The incentive structure is a key element of any referral marketing campaign. If the incentives aren’t compelling enough, advocates won’t share and friends won’t engage. On the other hand, if incentives are too high, it can affect your costs to run the program. Optimizing your incentive structure can help ensure that you get the most from your investment in referral marketing.
What Is a Referral Incentive?
Referral programs give marketers the opportunity to reward advocates and incentivize friends to purchase. When choosing a referral incentive program it’s important to consider your goals for the program. Here are two option to set up your incentive structure based on your goals:
With a double-sided referral incentive—the most commonly used structure—advocates are rewarded and friends receive an incentive to buy. In a symmetrical double-sided offer, such as a “Give $10/Get $10” offer, the reward is the same for both parties. With an asymmetrical double-sided offer, the rewards are different. For example, in a “Give $15/Get 15%” offer, the friend gets a $15 discount and the advocate gets 15 percent off their next purchase. The reward can also be weighted in favor of either the advocate or friend, but we have seen that the most effective asymmetrical campaigns weigh the reward toward the advocate to encourage more sharing.
Consider your business model when determining your incentive structure. While a double sided offer can be applicable, a standard discount or coupon may not be the best fit. For example, subscription merchants may choose to incentivize friends with a free trial, but reward the advocate with a gift card or free month.
With a one-sided offer, only either the advocate or the friend gets a reward. Double sided offers typically perform better, so this structure is typically used only under special circumstances. In one case, the advocate gets rewarded when a friend converts, but the friend has no incentive to try your brand other than a trusted recommendation (which sometimes is enough). This type of one sided offer is a great solution for regulated industries (such as insurance) in which you may only be allowed to reward advocates but not to incentivize friends.
A one-sided structure can also be set up so that the advocate can share a reward (e.g., discount, coupon code, free trial) with their friend but get nothing in return for doing it. This can work well in promotional-specific campaigns for advocates that are already established. For example, Wine Insiders has a give-a-box promotion that the company occasionally promotes to groups of customers in conjunction with its evergreen campaign to boost the referral program.
Why Do You Need Referral Incentives?
Referral marketing programs are successful for a number of reasons. One is that friends receive recommendations from advocates they trust, but that is often not enough to drive a purchase. You can capture the attention of a potential new customer when an advocate shares your brand, but to get them to take action, you should provide an incentive for the friend. Offering an advocate a reward for referring a friend drives engagement and encourages repeat purchases, while incentivizing the friend to buy drives new customer acquisition. When included as part of a larger strategy, referral marketing can be one of the strongest channels for driving sales and increasing customer lifetime value.
How to Choose the Right Referral Incentive Structure
Understanding the costs associated with your referral incentives is key to generating ROI and getting the most out of your referral program. Do the math before you launch your program and periodically evaluate your costs. Remember that advocates are only rewarded after a successful friend conversion -parameters the merchant defines- , which is one of the great benefits of a referral program—it essentially pays for itself.
Consider your referral goals and build your program around them. If growth marketing is your goal, double-sided offers often see the highest success. Advocates are motivated to share and friends have an incentive to try your brand.
It is also important to select compelling incentives that resonate with your customers. This might take some trial and error with A/B testing. Test different types of incentives and at different levels, including:
- Dollar amount discounts
- Percentage discounts
- Free subscription months
- Free trial periods
- Free shipping
- Free products or samples
- Gift cards
- Branded merchandise
Don’t make your referral program compete with other promotions. If your referral incentives aren’t as good as your other offers, people will gravitate to the best rewards. The referral offer should always be the strongest available discount.
If you have high-performing advocates, consider creating a VIP program that incentivizes them even more. These folks are already motivated to share your brand, so give them more reasons to keep engaging with you with tiered rewards, contests, and ambassador campaigns.
How to Measure the Performance of Your Incentive Structure
After you have created an incentive structure, pay attention to the share rate and referral conversion rate metrics to gauge performance. The share rate tells you how well the advocate incentive is performing, and the referral conversion rate is an indicator of friend incentive performance. Use A/B testing—ideally one incentive at a time—to fine tune your offer and continue to monitor performance.
Friendbuy Customer Examples
Fortunately, you don’t have to reinvent the wheel when determining the best incentive structure for your referral marketing campaigns. See what’s working well for these Friendbuy customers, and apply their strategies to your program.
The smart water detector brand updated its friend incentive from a predetermined product bundle to a coupon for 20 percent off orders of $300+, allowing customers to purchase the right products for their own needs. This, combined with a strong advocate reward, has driven significant growth in the channel.
This hair care brand used A/B testing to compare its existing free shipping offer to free sample-sized products, thinking the new offer would be more successful. The company’s typical offer of free shipping on orders of $50+ was not proving to be a rich offer that prompted engagement in the referral program. Free sample-sized products give participants something extra that is exclusive to the referral program and proved to be the better incentive for the brand.
This natural skin care brand learned that its referral campaign should always have the best offer because competing with other offers on the site discourages sharing. Herbivore Botanicals recently removed a competing email sign-up offer email to make the referral incentive the best offer on the site.
The marketing team at this online mattress company saw the effect of competing offers when they used the same 10 percent discount across multiple channels. To make the referral campaign the most appealing option, Casper is increasing its offer to make it the best one among all the channels.
Incentive Are Just One Piece of the Puzzle
A successful referral campaign incorporates multiple components: the incentive structure, a strong call to action, external promotion, and more. When all of the elements work together, the result is increased sales, new customers, and loyal brand advocates. Check out Referral Marketing: The Essential Guide for more tips on improving your referral marketing program.