Referral marketing is a
word-of-mouth
Word of mouth, or ''viva voce'', is the passing of information from person to person using oral communication, which could be as simple as telling someone the time of day. Storytelling is a common form of word-of-mouth communication where one pe ...
initiative designed by a
company
A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal person, legal or a mixture of both, with a specific objective. Company members share a common p ...
to incentivize existing customers to introduce their
family
Family (from la, familia) is a Social group, group of people related either by consanguinity (by recognized birth) or Affinity (law), affinity (by marriage or other relationship). The purpose of the family is to maintain the well-being of its ...
, friends and contacts to become new
customer
In sales, commerce, and economics, a customer (sometimes known as a client, buyer, or purchaser) is the recipient of a good, service, product or an idea - obtained from a seller, vendor, or supplier via a financial transaction or exchange for ...
s. Different to pure word-of-mouth strategies which are primarily customer directed with the company unable to track, influence and measure message content; referral marketing encourages and rewards the referrer for allowing a company to do so. Different to
multi-level marketing
Multi-level marketing (MLM), also called network marketing or pyramid selling, is a controversial marketing strategy for the sale of products or services in which the revenue of the MLM company is derived from a non-salaried workforce selling th ...
, there is no incentive for the original existing customer to drive or influence the subsequent referrals of the new customer – only the conversion of the initial, primary customer is rewarded.
Overview
Referral marketing is a tool used by various businesses and corporations across a wide variety of different industries to grow and build customer bases. In the past, referral marketing was purely focused on spreading information through verbal interaction with a close network. Modern-day referral marketing now heavily relies on
social media
Social media are interactive media technologies that facilitate the creation and sharing of information, ideas, interests, and other forms of expression through virtual communities and networks. While challenges to the definition of ''social medi ...
and the
internet
The Internet (or internet) is the global system of interconnected computer networks that uses the Internet protocol suite (TCP/IP) to communicate between networks and devices. It is a '' network of networks'' that consists of private, pub ...
, allowing the scope of referrals to increase dramatically by reaching a far broader audience.
Most recently, referral marketing has allowed companies such as
PayPal
PayPal Holdings, Inc. is an American multinational financial technology company operating an online payments system in the majority of countries that support online money transfers, and serves as an electronic alternative to traditional paper ...
,
Dropbox
Dropbox is a file hosting service operated by the American company Dropbox, Inc., headquartered in San Francisco, California, U.S. that offers cloud storage, file synchronization, personal cloud, and Client (computing), client software. Dropb ...
and
Airbnb
Airbnb, Inc. ( ), based in San Francisco, California, operates an online marketplace focused on short-term homestays and experiences. The company acts as a broker and charges a commission from each booking. The company was founded in 2008 b ...
to grow exponentially with their personalized referral programs.
There are three fundamental elements that help define and differentiate referral programs from organic WOM (word of mouth). They are company driven in that they are actively managed by the parent company, different to organic WOM which involves the unprompted recommendation for a company's products or services through external interaction, free from company influence. Secondly, an overarching aim to convert an existing customer's networks to join as new customers. Lastly, is a reward or incentive given to the existing customer by the company for the successful conversion of their network to their products and/or services.
There are typically two types of referral programs: incentive payment and non-incentive payment. The former is much more common and includes rewards such as cash, prizes, discounts, shopping vouchers or the service itself for a limited time.
For example, telecommunication companies may offer discounts or vouchers to customers and credit card companies may offer redeemable points, coupons or cash for a new service. The latter referral marketing program benefits the existing customer through increasing reputation and gaining special treatment from the parent company through working
without economic payment on presentations and online forums for example .
Referral marketing was questioned by managers for the effectiveness and material benefit it could bring to a company in comparison to organic WOM and other means. Concerns over operating costs of implementing a referral program, unsustainable economic benefits, suspicion on the trustworthiness of the referee given the monetary incentive to recommend, as well as abuse from opportunistic referrers all questioned the value of referral marketing brings to a company.
Online referral marketing
Online referral marketing is the internet-based, or Software as a Service (SaaS) approach, to traditional referral marketing. By
tracking
Tracking may refer to:
Science and technology Computing
* Tracking, in computer graphics, in match moving (insertion of graphics into footage)
* Tracking, composing music with music tracker software
* Eye tracking, measuring the position of t ...
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 code
A QR code (an initialism for quick response code) is a type of matrix barcode (or two-dimensional barcode) invented in 1994 by the Japanese company Denso Wave. A barcode is a machine-readable optical label that can contain information about th ...
s 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. 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.
Advantages
There are multiple advantages for referral programs. Typically, referral customers are better matched due to the existing customer knowing both parties and able to determine the benefits to the potential new customer; given the product or service is useful to the referrer, the prospect has a higher chance of also finding it useful. This brings higher value customers to the company or authority at a lower cost.
With a referral from a close tie, there are implications on the referrer's reputation if the product or service is not well-received, given the higher value placed on a personal recommendation rather than an advertisement. Thus, it is in the referrer's best interest to recommend a product or service that is not only useful to the potential prospect but also something that they themselves have used.
Literature has determined that the customer value and contribution derived from referral programs are higher for a firm than those sourced from other means.
