Referral Marketing: How to Acquire New Customers with Minimal Effort (and Budget)

The average cost of acquiring a new customer varies wildly by industry — from around $395 for software companies to just $10 for retailers — and the costs are rising as online shopping prolongs the buying cycle. 

What if you could slash your customer acquisition costs by convincing your existing customers to refer new business to you? Actually, you can. 

Referral marketing is a word-of-mouth marketing tactic that encourages happy customers to advocate on behalf of your brand in exchange for gifts or other incentives. Sometimes called refer-a-friend programs, referral marketing has become a go-to method for ecommerce stores looking to grow their sales while minimizing the cost per action. 

This strategy creates a win-win situation for you and your current customers, and data shows that customer referrals help businesses build trust and brand recognition far more effectively than traditional advertising. 

Not only is referral marketing relatively inexpensive — your main expenses are incentives and the cost of promoting referral marketing campaigns — but new shoppers acquired through referrals also have a higher customer retention rate than those acquired by other means. Their lifetime value (LTV) is also higher compared to non-referred customers.

Unlike previous generations, Millennials and Gen Z are not obligated to take advertisers at their word. They can comparison-shop online, ask around for opinions, consult review sites or forums or take advice from an influencer on various social media platforms. Consequently, brands and startups struggle to build credibility. 

Referrals from trusted friends and family are far more compelling than any claim made by an advertiser. 

Take it from PayPal, which hit one million users just two years after launching in 1998 by giving new customers $10 for signing up and another $10 for every friend they referred.

According to ReferralCandy, the fintech company reportedly spent $60 million on referral marketing incentives, according to founder Elon Musk, and now has more than 400 million users. 

The best part about how referral marketing works is you only pay for successful referrals that result in a conversion. 

Precision targeting.

Referrers are likely to recommend your business to people who trust their opinion and who may already have purchase intent. They also know how to convince this person to buy your product better than you do because they have a personal relationship with that potential customer.

Trust factor. 

According to Nielsen, people are four times more likely to buy if they are referred by a friend. In fact, 46% of consumers already consult family and friends before making a purchase. When a friend or family member recommends a product or service, it means they’ve had a positive experience with the business. 

Reach and acceleration.

Referral marketing enables you to generate leads you wouldn’t otherwise reach through traditional advertising. Referrals also boost brand awareness and build social proof (the notion that an object, activity or behavior is desirable because other people are engaging with it). 

Case in point: Dropbox grew its conversion rates by a whopping 3900% in 15 months thanks to its referral program. The formula? Dropbox offered referrers extra storage space in return for inviting their friends to try out Dropbox.

Design your referral program strategically. Choose an incentive your customers will value, establish the terms for what constitutes a “successful” referral, and set goals for your referral program. 

If your competitors run successful referral programs, find out what incentives they offer and try to exceed them in value. This doesn’t necessarily mean spending more money. Gifting a personalized item or experience goes a long way toward making customers feel special. 

Provide referrers with a unique tracking link so they can share the offer with friends and receive credit for successful referrals. 

Choose an incentive.

Most referral programs consist of two-sided incentives — if the referrer receives a gift or discount, their friend does, too — which taps into the principle of reciprocity. 

Offer various levels of incentives the more referrals your customers pass on to you. This introduces an element of gamification that induces customers to make more referrals to maximize their rewards. 

Cash

Cash rewards can be a fixed amount or equivalent to a percentage of the referee’s purchase value. This type of reward is repeatable and it doesn’t take much cash to motivate people — even just $5 or $10 will nudge people to take action. 

Beware that cash doesn’t incentivize customers to make repeat purchases at your store after a successful referral, but a gift card or store credit to your ecommerce store will. However, cash is best if your product has a long buying cycle or is a one-off purchase. 

Points

If you already run a points-based customer loyalty program, you can offer customers points for referring new clients. Points can be redeemed for discounts, giveaways, or experiences. 

Discounts

A popular referral incentive is to offer two-sided discounts. If Customer A refers Customer B, Customer B will receive $X off their first purchase while customer A receives the same discount for their next purchase. 

Discount offers motivate shoppers to check out faster because their friend is counting on their purchase to receive their own discount. 

