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Referral marketing is the method of promoting products or services to new customers through referrals, usually word of mouth. Such referrals often happen spontaneously but businesses can influence this through appropriate strategies.
Referral marketing is a process to encourage and significantly increase referrals from word of mouth, perhaps the oldest and most trusted marketing strategy. This can be accomplished by encouraging and rewarding customers, and a wide variety of other contacts, to recommend products and services from consumer and B2B brands, both online and offline.
Online referral marketing is the internet-based, or Software as a Service (SaaS) approach, to traditional referral marketing. By tracking customer behavior online through the use of web browser cookies and similar technology, online referral marketing can potentially increase brand awareness, referrals and, ultimately, revenue. Many platforms allow organizations to see their referral marketing return on investment (ROI), and to optimize their campaigns to improve results. Many of the newest systems provide users with the same experience whether they are on a desktop or mobile device. Offline referral marketers sometimes use trackable business cards. Trackable business cards typically contain QR codes linking them to online content for sale while providing a way to track that sale back to the person whose card was scanned.
Online referral marketing focuses on interactions between customers. The Internet is a common channel for referral-based marketing. It delivers abundant outlets for customers to share their opinions, product favourites, and experiences, including the company's website and through social media such as LinkedIn, Facebook, Twitter, and Google+. The marketers can encourage the referring parties by providing pre-scripted messages. Advocates can provide their family members and friends with personalised links including unique referral codes and advertisement information through e-mails, blogs and instant messages. The company can give rewards to advocates when their family members and friends buy through the link.
These same technologies also help companies set up a system that integrates referrals into the marketing plan. By tracking user traffic, the companies can offer referrals to other online customers.
Benefits of referral programs
A study conducted by the Goethe University Frankfurt and the University of Pennsylvania, on referral programs and customer value which followed the customer referral program of a German bank that paid customers 25 euros for bringing in a new customer, was released in July 2010. According to Professor Van den Bulte, this is the First ever study published on the financial evaluation of customer referral programs. The study found that referred customers were both more profitable and loyal than normal customers. Referred customers had a higher contribution margin, a higher retention rate and were more valuable in both the short and long run.
On whether customer referral programs are worth the cost, the study says that it records "a positive value differential, both in the short term and long term, between customers acquired through a referral program and other customers. Importantly, this value differential is larger than the referral fee. Hence, referral programs can indeed pay off."
There are two types of rewards provided by referral programs.
In one option, current customers are given an incentive. The referral rewards can be in different forms, such as cash, prizes, discounts, shopping vouchers, or redeemable points. For example, mobile phone operators give a referring customer a one-time reward and add long-term savings depending on his or her individual usage. The operators also offer a lower rate for interactions between customers than for interactions with noncustomers.
The second program is where the referrers benefit from existing customers by having increased visibility or recognition as a specialist or by gaining special treatment, especially if the customers become the partners of company.
Existing customers know the purpose of marketing and understand the need for potential clients. The referrers can measure a good fit between the two and the well-matched customers can help the company produce more profits at a lower cost.
The value and contribution of customers acquired through referral campaigns are higher than those of non-referred customers.
Referral programs are a good method to define consumer satisfaction. If comparatively few consumers are willing to act as referrers, a company's customer satisfaction may be low.
Referral programs help the company establish long-term relations with customers. The company can match motivations with consumer expectations and raise the effectiveness of market programmes. Referral reward programs can also be regarded as a tool for retaining current customers.
The referral program may be abused by opportunists. They may recommend unsuitable products to other people to acquire referral fees. The financial motivation of the referring customers may harm the sincerity of their recommendations.
To recognise referrers and trace purchases by referred consumers on social media, the referral programs rely heavily on a database. The precisely targeted advertising and direct mail campaigns based on the database help the company classify customers and increase the referral rate.
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