When aiming to expand your company’s reach, your existing customer base may be the most powerful tool up your sleeve. With a great referral program in place, you can turn your current buyers into active contributors to your business growth.

Referral programs are a cost-effective strategy for boosting your customer acquisition efforts. These programs connect you to a new network of potential leads with minimal effort. Simultaneously, your program can boost customer loyalty and lifetime value by engaging your existing network over and over again.

Keep reading to learn more about referral programs, including what they are, why they work, and how you can build one for your own brand.

What is a Referral Program?

Referrals programs (also known as rewards programs or affiliate programs) are a part of referral marketing, a type of marketing that leverages existing customers to acquire new ones. Referral marketing focuses on building relationships with customers and incentivizing them to share their experiences with others. Through this process, businesses can tap into the power of word-of-mouth advertising and earn more leads for their product or service. The basic concept is fairly simple: An existing customer shares their positive experiences with a business with their friends or family and, in return, they receive some sort of reward. This could range from discounts to free products or services. The incentive encourages current customers to become advocates and helps businesses grow through organic referrals.

A customer referral program—sometimes known as a refer-a-friend program—is a marketing strategy that encourages and incentivizes current customers and buyers to recommend a product or service to their peers. In most cases, this involves an incentive that gives your audience a good reason to actively reach out to potential new customers.

The role of a successful referral program is to turn happy customers into brand advocates. Instead of investing in campaigns that target potential buyers directly, your team can use this program to let your best customers do the talking, which can be far more effective than spreading the message yourself.

People trust their peers more than any other groups or ads, with as much as 92% of shoppers trusting the recommendations given to them by friends and family members. When real people start recommending your brand, you can gain instant trust from new users—including those you may not have considered reaching out to—and let your conversion rates soar.

Word-of-mouth marketing is the perfect vehicle for your brand message, and referral programs are one of the best ways to make it happen.

Why You Need a Referral Program: 4 Benefits

As a small business owner, you know that generating leads and building trust in your brand is crucial. One way to do this is by implementing a referral program. A referral program offers numerous benefits, including:

Attracts new customers at a low cost
Attracts high-quality customers
Extends your market reach
Increases conversion rates

We’ll go over each of these key benefits below.

Attracts New Customers at a Low Cost

Referral programs are an effective and inexpensive way for small businesses to attract new customers. By enlisting existing customers to spread the word about their business, small businesses can gain a larger presence in the marketplace and decrease customer acquisition costs without throwing away marketing budget.

It works like this: Customers who refer friends, family members, or colleagues receive a reward when those referrals make a purchase. The reward incentivizes customers to recommend your business, and it makes them feel valued for their loyalty. Meanwhile, the new customer gets an incentive for taking the time to try out your product or service. This creates more opportunities for growth at a low cost because referral programs leverage existing relationships and don’t require additional resources.

Attracts High-Quality Customers

Studies have found that referred customers are 18% more loyal than a customer acquired by other means. These loyal customers are also likely to spend more money with the business and shop more frequently—making them even more valuable in the long run. Additionally, since referrals often come from people close to them, these potential customers will already have some familiarity with the business, which helps build trust and loyalty quickly.

Extends Your Market Reach

Referrals create a positive buzz about your business. This kind of word-of-mouth marketing is a great way to reach people who would never have heard of your business otherwise. When someone refers a friend to you, they’re essentially vouching for you and saying that your product or service is trustworthy and worth trying out. This spreads the word about your business, which leads to new people hearing about what you have to offer.

Secondly, referral programs provide incentives for existing customers to spread the word about your business and bring in new customers. Whether it’s a discount code or freebie item for the referrer, this encourages them to tell their friends about you and incentivizes new customers to give you a try.

Finally, referral programs open up opportunities for targeted advertising by allowing businesses to segment their audiences based on who’s referring who. This helps businesses make sure they’re targeting the right people with their ads and offers, as opposed to just blanket advertising which is often less effective.

Increases Conversion Rates

Starting a referral program is a highly effective way to increase conversion rates—referral marketing generates 3-5x higher conversion rates than any other channel.

One key reason why referral programs can be so successful is because they leverage the trust that already exists between current customers and potential leads. Referrals often come from people who have used the product themselves or know someone who has, making them more likely to give it a try. This trust can be further compounded if the referrer receives bonus points or discounts for sharing their recommendation with friends or family members.

Finally, referral programs are cost-effective and easy to administer since they don’t require as much overhead as other types of marketing campaigns. They also have a good return on investment, allowing businesses to turn one sale into multiple sales without having to pay high upfront costs like they would with traditional advertising techniques. By utilizing referrals, small business owners can get more bang for their buck while still boosting their overall conversion rates.

How Does a Referral Program Work?

Referral programs are an effective way to leverage customer loyalty and turn customers into ambassadors for your brand. When customers are highly satisfied with their experience or receive rewards, they are more likely to recommend your products and services to family, friends and colleagues. This can be a major asset in providing word-of-mouth marketing for small businesses. Referral programs also enable you to give customers a reward for recommending your products or services without having to pay large advertising fees. Ultimately, this creates a win-win situation—customers get an incentive for referring others, while small businesses get more cost-effective leads and ongoing growth.

