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Referral Marketing: What it is and How to Use it

Think about your favorite store or business. How did you find it? Through Google search? While walking by? Or maybe through word-of-mouth from a friend, family member or trusted influencer.

Chances are at least one person you know shares your enthusiasm for that place. And you’ve probably told a handful of other people about it, too. Maybe, you’ve even left that business a review. Or, helped them get new customers in exchange for a discount or freebie.

Referral marketing is a powerful tool that can help you leverage your existing customers and fan base to build relationships with new ones. By tapping into your customers’ networks, you can quickly reach potential prospects who are eager to learn about your business.

In this guide, we’ll cover everything you need to know about referral marketing, its benefits and how to create a successful referral marketing program.

Table of contents:

What is referral marketing?

Referral marketing is a form of advertising in which businesses encourage customers to recommend their services, products or experiences to other people. Unlike word-of-mouth marketing, which relies on people spontaneously sharing information, referral marketing is a deliberate strategy involving incentives and rewards for customers in exchange for successful referrals.

For example, a company may offer a discount or special promotion to customers who successfully refer their products to someone else. Or, they might partner with an influencer or offer an affiliate program to incentivize people to promote their products. This not only encourages people to share product information but also to become active participants in the marketing process by finding potential leads and providing referrals.

The best part of referral marketing programs is they don’t just benefit companies–customers also reap the rewards of their efforts. This makes referral programs an excellent way to build loyalty, as well as increase your customer base.

Why referral marketing is so important

Referral marketing is an effective way to attract new customers and increase sales. Here are a few reasons your business should consider having an active referral marketing program.

Little to no cost

There are very few upfront costs to this strategy. All you need is a passionate customer base, a strategic plan and some creative referral marketing ideas. 

Now, that’s not to say that you shouldn’t reward your customers for their referrals. Offering incentives like discounts or free products helps to encourage people to spread the word about your business. Be sure to factor in some costs for incentives and planning.

High customer lifetime value

A study from the Wharton School of Business shows that referred customers have a 16% higher lifetime value than average customers. This means that over time, customers who come via a referral will bring more revenue to your business than those you acquire elsewhere.

Remember, every customer you bring in costs your business money, whether from advertising, discounts or other marketing techniques. If referral customers have a higher lifetime value than the ones acquired through paid channels, they can pay off those costs more quickly and help your business save money in the long run.

Likelihood of conversion

Referral marketing often leads to higher conversion rates than more traditional forms of advertising. With word-of-mouth referrals, customers receive personalized recommendations from someone they trust. This makes them more likely to take action on the recommendation and purchase.

According to data from McKinsey, 63% of GenZ consumers say that recommendations from friends are their most trusted source for learning about products and brands.

Establishes trust

Humans trust other humans. That’s just a fact. Think about it, if you’re looking for a new product or service, it’s much more likely you’ll purchase if you get a recommendation from someone you know. You might even read online reviews before you buy, to make sure you’re getting exactly what you expect.

We often call this social proof, which is the idea that if people around us are doing something, it must be alright to do it as well. It’s why people stand in line for the latest Jordans, or why Supreme drops are such a big hit. They aren’t necessarily offering the best product on the market, but it’s the most coveted because everyone else is buying it.

How does referral marketing work

Referral marketing encourages customers to promote a company’s products or services in exchange for some type of reward. This could be discounts, free items or other perks that make it worth their while to do so.

B2B and B2C businesses may need to approach their referral marketing strategies a bit differently. Here’s a quick breakdown of both strategies.

B2B referral marketing programs

B2B businesses are no strangers to a long sales process. It requires in-depth research, months of vetting and gaining the trust of multiple stakeholders to finalize a deal.

A 2023 study found that 82% of B2B sales leaders believe that referrals generate the best leads. That makes referral marketing programs essential for B2B businesses.

If you want to build out your B2B referral program, there are a few ways to go about it. If your business sells products, you could start by offering incentives like discounts to customers who refer you to their colleagues. Or, you could offer a loyalty program where customers receive rewards points for referring you to their peers. Check out Sprout’s Partnership Program as an example.

Sprout referral program

If you’re running a service-based business, consider offering timed service discounts. For example, a free day or free month. You can also offer credits for future purchases or services.

Remember, referrals don’t have to come only from customers. Accepting referrals from other businesses in exchange for discounts or rewards is a great way to generate new leads. Consider who in your field may be looking for referrals and create a referral marketing program that benefits both parties.

If you’re a SaaS company, you may want to partner with a tool that fills a gap in your offering and offer customers a discount for signing up for both platforms. Similarly, if you’re selling machine parts, partner with a delivery company that can fulfill orders for your clients and provide them discounts for choosing that shipping method.

B2C referral marketing strategies

B2C businesses are perfectly positioned to take advantage of referral marketing because they have a direct relationship with their customers.

