REFERRAL MARKETING STRATEGY

How to Build a Referral Program That Pays for Itself

by Emma Kimmerly

November 3, 2022


Think of the last time you bought something. Chances are, the idea came from a friend. Maybe you got an explicit recommendation. Maybe they just gave you an idea. But no matter what it was, statistics suggest purchase decisions come mostly (54%) from word-of-mouth.

What does that mean for your business? You need more people recommending what you offer to their friends. But it isn’t enough to hope for word-of-mouth advertising. You can make it happen by building a referral program to incentivize more recommendations and more sales. Here’s how building a referral program works.

 

Jump ahead:

  1. Start With Your Target CPA
  2. Design An Incentive Structure With Compelling Referral Rewards
  3. Set Up The Core Technologies For The Ability To Refer
  4. Put It All Together With Creative Design And Messaging
  5. Test And Polish Your Referral Program Prior To Launch
  6. Test And Optimize

 

1. Start With Your Target CPA

Your CPA is your cost per acquisition. And it’s one of the most important variables your business will ever encounter. This is the number that tells you exactly how much money you’re spending to acquire new customers.

A “good” CPA will depend on what you sell. You don’t want to pay $100 per acquisition if you’re selling $90 sweatshirts, for example. According to Wordstream, “good” CPAs will vary by industry. For instance, they saw $10 as a “good” CPA in the world of apparel.

A referral program might sound expensive at first. But when you see the impact of your referral program on CPA, you’ll find it’s far less expensive than traditional advertisements. For example, Friendbuy’s benchmarks in the apparel category beat $10, which is a “good” CPA, according to Wordstream. We found our clients only paid $1-10 in cost per acquisition

 

Here’s what to do:

  1. Before you start building your referral program, look at the typical CPA in your category. 
  2. Compare it to Friendbuy’s benchmarks
  3. Then set a goal for your campaign. 

Once the data starts rolling in, you’ll be able to tell if you’re on track or if you need to make adjustments.

 

2. Design An Incentive Structure With Compelling Referral Rewards

Word-of-mouth is great if it’s spontaneous. But relying on spontaneous word-of-mouth is also inconsistent. To lower your cost per acquisition and get more customers to spread the word about what you sell, you need to know how to turn word-of-mouth into a bona fide referral marketing system. That comes from building an incentive structure that makes people want to recommend your products via your referral program. Here’s how you make referral marketing work for your brand.

 

A. Determine Who Will Get The Referral Rewards

The most basic unit of most customer referral programs is the reward. First: who gets it? 

  • One-sided incentives are those where you pick one party who gets the reward. For example, you might create a referral reward program where the existing customer doing the referring gets a $50 gift card if they send a new customer your way. 
  • Double-sided incentives (rewarding both the referrer and the person being referred) ensure motivation on each side. 

Ideally, you’ll use double-sided incentives for your customer referral program. It may sound expensive, but it can end up being more efficient with your cost-per-acquisition (more on that in a bit).

For example, Friendbuy created a 47x return on ad spend (ROAS) in the “high consideration” category. Why? It all comes down to how incentivizing your customer referral program is. 

You can easily decide who gets rewarded by editing either the Advocate Reward or Friend Incentive in your referral campaign on the Friendbuy dashboard:

 

B. Choose Your Referral Rewards

We’ve thrown around the word “incentive” a lot. But what does it mean? You’ll have to pick a specific reward that your existing customers will find incentivizing in the first place. Here are a few examples of rewards and incentives that have worked for our existing customers in the past:

 

 

  • Coupon code. A quick incentive: give them a discount on the next purchase they make through your referral link.
  • Account credit. Even more directly, boost their account credit, which only inspires them to spend more at your store.
  • Gift card. Transferable gift cards can be great incentives, and easy to share through a referral link as well.
  • Points / badges. If you have a VIP program with “points” earnings, make a referral worth more points than anything else they can do.
  • Third-party gift cards. There’s something exciting about having a company buy someone else’s gift card because you made a referral for them.
  • Cash rewards. Let’s be honest: this one will always work.

 

C. Decide On A Reward Structure

A successful referral program ultimately comes down to this: what is going to motivate people to refer friends? And what’s going to motivate those friends to sign up for the first time?

The rewards above are a good start. But let’s get specific about rewards structures in our referral marketing program that have produced results for our customers in the real world.

 

Standard Reward Structure

The standard reward structure is simple: if the customer refers new customers, they get a reward. It should sound as simple as cause and effect. Here’s MeUndies on Instagram doing exactly that.

