By Neil Patel
As a business owner, you have to keep coming come up with creative ways to attract new customers. But as you know, this type of marketing can be expensive.
It’s much more cost-effective to market to your existing customers than to find new ones. Acquiring a new customer is six to seven times more expensive than retaining a current customer.
Sure, you may be very profitable right now without putting too much emphasis on acquisition. However, that business model isn’t sustainable forever.
You can’t grow at an exponential rate without expanding your customer base. Sooner or later, you’ll need to run marketing campaigns to attract new customers.
That’s why you need to implement customer acquisition strategies that won’t break the bank.
A customer referral program is one of my favorite ways to do this. Your campaigns will leverage your existing customers to bring in new business.
Take a look at the most significant driving factors of retail revenue:
As you can see, retention and acquisition ranked first and second on the list. Combining both of these into one marketing campaign will be very beneficial for your business.
If you can properly implement a customer referral program, you’ll get new customers without having to do much work. All you have to do is set up the program. The rest will take care of itself.
Don’t get me wrong. It’s not as easy as it sounds.
The key here is coming up with the right referral program that gets your current customers excited enough to participate.
Whether you’re creating your first customer referral program or trying to improve your existing one, this guide will help you. I’ll tell you everything you need to know about referral programs that drive sales.
Prioritize the customer experience
Before you start worrying about the logistics of your referral program, you need to make sure your existing customers are properly taken care of.
After all, this strategy won’t work if your customers are unhappy. Research shows that 89% of businesses named customer experience as a key factor for customer retention and loyalty.
In fact, customers care more about the customer service than the quality of whatever they are purchasing.
Research indicates 86% of consumers are willing to pay more money for an enhanced customer experience.
This type of service starts at the top of the organization and works its way down. As the owner, you need to set the tone and make sure all your employees know how important customer service is to your success.
Unhappy customers are bad for business. Only 1 out of 26 dissatisfied customers will complain. What about the other 25? They’ll leave without saying a word.
According to research, 68% of customers say they left a company because they believe the brand didn’t care about them. Don’t let this happen to you. Let your customers know how much you care.
Happy customers are much more valuable. In fact, more than 80% of customers say they are willing to make referrals.
Unfortunately, only a smaller percentage actually do.
That’s why your referral program will need to provide some extra incentives, but we’ll talk about that in greater detail shortly.
Offer referral incentives
If customers are happy, you’ll get some organic referrals even without implementing a program.
But for the most part, you can’t rely on such referrals alone when it comes to driving sales and getting new customers. It’s not scalable.
Give your customers a reason to refer their friends and family. Discounts and other monetary benefits will be the most actionable.
Put yourself in your customers’ shoes for a minute. Think about some of your favorite brands. Are you going to spend a ton of time trying to bring them new customers? If it comes up in a conversation, you might make a recommendation. But I assume you’re probably not actively going out of your way to do this.
However, I’m willing to bet that if the company offered you a credit, discount, or reward for these efforts, it would probably change your approach.
On the flip side, let’s say someone refers you to a new company. Sure, you may be likely to try them out. But an incentive would definitely boost your motivation to do that.
The best customer referral programs offer incentives to both current as well as new customers.
Here’s an example of this strategy implemented by MeUndies:
It’s a simple concept.
When one of their customers refers a friend, the new customer will get 20% off their purchase. Once that purchase is made, the original customer gets a $20 gift card.
That adds up fast. The customers know they’ll get a $100 credit if they can convince just five people to make a purchase. This gives them a reason to spread the word.
Make sure your incentives are worth it to both parties. The amount needs to be relative to your prices.
With the MeUndies example, most of their products fall within that $20 range, so it’s a great amount. But if the reward was only $5, it may not be worth their customers’ time.
However, that doesn’t mean $5 won’t work for another business. Check out this referral incentive offered by Bird:
If you haven’t heard of Bird, they are a new brand with an innovative spin on ride sharing. They have electric scooters placed all over different cities.
Customers use their mobile app to unlock the scooters. At a rate of just $1 to unlock a scooter and an additional $0.15 per minute, the $5 reward translates to nearly 30 minutes of free riding time.
While $5 may not be a big incentive for other referral programs, it is for this one.
That’s what you need to come up with. Take a look at your products or services, and decide what would be a good offer.
