
Your Thoughts and Experiences
Have you ever created a referral program for your business?
How did it perform? Are there certain aspects of it that worked and others that didn’t?
Share with us in the comments below!
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