Referral Marketing: The Essential Guide

Breaking Down the ROI of Referral Marketing

Marketing teams are always looking for the right combination of campaigns to maximize their return on spending. If you want to invest in marketing programs that make dollars and sense, we’ve got good news for you: The benchmark performance numbers for referral programs offer some of the best value you’ll ever get from a marketing channel.

Here’s a by-the-numbers look at what marketing teams are able to achieve through referral marketing:

Costs per acquisition (CPAs) as low as $1.

The less you spend on acquiring new customers, the more you’re able to attract—and the faster you’re able to turn a profit on your acquisition efforts. As you optimize your referral program, your average CPA should continue to drop.

A 5x greater average lifetime value.

Acquiring a new customer is just the first step in building a successful business. To achieve sustainable, long-term growth, your new customers need to become repeat buyers. Referral programs facilitate strong customer relationships that lead to repeat purchases and a much higher lifetime value than other marketing channels.

Marketing share rates of 30 percent or more.

Share rate performance can vary based on a number of factors, but some of our top-performing brands have achieved share rates in excess of 50 percent.

Conversion rates of 15 percent or higher.

Compared to the single-digit conversion rates offered by other marketing channels, referral programs are able to achieve more cost-effective conversion rates to accelerate your brand’s growth. Referred visitors are more qualified and have higher intent to purchase.

Referral programs can account for 5-20 percent of overall revenue.

In apparel & accessories and health & beauty brands, for example, the typical percentage of total revenue ranges from 5-14 percent. Subscription categories see total revenue contributions as high as 17 percent (and sometimes even as high as 30 percent when the brand is experiencing accelerated growth).

Referral marketing can achieve >25x return on investment.

Both the apparel & accessories and consumer packaged goods/essentials categories have achieved this level of ROI for their referral campaign spending. For high-consideration categories, this figure can be much higher, driving a 47x average ROI.

Regardless of your industry, a well-designed referral program can become a revenue machine that charts a new course for your company’s growth. For most brands, the biggest question is when to develop and launch their program.

As a very general rule, any business generating at least $500,000 in monthly revenue has an opportunity to quickly achieve ROI-positive results with its referral program.

Depending on your funding and/or your desired growth timelines, you may be willing to launch this program before your business reaches this milestone to help fast-track your ability to scale. But half a million dollars in monthly revenue is a good benchmark for knowing that you’ve got the existing customer base and the transaction volume to achieve strong ROI with a best-in-class referral platform.

A word of caution about launching a stripped-down referral program, either through cheap plugins or with a minimal internal implementation: Although it may seem attractive to launch a referral program as soon as possible, if you’re offering incentives to your customers and their friends without the necessary infrastructure, you may find yourself stuck in a quagmire of customer support issues while also spending hours trying to separate valid referrals from fraudulent ones. 

Without proper tracking, reporting, fraud prevention, and reward fulfillment protocols, you won’t have the seamless ease of use to make referrals fun for your best customers, the visibility you need to service your customers, or the ability to prevent bad actors from gaming the system. The result will be weak performance and frustrated users—not to mention too many headaches for your staff. 

Our recommendation is to be thoughtful in your timing for the launch of a referral program that combines high-performing sharing modules with robust tracking, reporting, automation, and reward fulfillment. This approach may ultimately delay the launch of your referral program, but it should result in faster scaling of your customer base and higher customer satisfaction, and thus higher ROI.

The Offer

What incentive are you going to give your customers, or advocates, when they deliver new customer conversions to you? Most campaigns feature one of two offer structures:

Single-sided:

Your existing customer, the advocate, receives a reward for sharing your brand and delivering new customer conversions. This can be in the form of a discount toward future purchases, account credit, a gift, or other incentives such as a third-party gift card.

Double-sided:

Your advocate receives their incentive, and their friends are also enticed with an offer to become a new customer. Common examples of this offer structure are promotions such as “Give $10, Get $10,” which reward both the advocates and their friends when new referral conversions occur. This offer structure is more common because it is proven to yield higher ROI.

Core Technology

In practical terms, how will you deploy your referral program and manage it on an ongoing basis? The referral program itself must be highly accessible and super easy for your customers to use. But it must also allow your marketing team to manage offers and analyze performance, and allow your support team to address customer support inquiries. 

And then there’s the need for automation, particularly if you want your program to scale. A scalable referral program must automate reward fulfillment, facilitate business rules such as minimum purchase requirements, distinguish new customers from repeat buyers, and incorporate waiting periods for returns and cancellations. These are just a few of the back office considerations you need to address to achieve sustainable success with referrals.

A comprehensive referral platform is your best bet for implementing professional, engaging referral assets that facilitate referrals between your advocates and their friends, while also providing the technologies to support your business operations requirements.

Let’s start with sharing enablement:

Email

Email is one of the two highest-converting channels for referral programs. When customers refer via email, we see open rates as high as 80 percent. Our data across thousands of clients validates that your advocates love to share via email and that referred friends who receive these emails are highly captive and very likely to engage with these referral invitations.