You don’t want to offer something too high that’s going to lose you money, but it also can’t be so low that it doesn’t motivate customers.
Find that sweet spot in between, and set your incentives at that amount.
Focus on a fast ROI
Just like with any other marketing campaign, you want to make sure your referral program makes sense from a financial standpoint.
If you’re spending money without getting a return on your investment, you obviously won’t be profitable. But the great thing about referral programs is that unlike traditional acquisition campaigns, they cost much less.
This connects to my previous point about finding an incentive that will encourage sales without depriving you of your profits.
When you’re unsure how to do things, it’s always a good idea to follow the lead of those who succeeded before you. Take a look at Uber.
That’s one of their initial referral promotions. It was a standard “give $20, get $20 concept.”
Let’s do some simple math here. If the current customer and new customer each get $20, the cost per acquisition is $40 based on this campaign.
I know what you’re thinking: $40 per acquisition sounds high. You might not think your business can afford something like this.
But if you do your research ahead of time, you’ll be able to get a quick ROI if you know your margins.
In a short period of time, Uber turned into an international giant. Customer referrals were the driving force behind their expansion strategy. I came across a recent study that analyzed how they were able to accomplish this:
Keep these numbers in mind. If Uber kept 25% of what the average customer spent in a month, that would mean they would break even in less than two months if their acquisition costs were $40.
Once that $40 is repaid, everything else is profits.
The $20 for $20 offer is no longer available in every city or region.
Once they were able to control a large portion of the market share and prove their concept, they lowered the incentive. However, the new customers were already hooked.
You can apply the same approach to your referral program. Start off with high incentives to spread the word fast, but make sure you get a return on your investment.
After that, you can always make adjustments that translate to higher profits for your business.
Set yourself up for growth
Think about how you were able to get your existing customers to refer their friends.
You leveraged their customer loyalty and offered an incentive. Now, you have to apply that concept to these new customers.
Don’t waste any time. This is your chance to secure them for the long haul as well. Sure, they made a purchase because of a recommendation.
We know 92% of consumers trust a recommendation if it comes from someone they know. Your new customers already have a positive impression of your brand.
Now you have to convince them to stay. Once they make that first purchase because of the incentive you offered, what’s next?
Use your email marketing strategy to create an actionable drip campaign, and encourage these customers to buy again in the future.
Make sure they understand they can benefit from the referral program. This should be much easier for you because referred customers are more willing and likely to refer more new customers.
Furthermore, the profit margins from referred customers are roughly 25% higher than from non-referred customers.
Your customer referral program can set you up for exponential growth. Think about how successful you would be if each new customer referred just one new customer.
And then imagine all of those new customers also referred a friend. Can you see how quickly this could turn into a sales-driving formula for your company?
Keep an eye on quality control
This whole concept started with prioritizing the customer experience. Don’t ruin that.
For example, let’s say a customer refers a friend, but due to some glitch in your system, they don’t receive their incentive. That’s a big problem for you.
Now they went from a happy customer, who wants to refer their friends, to a dissatisfied customer, who thinks you’re trying to take advantage of them. Instead of getting an additional customer, you may have lost one.
It’s important you thoroughly check all the technology associated with your referrals. How will you send the incentives?
Text. Email. Social media. Promo code. Make sure each distribution method works.
Here’s something else to consider. You have to keep an eye out for customers who may be trying to rip you off. Just like with anything else, there will always be people looking to take advantage of the system.
You spent the time and crunched the numbers to come up with the perfect incentives for your customer referral program. In order for you to profit, those margins can’t be tampered with.
Customers might create multiple accounts and refer themselves to get the incentive on both accounts.
If this happens, you’ll end up losing money without getting a new customer. Make sure you have some safety nets in place to catch and/or prevent this type of occurrence.
Your business needs new customers.
With high average acquisition costs, you need to focus on cost-effective marketing campaigns. Leveraging your current customers is the best way to do this.
First, you need to focus on providing excellent customer service. Next, you’ll have to come up with an incentive that encourages the current customer and prospective customer to make a purchase.
Set yourself up for exponential growth and a quick return on your investment.
Keep an eye on the quality. You need to make sure your program works from a technical perspective and that nobody takes advantage of any loopholes.
If you implement this strategy, you’ll see an increase in sales from both current as well as new customers.
What kind of referral incentives are you offering to drive sales?