6 Myths About Referral Programs Debunked (#3 is the Worst)

by Friendbuy

December 8, 2014

Let's clear the air about referral programs and some commonly held (mis)beliefs.  Yeah, we know you have a lot of choices for attracting new customers – print, display, PPC, SEM, retargeting, etc. Heck, if you're lucky enough to have $4 million lying around, you can run a 30-second broadcast spot during the Super Bowl.

But how much growth can you expect from these channels? More importantly, how efficient are these investments? Referral programs beat them all!  Let's zero-in on referral programs and dispel few myths...

6 Myths About Referral Programs Debunked

MYTH 1: "Referral programs don’t generate much growth."

FACT: In addition to driving significant customer acquisition, a referral program is the most efficient marketing channel for acquiring new customers.

Referral programs contribute 5% to 30% of revenue. And as a marketing channel, referral programs are incredibly efficient. Consider this: while you’re doing the leg work of acquiring traffic via the standard playbook – SEO, blogger outreach, email marketing, etc. – a referral program can activate this traffic to generate new, highly qualified traffic. And referral traffic tends to convert faster with higher Average Order Value (AOV) and higher Customer Lifetime Value (LTV).

In other words, a referral program is the best way to make your money work for you. On a Cost Per Acquisition (CPA) basis, you can expect to pay less than $10 for every new customer. In fact, much less – most Friendbuy clients hover around the $3 CPA mark (and some even less than that). Compare this to $40 CPA for display ads, pay per click (PPC) or other channels.

See how Nuuly used Friendbuy to drive thousands of new subscriptions within  weeks of launch. >>

Referral programs also give you an evergreen solution that keeps on giving. After the initial investment of setting it up, you can update it for seasonal campaigns without spending additional money on software development.

Lastly, if you implement with our recommended best practices, you can be ROI positive in month one. (Shameless Plug: We have many clients who literally pay for their entire annual Friendbuy license with just one month of profits generated through the Friendbuy platform – no joke.)

6 Myths About Referral Programs Debunked

MYTH 2: "Things like this take too much effort. I don’t have the team to implement a referral program."

FACT: Referral programs can be deployed quickly and easily, saving you time and money.

We hear anecdotally that it takes three to five engineers (Ouch!) to build and maintain an in-house referral program, plus another two marketers to manage it. That's a massive sink on resources. And once a program is live, optimizing can take weeks, depending on everything else in your development queue.

The good news now is that you don't have to build a referral program yourself. You can actually launch a referral program within hours (not weeks) with little or no developer resources. As a DIY tool for managing your referral program, Friendbuy gives marketers the power to make changes on the fly to optimize performance. Referral program A/B testing is a breeze and doesn’t incur developer headaches every time you want to test new ideas.

6 Myths About Referral Programs Debunked

MYTH 3: "Referral programs only work for subscription sites or daily deal sites."

FACT: Referral programs can be effective for any B2C or B2B business.

It’s true that referral programs work really well for subscription sites. It’s also true that daily deal sites benefit from the inherent virality of soon-to-expire deals. However, referral programs can work for any e-commerce brand as well as sites offering pure-play digital products such as legal documents, banking products or even software downloads. The vast majority of Friendbuy’s clients are not subscription sites or daily deal sites, and they are killing it with referrals.

Here’s a shorthand for thinking about it: If you can acquire traffic which converts at a reasonable conversion rate, then a referral program can work really well for you. Said another way, if you can get people to buy, you can get them to share.

This is especially true for challenger brands. For example, Warby Parker (a Friendbuy customer) offers designer eyewear at revolutionary prices. They are in competition with the category leader, Luxottica. A robust customer referral program becomes all the more strategic to grow in a space that’s dominated by a dominant player. Warby Parker can opt out of matching Luxottica dollar-for-dollar on advertising and PR, because they can efficiently drive customer acquisition by empowering their passionate customer base to influence their peers with measurable word-of-mouth marketing.

6 Myths About Referral Programs Debunked

MYTH 4: "A referral program won’t work for me because my customers aren’t the type to share."

FACT: If you can get people to buy, you can get them to share.

Don’t sell your customers short. Your product doesn’t need the viral buzz of a Kardashian sighting for your referral program to be successful. While sharing metrics can certainly vary based on many factors, if your customers have given you the stamp of approval by spending hard earned money with you, it is highly likely they are willing to tell their friends about you. A well-executed referral program makes the process of sharing seamless and easy. And if you give them an incentive for doing so, why wouldn’t they? At Friendbuy, we’ve seen sharing rates exceed 50% – a notable optimization goal for every site.

The bottom line is this – people love to talk about things that they love. Offer your customers even a modest reward, and they’ll spread the word for you.

Key Note: It’s important to implement a referral program that doesn’t force a login for people to share. Forcing a login creates undue friction and can result in 90% drop off from expected sharing performance.

Galvanize your site traffic by featuring your program strategically throughout your site, including the homepage. Prominent placement on the homepage will facilitate the impulse referral – that easy ability to refer the moment you think of someone. And remember, even visitors who don’t immediately purchase may know someone who will love your brand, so make it easy for them to share.

6 Myths About Referral Programs Debunked

MYTH 5: "A referral program won’t work because my customers aren’t active on social media."

FACT: Email sharing is still the most popular channel for customer referrals.

Facebook and Twitter have certainly given consumers more ways to share. That said, data shows that email is still the strongest driver of referral performance, followed by copying and pasting the Personal URL (PURL).

Every brand will have a different ‘social footprint,’ but referrals work across any demographic if you offer your visitors many options for spreading the word.

6 Myths About Referral Programs Debunked

MYTH 6: "All referral platforms are pretty much the same."

FACT: Referral platforms are NOT created equal.

Most customer referral platforms can handle the basics of referral tracking, but if you’re a sophisticated marketer, you’ll want advanced features to maximize performance.

Initially, you may keep it simple with a single widget on a landing page that you link to. But it won’t be long before you run widgets in multiple locations - homepage, order confirmation page, user account page, etc. Eventually, you may even run different offers in different locations. Or launch a campaign just for a seasonal initiative, with or without a referral incentive.

You might even run targeted campaigns or pass custom tracking parameters. Heck, as your company grows, you might hire a developer who wants to use APIs to implement complex business logic.

When you first get started, you might run one simple A/B tests. As your confidence grows, you might optimize each widget separately with different offers and different shared content.

The point is this – think ahead when you’re researching referral platforms. You don’t want to limit your growth potential. Be mindful of where you are today and where you’re going. The right partner should give you the tools to run a simple referral program as well as develop a practice around viral growth.

Key referral platform capabilities that drive growth:

  • Open Access Sharing – give customers the ability to refer friends without forcing them to login
  • Quickly run your own A/B tests
  • Monitor campaigns with real-time reporting – launch, track and analyze social referral performance
  • Identify customers who've self-referred via fraud detection
  • Automation using referral APIs / Webhooks (also great for implementing custom business logic)

See how Nuuly's referral program generated thousands of organic subscriptions within weeks.