5 Tips for Starting a Customer Referral Program & Why You Need One

Elaine Margrethe Alcantara

Word-of-mouth marketing has always been a phenomenon in the business world. As consumer behavior and the business landscape evolves, marketers have gone above and beyond to innovate and get their target audience to advocate for their products or services.

Customer referral programs are a product of evolution. It’s a strategy that focuses on getting satisfied customers to refer or recommend a certain brand in exchange for incentives or rewards. For instance, companies can offer discounts if they refer their friends or family on social media, their website, or through email marketing campaigns.

As easy as it seems at first glance, executing a successful referral program is hard, especially for those without prior experience. Continue reading this ultimate guide and we’ll break down why customer referral programs are essential, what types of programs are out there, and give you tips on how to start one.

Discover the best digital marketing agencies ready to help you plan and execute your customer referral program here on Visual Objects.

The Power of Referrals

Referral marketing is one of the most cost-effective and fastest ways to help businesses grow. It aims to get more customers talking and advocating about services, products, and brands by incentivizing them through free upgrades, cash rewards, store credits, and even free products. Effective customer referral campaigns generate 71% higher conversion rates.

The buzz generated by those existing customers helps attract new prospective customers to brands. Those referrals are more likely to convert into quality leads especially when they’ve been referred by the people they truly trust.

Referral marketing statistics

Source: Viral Loops

To be clear, a referral program isn’t the same as an influencer or advocate marketing campaign. Businesses can include referral programs as part of their advocacy marketing initiatives and supplement other marketing channels.

Among the biggest misconceptions about customer referral programs is that it’s only for bigger companies with a ton of resources. The truth is, even small businesses and startups can introduce their own programs. In fact, it can actually make significant contributions to their growth by generating more sales and effectively expanding their customers base.

Customer Referral Program Structures 

In referral marketing, there’s no one size fits all solution. Businesses must have a keen understanding of their operations, limitations, budget, and needs when deciding which program model and type to plan. Here’s a brief guide on the most common structures adapted by many brands.

Main Program Types

Program types generally refer to who gets rewarded and any type can be applied to any of the models that will be mentioned next. There are two main types of referral programs — one-sided and two-sided rewards.

As its name suggests, one-sided rewards are a type of program that only benefits either the existing customer or the person they’ve referred. Choosing this model has its pros and cons. Only incentivizing your existing customers may motivate them to continue advocating for your brand but that doesn’t entice potential customers.

On the other hand, if you choose to only incentivize new customers, existing customers will not have the same enthusiasm. It might be more cost-friendly since businesses only need to spend on one demographic but it has its glaring weaknesses. This type of program is only recommended for businesses that already have very loyal customer bases.

Moreover, two-sided rewards aim to incentivize both current customers and referred customers. This type of program may seem more costly than one-sided rewards but if done correctly, it not only gives all customers a “win-win” feeling but also produces strong results for businesses.

Common Program Models

Program models refer to how customers receive rewards or incentives. There are four common models seen in the business landscape nowadays — standard, tiered, multi-step, and gamified reward program models.

The standard model is arguably the simplest among the four. Businesses provide a set reward for every successful referral. This model is easy to understand and track, making it ideal for small businesses or beginner entrepreneurs. The only downside is that it’s not as effective as the other models, especially in the long-term run.

Tiered program models offer varying degrees of incentives that can entice current customers to endorse brands. Existing customers can reap better rewards the more new customers they’ve successfully referred. Businesses applying this model will need planning and access to specific tools or software that will allow them to efficiently track how many new customers come in.

Meanwhile, multi-step reward models, as its name suggests, require customers to accomplish more several steps before receiving the incentive. While tiered programs count the number of referrals for the level of rewards given, the multi-step model gives higher incentives depending on where the new customer is on the referral process or sales funnel stage.  

Lastly, gamified models create a sense of urgency or stake by incorporating fun, engaging mechanics. Usually, gamified referral programs run through set or seasonal time frames and it involves giving customers high-value incentives such as limited items. This model is more complicated to track and it losses effectiveness if customers do not see the value of the incentive you’re giving as a reward.

5 Tips for Starting a Customer Referral Program

Now that you know why customer referral programs are important along with the basic models and types, the next thing to do is to understand what you need to launch a productive program. Here are our five tips for starting a customer referral program:

Define KPIs and Goals

Understanding your primary goals and target key performance indicators (KPIs) will always be one of the most crucial parts of planning any strategy. When structuring your customer referral program, take a moment to ask yourself the following questions:

  • What will we achieve with this program?
  • Does it align with your other digital marketing campaigns?
  • How can we combine it with our other initiatives?
  • What metrics do we need to measure?

Starting a customer referral program isn’t complicated but it needs clear direction. Answering crucial questions and studying your business can help you plan what type and model to follow. 

Provide Unique Incentives and Rewards

Your customer referral program relies on what incentives you provide. Discounts, coupons, giveaways, and gift cards work but offering unique referral rewards fosters a heightened sense of accomplishment, exclusivity, and intrigue for customers.

You can consider offering limited edition or seasonal incentives because those generally drive buzz. Keep in mind your customer acquisition budget when deciding what incentives to give. There’s no point in running a customer referral program if it’s costing your business by taking a sizable chunk of your profit margin.

Dedicate a Landing Page 

First impressions are always important to reinforce a purchase decision. Existing customers will feel more confident referring a brand online if their e-commerce website has a dedicated, user-friendly landing page.

Nowadays, businesses maximize the conveniences brought by the internet. Customer referral programs have become more accessible and popular because existing customers can simply share a referral link that will redirect a new customer to a website.

Having a bespoke referral landing page to welcome new customers not only reinforces your brand’s credibility, it also increases the likelihood of converting them.

Market Your Referral Program

Promote your customer referral program to your customers. Post it on your social media accounts, highlight it on your website, send it through your email marketing efforts, and market it in your stores. If you have an app, you can alert your customers if you’re launching a customer referral program via notifications.

Do everything in your power to make them aware of it. At the end of the day, no matter what referral incentives you provide, if your current customers don’t know you have a referral program, it’s pointless. 

Thank Your Customer

Once you start seeing solid results come in, don’t forget to thank your customers. Making them feel seen, valued, and appreciated won’t cost you anything and it’s essentially part of providing them a great customer experience. Happy customers are important to fostering strong customer loyalty and customer retention rates.

You don’t need to create a long press release or post an elaborate video, you can simply share it on social media or via email. Expressing gratitude to your existing and new customers helps deepen their relationship with your brand.

Referrals Generate 5x Higher Conversion Rates

Customer referral programs produce great results when done right. Not only will it help drive brand awareness, but it also helps lessen customer acquisition costs. However, it won’t be a set-it-and-get-it channel because it requires constant monitoring but the ROI is worth it as referral marketing programs generally drive 3x to 5x higher conversion rates compared to other channels.

If at first, you feel like your program isn’t working, it’s not difficult to adjust, pivot, and improve its structure. Results don’t come instantly and it may take some time to figure out what type and model works best for your brand so don’t be discouraged immediately.

To get the best results, team up with a reliable partner. Find and connect with the leading digital marketing agencies on Visual Objects.

Additional readings:


Elaine Margrethe Alcantara

Elaine Margrethe is a part of Clutch’s global team of writers. She is responsible for writing blogs, supporting blog processes, and content creation efforts.
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