One of the best referral marketing ideas for B2C companies is to offer rewards in exchange for referrals. This could be a discount code, free product, gift card or another incentive that encourages customers to tell their friends and family about your company.

Fresh Prep B2C

You can also incentivize customers with loyalty programs, where they earn points for each referral or purchase their referee makes. This allows customers to save up points over time and redeem them for discounts, exclusive offers or other rewards.

Email campaigns are also an effective referral marketing strategy. By including social sharing buttons in your emails, you allow customers to share your products, news and offerings quickly and easily.

The most important thing to remember when creating a referral program is that it should be an integral part of the customer experience. Referrals should be included in every customer touchpoint, from website navigational menus to the checkout page. Similarly, be sure to integrate your referral program with other critical systems, such as your CRM, eCommerce technology and point-of-sale systems, so you can keep track of all referral activity.

Referral marketing strategies

If you’re looking to get started with referral marketing, there are a few core concepts you should understand.

1. Create shareable content

The best referral marketing programs go beyond just providing discounts or rewards for successful referrals. Your program should also include content that is easy to share, such as blog posts, helpful guides and interesting video clips that potential customers can use to help them decide whether your product or service is right for them.

As well, make sure your posts are easy to share. That means adding social media sharing buttons, such as a “Share to Facebook” button, on your website, blog posts and email marketing campaigns.

Create shareable content

2. Provide excellent customer service

The backbone of any successful referral marketing program is excellent customer service. If your customers are happy with their purchase, they’re more likely to recommend you and share their positive experiences with others.

You can provide exceptional customer service in a number of ways:

  • Give customers the option to contact you directly via phone call, text message, email or live chat.
  • Have a well-trained customer service team that can quickly and effectively answer any questions, concerns or complaints.
  • Make refunds, exchanges and shipping as simple as possible.
  • Answer all feedback on your social channels promptly.

The better the experience customers have, the more likely they are to become loyal customers and refer others to our business.

Sprout customer service

3. Define your goals

Goals give businesses direction and help measure success. When building out your referral marketing program, think about what success looks like to you. Ask yourself questions like:

  • How many referrals should our program generate?
  • What kind of customers do we want to connect with through referrals?
  • Are there any geographic areas we’d like to target?

Once you know what you want to achieve, you can focus on tactics to help get you there. For example, if you want to target customers in a specific area, you might try offering coupons only to people in that location. If you’re looking to connect with people outside of your direct network, partnering with an influencer or influencer marketing platform can help you reach a broader audience.

4. Plan your campaign

With your goals in mind, it’s time to plan your referral marketing program. This includes choosing the right platform, setting up tracking and analytics tools, crafting an email strategy to encourage referrals and developing incentives that will motivate customers to share your brand with their friends.

Some things to consider when planning your campaign include:

  • How long will the program run?
  • What types of rewards will you offer for referrals?
  • How will customers track their referrals and collect rewards?
  • Will there be any restrictions on where people can share your referral link?
  • How will you measure success and track ROI?

Once you have a plan in place, you can get creative with your referral marketing ideas. From creative email campaigns to social media contests, there are many ways to spread the word about your company.

Types of referral marketing

There are several types of referral marketing that you can use to promote your business. Here are some of the most popular.

Direct

Direct referrals involve asking your existing customers to refer people they know. You can use email or even in-person events to ask for referrals. You can also consider hiring a brand ambassador to present your company to a broader audience.

Collagen TikTok direct referral marketing

Incentivized 

Incentives are a great way to encourage customers to refer their friends. Who doesn’t want more of a product they already love? Referral marketing incentives can include discounts, free products or cash rewards. If you offer incentives, make sure they are generous enough to be enticing and promote loyalty among customers.

Incentivized Referral Marketing

Email

There are more than 4 billion active email users worldwide, making it one of the most powerful tools in your referral marketing arsenal. With email marketing, you can send personalized messages to customers and prospects to inform them about promotions or referral programs. You can also use email newsletters to keep contacts up-to-date on new products and services.

Email referral marketing

Reviews

According to a recent customer survey, 49% of consumers trust online reviews as much as they trust personal recommendations. This means that it’s important to nurture and cultivate a positive online reputation through customer reviews. You can encourage customers to post reviews on your website, Google My Business page or other review sites like Yelp. Or, build up your Amazon review ratings for products that you offer.

Reviews - referral marketing

Social

Social media can be a powerful referral marketing tool. Your advocates can share their experiences with your brand, post promotional content and messages or even host live streams to engage with other customers and prospects. 

You can create a referral program with special incentives for people who refer new customers or reward loyal followers for engaging with you on social media. Just make sure you’re using a custom URL or hashtag when customers make referrals so you can track and measure the success of your program.

Sprout Social referral marketing

Increase referrals by finding your brand advocates

Brand advocates aren’t always easy to come by. Luckily, there are resources available to help you identify and reach out to potential brand advocates.

If you’re feeling stuck figuring out campaign strategies, check out our list of marketing campaign ideas to help get you started.