3 Types of Referral Programs

There are a lot of ways to get referral programs right—what works for your competitors might not necessarily be the most effective strategy for you. The three main types of referrals are:

Direct referrals
Reputation referrals
Incentivized referrals

We’ll take a look at each of these referral types below.

Direct Referrals

Direct referrals are one of the most common types of customer referral programs. This type of program allows existing customers to refer their friends, family members, or colleagues directly in exchange for rewards. For example, you could offer existing customers a discount off their next purchase if they refer someone who makes a purchase from your business. This type of referral program is great for creating word-of-mouth marketing and it’s relatively easy to implement.

Reputation Referrals

Reputation referrals are another type of customer referral program that relies on customer reviews and ratings. In this type of program, businesses encourage their existing customers to leave reviews on websites like Yelp, Google Reviews, or TripAdvisor in exchange for rewards. These rewards could be coupons, discounts, or even free products or services—it all depends on what works best for your company. This type of program is great for building brand awareness and increasing customer loyalty.

Incentivized Referrals

Finally, incentivized referrals are a bit different from the other two types mentioned above. Instead of relying solely on word-of-mouth marketing or reviews, incentivized referrals focus more on offering incentives to both the referrer and the referee in exchange for completing certain actions (such as making a purchase). This type of program is great for getting people excited about your product or service and can be used to drive sales quickly and efficiently.

How to Create a Customer Referral Program in 6 Steps

1. Set Your Goals

To create a successful referral program, you will need to have well-defined goals. Goals could be anything from increasing brand awareness and driving sales, to attracting new customers or improving customer loyalty. Here are a few tips to keep in mind as you establish your goals.

Think about what type of rewards you want to offer, how many referrals you want to generate, and what you expect those referrals to do.
Make sure that all deliverables are measurable. You should be able to track progress easily and identify what’s working and what isn’t so that you can adjust as needed.
Set both short-term and long-term goals for your referral program. Short-term goals should be attainable within a few months or less, while long-term goals should span several months or years.

making a list of loyal customers

2. Make a List of Your Most Loyal Customers

Your current customers are already familiar with your business and will likely be more willing to make referrals than those who don’t know you yet. Not sure how to identify your best customers? Here are a few tips:

Analyze customer records. Use customer data to determine who is regularly returning to your business. Look at past sales, loyalty program information, and customer behavior when evaluating customer loyalty.
Monitor the frequency of visits. Take note of how often repeat customers come back. If someone is coming back every few weeks or months, they’re likely a loyal customer who will continue to shop with you in the future.
Connect personally. Make an effort to get to know your repeat customers by having conversations with them when they visit your store or restaurant. Personal connections can be key indicators of loyalty—after all, why would someone come back if they didn’t like your service?
Ask for feedback. Utilize surveys, online reviews, and other methods of gathering feedback from customers so that you can better understand what makes them loyal (or not). You can use this information to tweak your services or products based on what people are saying about you.

3. Determine the Incentives You’ll Offer

Determining the types of incentives you should offer in a referral program is essential to its success. Here are some tips and ideas for small business owners to consider when setting up a referral program:

Make the incentives attainable. Offering incentive packages that are too difficult or expensive to achieve may discourage potential referral partners. Consider offering rewards that are achievable, like discounts on products or services, free merchandise, or a referral bonus.
Personalize the incentives. Think about what people who would be incentivized by your referral program might actually want and need. For example, maybe you sell home decor items but you know that many of your customers have children who play sports. Offering gift cards to sporting goods stores may be an ideal reward for them.
Ensure the value outweighs the cost. Calculate the per-referral cost of your rewards package and ensure that it remains within your budget while still providing enough value for each customer who participates in the program. Offerings such as discounts on future purchases, free shipping, or exclusive member benefits can generate interest while keeping costs low.

spreading the word about a program

4. Tell Your Customers About the Program

Once you’ve established what kind of rewards you’ll offer, it’s time to create some hype around the program. Here are some tips for spreading the word and making the most of your referral program:

Leverage social media. Make sure to publicize the referral program on all your social media channels, including Facebook, Twitter, Instagram, etc.
Create content around it. Invest time into creating blog posts, podcasts, and videos that explain how the referral program works and why people should take advantage of it. Include specific information about rewards for referrals along with stories from customers who have taken part in the program so far.
Reach out directly. Don’t forget to directly reach out to loyal customers using email or text messages, inviting them to recommend you to their friends and family members. You can also offer exclusive deals through these communications that only members of your referral program receive.
Make the most of online reviews. Ask satisfied customers who have participated in your referral program if they’d be willing to leave a review mentioning the referral program. This will help other potential customers learn more about your business, provide valuable visibility for your brand online, and increase awareness of your referral program.