Free Gift

Free gifts can be samples of new products or products your customer hasn’t tried yet. Samples expose customers to new items they can buy in the future. In fact, if the free product is special or exclusive enough, your customer will tell their friends about it, too. 

Experiences

Gifting experiences not only provides your business with content to post on social media but there is a chance that the referrer will post about it, too. Make sure the experience is related to your core product offering but is not something customers can purchase on their own. 

For example, if you run a spa, you might offer a custom pampering sesh that’s unlike your other spa packages. Alternatively, you can use this strategy to promote a new experience you’re about to launch. 

If customers like it, they’ll purchase that experience again — or send more referrals your way. 

Account Upgrade

Gift your customer a free trial for a higher membership tier or upgrade their account temporarily. This incentive is especially suitable for companies that offer software products and costs almost nothing.

Custom

Don’t be afraid to experiment with unique ideas or try a combination of different incentives — as long as they resonate with your customer. In fact, if you know something personal about your customer — they are expecting a baby, for example — and can create a product or experience exclusively for them, you can charm your referrers and convert them into loyal customers. 

If you’re stumped for ideas, survey your audience to find what types of rewards motivate them. 

Determine when to introduce your incentive program.

The timing and incentive structure of your referral program are deciding factors in its success. According to a marketing survey by Texas Tech, 83% of customers are willing to refer products and services to others, but only 29% actually do. 

Customers may not know how to refer people or what rewards they can earn with every referral, or perhaps your reward thresholds are too high.

If your products have a short buying cycle, you can introduce your referral program right after a customer makes a purchase to motivate them to earn rewards for their next purchase. 

For products with a longer buying cycle, such as mattresses, consider offering your referral program to would-be customers who have shown an interest in your products but haven’t hit the ‘Buy’ button. This not only motivates them to buy but to recommend your business to their friends and family. 

Finally, don’t forget to promote your referral marketing program on all your marketing channels. Email marketing and email campaigns are one of the best ways to promote a referral program as it’s direct, personal and customized. 

Track your results.

Monitor your data so you can determine the efficacy of your program. Are customers slow to adapt? Are certain incentives failing to attract referrals? Make sure you’re tracking referrals correctly — this means collecting data on all actions throughout your referral program to make sure customers receive credit.

You can track referrals manually using spreadsheets or automated referral marketing software. 

Here are some key metrics to measure the health of your referral program:

• Customer Participation Rate: Average number of monthly users taking part in your referral program. Remember that not all referrals lead to conversions. 
• Referral Rate: Number of referrals made by each participant.
• Impression Rate: Number of views for your referral landing page. 
• Response Rate: Number of people who visited the referral page and took action — signing up for a trial or providing contact information — but not to the point of making a purchase. 
• Conversion: Number of people who used a friend’s referral link to make a purchase. 
• Website Referral Traffic: Number of people who visited your e-commerce website after receiving a referral link. 
• Average Order Value: Average dollar amount for a single order. 
• Total Sales: Measure the impact of your referral program on your company’s overall sales.

Referral marketing tools help companies create and manage referral programs, monitor activity, personalize communication and automate processes like enrollment and reward disbursement. This tool can also come in handy when promoting the launch of your program. 

More importantly, referral marketing tools provide a positive user experience for your referrers by enabling them to keep track of which of their friends have signed up, referral rewards they’ve earned, and when to expect compensation. Referrers can sync all their email contacts and quickly select which friends to send an invite.

The software makes it easy for you to create a branded landing page for your ecommerce referral program and distribute unique tracking links for each referrer. You can even create canned email templates for referrers to send to their friends, email alerts for when a friend signs up and alerts when their gift is on the way. 

Better yet, add a pop-up referral widget on your website so customers can sign up for your referral program without any extra effort on your part.

CBDistillery.

CBDistillery’s online store has a loyalty program that allows referrers to receive a 30% off coupon code for each successful referral, while their friend gets 30% off their first purchase.

Referral marketing is a scalable, low-cost way of acquiring new customers and building brand awareness. By offering incentives to satisfied customers who advocate for you, you create a mutually beneficial situation while building loyalty within your existing customer base.