 

 

The standard reward structure fits neatly into two statements. “Invite your friends….get store credit in return.” Easy-peasy. The advantage here? You can easily share the entire plan with your social media followers and get more signups. The key here? Use specifics for customer referrals. Notice the exact numbers (like 20% off) that promise no surprises, just incentives.

 

Tiered Reward Structure

Maybe you don’t want one friend from one customer only. You can pile on the rewards with a “tiered” structure. This is great for “gamifying” your referral program, which means letting loyal customers “unlock” greater rewards the more they participate. 

 

 

In the example above, Cora boosts customer rewards if they refer 6-10 friends. Think of this as the modern version of the “buy 10 sandwiches, get one free” punch card. By giving better rewards for customers who unlock greater tiers, you inspire more loyalty—and give customers even more reasons to tell their friends.

Read more about how to set up tiered rewards.

 

Multi-Step Or Staged Reward Structure

When Casper ran an ad for their referral program, they used a limited-time incentive of a $200 gift card. But they also wanted the rewards to have “evergreen” value. The solution? A multi-stage reward structure with two separate tiers.

 

 

This is a great option if you need to run referral programs in off-season months, far away from the holidays. It’s also ideal if you do want to use the holiday boost in shopping to create separate “evergreen” rewards that keep customers coming back all year long.

 

Referral Contest

What if you don’t think a small incentive is particularly engaging for your target audience? You can pump the numbers up without dramatically increasing your budget. Use an incentivizing referral contest to give referrals a chance at winning a far more ambitious prize.

 

 

Nature Box, for example, gave out top-three prizes with Amazon gift cards and free snacks. The total for the top three spots? $900. Yet if enough customers tried to win the top prize, the cost-per-acquisition had the potential to be even lower than traditional refer-a-friend programs.

 

Gamified Reward Structure

What keeps so many gamers glued to their phones, PCs, and consoles? It’s the promise that the next player upgrade is just around the corner. Using a “gameified” structure replicates this experience. Rather than offering a straight 1:1 incentive, you create additional incentives that kick in the more your referrers participate.

 

 

Nuuly offers “gamified” reward structures. The key? Create an accelerating reward system. Rather than having referrers get $10/referral, for example, kick up that per-referral number the more they participate. This holds the attention of your fiercest brand advocates, rewards them for their loyalty, and keeps additional customers rolling in.

 

3. Set Up The Core Technologies For The Ability To Refer

It all sounds great, right? But you still might have one thought: I have no idea how to execute a referral program, let alone something like a “gamified reward structure.

Don’t worry. The core technologies all come as part of a platform like Friendbuy. 

 

 

But you do have some decisions to make. You can customize your referral program according to the following variables:

  • Where will you put your CTAs? Home pages, customer account pages, refer a friend landing pages, post-purchases pages? Some of them? All of them? 
  • Which social channels will you employ? SMS, email, WhatsApp, Facebook, Twitter are all options for finding your referral audience.
  • What can your Advocates do with their profile on your site? The “Advocate” is your referrer, the person spreading the word. A good customer referral platform will let them manage and view their options from within their customer account page.
  • Choosing the “trigger” that kicks in the reward. For example, do you want to pay for a referral of a new customer registration? Or will you wait until the new customer makes their first purchase? Some companies require a minimum purchase price before rewards kick in.

If this all sounds a tad on the complicated side, refer to our Getting Started feature. You’ll notice that many of these decisions can spring from the “Offer Strategy” you choose. Settle your Offer Strategy and you’ll likely find the answer to these key platform questions.

 

4. Put It All Together With Creative Design And Messaging

Is it enough to offer a good reward for your referrers? That’s a start. But you still want to highlight the quality of your program with creative design and messaging. The more appealing you make the rewards program look, the more likely it is you’ll attract new brand advocates who want to work with you.

You can use landing pages, post purchase emails, website ribbons, email blasts, social media, and more to promote your referral program. 

 

 

Let’s look at some examples to help make it work:

 

Referral Landing Page

A landing page opens the real estate to make the full sale for your referral program. Include the following details:

  • Reward details (for both parties, if applicable)
  • Social sharing buttons
  • A link to send out the referral right now
  • A pre-written script for the referral

You can see all four elements in MeUndies’ referral landing page below:

 

Read more about how to create a high-converting referral landing page.

 

Referral Emails

Your customers’ email inbox is some of the best real estate for inspiring a referral. After all, they’re just a click or a “send message” button away from contacting their friends! Make it easy on them with your emails by including a link. And don’t forget to explain the benefits of referring a friend.