When you activate referrals via email, here are a few technologies you will need: the ability to customize and A/B test subject lines and the email body, analytics specific to this referral channel, a high domain authority for deliverability, and CAN-SPAM compliance technology. A big bonus would be an automated reminder email for friends who do not convert; this reminder can boost the performance of the email channel by 30 percent.

Personalized URLs (PURLs)

Another high-performing channel is the personalized URL, or PURL, which is a personalized referral link that your customers can copy and paste when referring. The power of personalized referral links is that advocates will share them in many different ways—via text, in Slack, or even in a post on their personal blog. In fact, PURLs and emails usually occupy the No. 1 and 2 spots for highest-performing referral channels. PURLs should be short and preferably easy to read. The ideal PURL has a vanity component, meaning it contains the name of the advocate in the link itself.

Text/SMS

One of the easiest share actions is to share via text/SMS. Your referral widgets should allow the user a one-click option that launches SMS on their phone and pre-populates the SMS message with compelling copy plus the advocate’s referral link. All the user should have to do is choose their recipients and send. Ideally, your widgets should be responsive to know when a user is visiting on a mobile device versus their desktop and therefore display the SMS option only when on mobile.

Social channels

Your sharing widgets should cleanly present the different sharing channels that are right for your brand, be they Facebook, Messenger, WhatsApp, and/or Twitter. Most social networks have APIs to facilitate friendly sharing experiences, where copy and imagery can be customized to entice viewers to click through.

An effective referral program should take advantage of these interfaces to garner high-quality referral traffic. Over time, with robust analytics across each social channel, you can optimize which social networks are best for your customer base.

Desktop and mobile widgets

Program analytics

Analytics are essential for optimizing your referral program over time. As a top-line measure, you want to monitor advocate sharing rates, total referral clicks, and referral conversions. But to truly maximize performance, you need to understand the performance of each sharing channel: email, personal URLs, SMS, social, and so on. Doing so allows you to get the most out of each channel while also allowing you to spot anomalies in a specific channel when the reason may not be obvious.

Business rules, reward validation, and fraud prevention

At Friendbuy, we often say, “Make your offer compelling, but make it a high bar.” Your referral program should know the difference between a new customer and a repeat buyer, but that’s just the beginning. Should your offer be combined with a minimum purchase requirement to make it profitable? Do you need to account for returns and cancellations? Is there a free trial that must convert into a paid plan before issuing the advocate reward? How will you handle bad actors who try to game the system through a variety of means such as fake email addresses and manipulation of cookies? Good, core technology will allow you to address these concerns and many more at scale.

Automation

As your business scales, your referral program will as well, generating thousands of shares and referral purchases. Automation is key to handling the increased volume. Without it, your business operations may suffer under the weight of a successful referral program. Here are a few examples of automation in action for referral programs: 

• • Triggered emails to advocates and friends reminding them to take advantage of offers and fulfill rewards
  • Automatic session-based discounts for referred friends
  • Automatic deposits of account credit for advocates who’ve earned them (with full validation of business rules)
  • Maximum rewards earned in a month or a year, with triggered messaging to reduce support inquiries.

Once your program hits an inflection point, you may find yourself in a catch-22 struggling to address these concerns, so it’s best to build with automation in mind from the beginning.

Awareness + Accessibility + Ease of Use = Impulse Referrals.

This is the winning formula for a high-performance referral program. Your customers will refer on impulse whenever they feel like doing so, but only if:

1. They have awareness of the program
2. It’s highly accessible
3. It’s super easy to use

In our experience launching referral programs for the world’s top brands, we’ve developed a number of best practice placements to ensure success via the formula above.

Here are a few placement strategies that deliver proven results:

Primary CTA

Featuring a primary CTA offers share rates as high as 42 percent and conversion rates averaging 9 percent on both desktop and mobile.

Referral landing page

Share rates can be as high as 45 percent for customers reaching this asset, with conversion rates up to 10 percent.

Post-purchase overlay

These overlays drive high share volume and program awareness, while delivering average referral conversion rates of 8 percent.

Account page widget

Use all available real estate to maximize referral program visibility.

Native mobile app

Mobile apps give referral programs one-click referral potential for your most engaged customers.

1. Have an onboarding/kick-off session.

In this meeting, you and your referral marketing partner will discuss your goals for CPA, percentage of customers acquired via referral, and integrations to support your Buyer’s Journey.

2. Build an offer strategy.

There are many offer strategies that can work, but the type of offer and structure that is right for you should be informed by campaign goals as well as the core technologies available to power offer fulfillment.

3. Decide on design, creative asset development, and messaging.

You should lean on your referral marketing partner and the technologies enabled by their referral platform to implement elegant referral assets that incorporate best practices for performance, many of which have been discussed throughout this guide. Your marketing team will be closely involved in this process to ensure brand consistency.

4. Launch, analyze, and review your performance.

Lean on data to tell the story of your initial launch and identify opportunities for improvement. A good referral marketing partner is proactive in helping you grow with each new lesson learned.

5. After 30-60 days, gather data and optimize your referral program.

Once you’ve been live for a while and have gathered a good sample of baseline data, your referral marketing partner can provide insights and strategic recommendations for offer testing, custom audience targeting, and additional campaign types to increase ROI and accelerate customers acquired via referral.