5. Track the Program’s Performance

It’s important to closely monitor and measure the success of your referral program so that you can adjust it accordingly if needed. To get an accurate assessment, there are several key elements to pay attention to. Be sure to:

Track how many customers have been referred via the program. This will provide an indication of how effective it’s been at driving sales and acquiring new customers.
Monitor customer retention rates among those who were referred. This can help gauge whether or not the referrals are actually generating long-term loyalty and repeat purchases.
Pay close attention to feedback and reviews from customers who have been referred through the program. This helps to track changes in customer perception over time, as well as identify areas where improvements can be made.

discussing changes to a program

6. Be Ready to Rethink and Redesign

As with any marketing initiative, determine how frequently you will evaluate the performance of your referral program—monthly is usually recommended—then make adjustments as necessary based on results obtained from tracking/analytics tools mentioned above as well as customer feedback received through surveys or interviews, etc. Refining your program over time will ensure that it is as effective and successful as possible.

6 Best Referral Program Ideas & Examples

Referral program examples can be found in just about every industry. After all, this referral marketing technique is highly flexible and can work for companies of any size, from massive brands like Google and Uber to small businesses and even freelancers. Below, we’ll describe some ideas that you can customize and make your own.

1. Two-Way Referral Incentives

Two-way incentive systems are one of the most common types of referral programs, allowing the referrer and the referred customer to benefit from their participation. Here are a few real-world business examples of this type of program:

Dropbox: Free storage space to referrers and the referred friends who use their invite codes.
Airbnb: $30 in travel credit for referrers and $55 for friends who use their referral link.
24 Hour Fitness: Free personal training or store credit to referrers and a free seven-day pass for new leads.

There are many ways to customize two-way referral incentive programs to your liking. You can offer free products or services, or give a free trial or sample. You may also offer higher-value incentives to referrers than referees (and vice versa), or entice current customers to participate with better referral rewards for first-time recommendations. Some brands may even reward loyal customers for leads, not just for conversions.

2. One-Way Referral Incentive

While referral programs with incentives for both participants can increase interest from new leads, a referral campaign that exclusively benefits current customers can be effective in its own way. When you invest solely in your existing customer base instead of spreading your budget between two parties, you make it more enticing for current buyers to influence others to choose your brand.

Consider this situation: If you have a $50 budget for a referral reward, you can either offer $25 each to the referrer and referred friend (a two-way incentive) or you can offer $50 only to the referrer. Choosing the latter option can catch the attention of more current customers, so they’re more likely to promote your brand.

By investing in existing buyers, you create an experience that is more engaging and builds long-lasting loyalty.

3. Contest

If you don’t have the budget to promise a reward for every referral, or you want to attract more referrers with the possibility of one massive reward, using a contest-based program may be the best route. This type of referral program gives customers the chance to earn a big prize just by getting new customers or leads on board.

Here are some examples of what a referral contest may look like:

A mobile app company offering one entry into a monthly drawing for a free month of membership per referral.
A clothing store offering a $100 gift card, $50 gift card, and $25 gift card for the top three referrers over a three-month period.

Even Tesla has a contest element within its referral marketing program. When current customers refer someone who purchases a vehicle, the referring customer gets free car-charging benefits and the chance to win a brand-new Tesla model.

4. Refer-a-Friend Challenge

Another referral program idea is to make it a personal challenge. Instead of having a few select winners, you can allow customers to unlock new perks by reaching set milestones for the number of referrals they make.

For example, an auto repair shop may provide 10% off two oil changes per year once someone makes their first referral. When they reach three lifetime referrals, they may unlock birthday discounts and priority service, too.

This is a great way of turning referrals into an ongoing, engaging game in which there are no losers. It can also spread your investment throughout the year, so referrers are guaranteed to return to your brand to take advantage of benefits.

5. Ambassador Program

Making your customers feel important can be an incredibly effective way to gain referrals. By elevating your best customers to “ambassador” status, they’ll feel more compelled to promote your product or service.

An ambassador program is easy to set up. First, you can select the segment of your customer base that is most likely to share your brand with friends and family, as well as on public social media pages and other marketing channels. Then, invite the group to sign up for the ambassador program, which allows members to earn rewards when someone signs up or makes a purchase through their referral link.

When building this exclusive referral program, make sure you have a way to screen applicants—even just by browsing their social media pages—before accepting them. Since they’ll carry the title of ambassador, you want to make sure they can represent your brand without tarnishing your name.

6. Fundraiser

The final type of referral program doubles as a fundraiser. Many consumers love to know they’re contributing to a good cause, and this referral marketing strategy provides an easy way for them to do a good deed.

Fundraiser referral programs work a lot like one-way incentive programs, providing one reward for every new customer or lead. However, instead of that reward going to your current customer, you’ll donate it to a specific nonprofit on their behalf.

This type of referral program can stand out by showcasing your company values, so you may even get new business simply by being an ethical brand.

Drive New Business with a Referral Program

Whether you own an e-commerce store, a brick-and-mortar location, or both, developing a strong referral program can help you get new customers while improving your return on investment. Referral programs help you turn existing customers into your greatest advocates, so you can build engagement and your customer acquisition rate all at once.

When customers are already recommending your product or service, there’s no reason not to give them a bigger platform. Once you have your referral program in place, you can start maximizing the power of your customer base by focusing on online reviews, a powerful word-of-mouth strategy for the digital marketing age.