 

 

In the Metromile example above, notice all the essential details are there. They explain the reward (a $10 Amazon gift card), the trigger (“for each one who gets a qualified quote”), and the benefits (“they’ll save money on their car insurance”). Think of your email as the “pitch” for your referral program.

Read more about sending post purchase referral emails and referral email blasts.

 

Referral Widgets

Theoretically, the referral program should be an easy sell. After all, you’re not asking for money. You’re offering it. But you still need one essential element to make your referral program more enticing. Lower the “friction” it takes to try it out.

Referral widgets are your key to low friction. PetFlow’s widget below, embedded in their post-purchase screen, does all the work on behalf of the customer:

 



With a widget that useful, all the customer has to do is enter their friends’ email, their own email, and click send. The message is even written for them. 

If you can’t figure out why your referral program isn’t getting traction, consider adding a post-purchase embedded widget. Sometimes, there’s just too much friction for customers who would otherwise be happy to share information about your products.

Read more about high-converting referral widgets.

 

As an Enterprise customer, you'll work with the Friendbuy onboarding team to determine an incentive structure that works best for your business, design and build widgets that fit your brand, and work with you to optimize and a/b test your copy for optimal results.

 

5. Test And Polish Your Referral Program Prior To Launch

No matter how good your platform, you never know how a referral program is going to suit your particular audience. You’ll need to test it. But what does that look like in practice? Here are some elements you can test separately, based on where they appear in your referral funnel:

  • Top-of-funnel variables are all about what your customers first see. In an email, that’s your subject line and first line. On a website, it might be a banner you place. Test colors, copy, and rewards to see which top-of-funnel pitches generate the most referral engagement.
  • Middle-of-funnel variables are what you test when you have a customer’s interest. Test your widget headers, your landing page copy, your background hero images (both in emails and landing pages), and your advocate rewards to see what generates the most interest. 
  • Bottom-of-funnel variables are friend rewards (what the “friends” in refer-a-friend programs receive for signing up), recommended products for referring, and even the referral codes your advocates receive. You can also test out the “dummy” template email copy for referrals that you automatically fill into your online widgets so your customers don’t have to type out their recommendations themselves.

 

6. Automate Referral Program Promotion

You’ll do a lot of creation and testing as you create your referral program. But here’s the good news. When you figure out what works, you can incorporate all sorts of customer referral automation so your program starts to take on a life of its own.

For example, if you add a post-purchase overlay that sells the “refer-a-friend” program, it might look like this:

 

 

Once that’s set up, you don’t need to touch it again. Customers who order from you will always see that post-purchase overlay. 

If you want to automate a more proactive approach to getting new referrals, set up an automated email blast to go out every quarter. You don’t have to write fresh content for this email blast each time. You can simply write it once and publish it multiple times throughout the year.

The key to making automation work? Even though it’s automatic, make sure your referral program pitches are distinct and obvious. That post-purchase overlay, for example, grays out the rest of the screen temporarily. When you’ve tested your pitch and polished your referral copy, you’ll start to get referrals automatically.

 

7. Test And Optimize

Think of it like trial and error, but smarter. A/B testing can sound intimidating if you haven’t had a referral platform with robust testing features in the past. Fortunately, Friendbuy makes that part of the equation easy on you. For instance, there are four basic steps with testing on Friendbuy you can repeat time and again:

  • Select the widget/element you want to test to set it as your variable
  • Create a second variable by duplicating that widget/element
  • Edit the variable to test a new option
  • Assign weights to each variable, such as 50/50, to equally test the two

 

 

You can find more information on A/B testing at our documentation pages. Our recommendation? Start with the big elements first. Pricing, for example, or the top-of-funnel elements like the color of your widgets will be vital for attracting attention and motivating people to join your referral program. Once you get a sense of which generates the most attention, you can dial down to the smaller factors and continue to iterate until you’ve discovered what your customers respond to.

 

Build Your Referral Program from the Ground Up

You may not nail every detail of your customer referral process from the first day. But there’s plenty you can do to get started. Replicate the examples you saw here. Decide on a reward structure that makes sense for your potential customers and current customers. Start A/B testing your biggest variables so you start to understand what your audience wants.

Rome wasn’t built in a day. Don’t expect your referral program to be a smashing success in the first few hours after launch. This is a marathon, not a sprint. But if you stick to these strategies and continue optimizing your incentives and offers with Friendbuy, you might be surprised at how much success you can have with your existing customers in generating word-of-mouth referrals.

Maximize word of mouth at scale