They can also serve as a tool to measure the health of customer satisfaction. High-performing referral programs or a high magnitude of referrers may indicate high customer satisfaction and vice versa.
Referral programs can help establish long-term relations with customers by matching customer motivations and expectations with referring new customers. This way, referral programs can also be regarded as a tool for retaining existing customers.
Disadvantages
The referrer may not be impartial if compensation is based on the prospect joining the customer, not just for the referral. Incentives can place an ulterior motive on the referrer's end, which can introduce a drive to 'sell' referrals in order to receive compensation. This can result in uncertainty from the referred customer, and reduce trust in both the existing customer and company regardless of the product or service sold. This does not happen with pure WOM given that there are no incentives given to referrers by a company to recommend.
A large majority of referral marketing programs will compensate regardless of longevity or quality of the new customer; this creates a
moral hazard
In economics, a moral hazard is a situation where an economic actor has an incentive to increase its exposure to risk because it does not bear the full costs of that risk. For example, when a corporation is insured, it may take on higher risk ...
favoring opportunists and potentially harms the genuineness of the recommendations.
Referrers can spread referrals to a wide audience, either offline or online, and introduce low quality customers to the business with no consequence.
However, this abuse is offset by the benefits of the referral marketing program and companies should still consider the implementation. Depending on the size of the reward, referrers may also knowingly recommend to their network a poor service or product.
Referral programs are not free and have operational costs to acquire new customers. Administrative costs, software with databases to recognize and trace purchasers, advertisement campaigns and incentive costs are just some of these.
Effectiveness of referral marketing
A study in 2010 by the
University of Pennsylvania
The University of Pennsylvania (also known as Penn or UPenn) is a private research university in Philadelphia. It is the fourth-oldest institution of higher education in the United States and is ranked among the highest-regarded universitie ...
and
Goethe University Frankfurt
Goethe University (german: link=no, Johann Wolfgang Goethe-Universität Frankfurt am Main) is a university located in Frankfurt am Main, Germany. It was founded in 1914 as a citizens' university, which means it was founded and funded by the wealt ...
aimed to determine the relationship between the value a customer brings to a business through online referral marketing versus other methods by answering four questions:
* "Are referred customers more valuable?"
* "Is the difference in customer value large enough to cover the costs of such stimulated WOM customer acquisition efforts?"
* "Are customers acquired through a referral program more valuable because they generate higher margins, exhibit higher retention, or both?"
* "Do differences in margins and retention remain stable or do they erode?"
This study followed the online referral program of a bank in Germany and saw that each referral by an existing customer would result in a 25 euro reward. The results determined 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 overall in both the short and long term16% more in profits and 25% more valuable. A referred customer had an 82% chance of being an active customer after 33 months in comparison to 79.2%. However, it was found that the program was less effective in referring individuals over the age of 55 or low-margin customers.
This study also determined that the aforementioned disadvantages associated with referral marketing are lower than the overall benefits and that referral programs should be considered for a company to grow their customer-base. It also noted that referral programs are able to better target high value customers who are more likely to retain the service provided, at a lower cost than conventional marketing means. In terms of the referrer, they found that firms should make the reward a function of the value of the existing customer instead of following their own competitors.
Referral marketing reward structure
A study in 2019 by
Harvard Business School
Harvard Business School (HBS) is the graduate business school of Harvard University, a private research university in Boston, Massachusetts. It is consistently ranked among the top business schools in the world and offers a large full-time MBA p ...
,
Washington University in St. Louis
Washington University in St. Louis (WashU or WUSTL) is a private research university with its main campus in St. Louis County, and Clayton, Missouri. Founded in 1853, the university is named after George Washington. Washington University is r ...
and
University of California, San Diego
The University of California, San Diego (UC San Diego or colloquially, UCSD) is a public university, public Land-grant university, land-grant research university in San Diego, California. Established in 1960 near the pre-existing Scripps Insti ...
aimed to find the highest converting reward structure for referral marketing.
The study examines five
incentive
In general, incentives are anything that persuade a person to alter their behaviour. It is emphasised that incentives matter by the basic law of economists and the laws of behaviour, which state that higher incentives amount to greater levels of ...
structures:
* No-incentive (control)
* Sender-benefiting
* Recipient-benefiting
* Shared
* Donations
The study found that recipient-benefiting incentive structures convert 1.41 - 1.79 times more than sender-benefiting structures. Additionally shared incentive structures converted at similar rates of recipient-benefiting structures. No-incentive and donation structures converted at substantially lower levels than all other options.
See also
*
Customer knowledge Customer knowledge (CK) is the combination of experience, value and insight information which is needed, created and absorbed during the transaction and exchange between the customers and enterprise.
Campbell (2003) defines customer knowledge as: "o ...
*
Content marketing
Content marketing is a form of marketing focused on creating, publishing, and distributing content for a targeted audience online. It is often used by businesses in order to achieve the following goals: attract attention and generate leads, exp ...
*
Affiliate marketing
Affiliate marketing is a marketing arrangement in which affiliates receive a commission for each visit, signup or sale they generate for a merchant. This arrangement allows businesses to outsource part of the sales process. It is a form of p ...
References
{{Reflist
Digital marketing
Marketing techniques
Promotion and marketing communications