Referrals are good for your business
As a customer you probably have one or even more stories of how your pizza delivery went wrong or how you got a bigger shoe size from your last online order. Think back about these events for a moment. The way that these mishaps were handled by the company – well or in a terribly annoying way – determine the story you are telling to your friends and family now. And the word-of-mouth channel is one of the most effective ways to grow your customer base organically. A customer you gained from a referral will spend 16% more with you than a customer you acquired through a different channel.
Why Do Customer Referrals Work So Well?
Customer referral programs have a lot of benefits for companies and customers:
- Low cost of setup and administration. Most of these programs can be fully digital and require little more than a couple of web pages to convert new customers.
- Very well targeted. Digital setups provide plenty of signals that a customer is likely to recommend your further. From NPS® survey responses to usage or purchase behaviour loyal customers can be easily segmented in most industries.
- Because the referrer knows well both your products and the person they are referring you to, they can ensure a good match between the two. This is the mechanism behind the higher margins and longer retention of referred customers.
- Being recommended helps to overcome the trust barrier, and that’s one of the major benefits of referrals. The other one, perhaps less widely known, is that “…the relationship with the firm is enriched when a family member, friend, or acquaintance is a customer as well.” (Source: How Customer Referral Programs Turn Social Capital into Economic Capital)
- Importantly, referral programs are easily scalable, if we apply the right data analytics techniques. We will cover more on this in HOW TO GET 100X MORE TIMES REFERRALS WITH MACHINE LEARNING section.
6 Ways to Motivate Customers
One of the main challenges in scaling up your customer referral program is getting people to recommend you. Getting people to talk about you is a topic extensively researched by Jonah Berger. He offers the following six principles of contagiousness, or why things catch on: “products or ideas that contain Social Currency and are Triggered, Emotional, Public, Practically Valuable, and wrapped into Stories.”
In other words, for people to (spontaneously) talk about your product, you would have to:
- Give customers something that will make them look cool if they share your products.
For example, your early adopting techie customers may want to emphasise to their social circle that they have been first in trying out a new service. Or, your Gen Z younger audience would be happy to see that for every new customer they referrer part of the revenue goes out to social causes.
- Use triggers.
Remind people about the product. If you are a telecommunications operator for example, can you send an email once a month reminding people that it’s because of your uninterrupted service that the customer was able to chat with their loved ones?
- Spark emotion.
When we care, we share. The more we care about a piece of information or the more we’re feeling physiologically aroused, the more likely we pass something on.
- Make it public.
Can you include a few influencers to take part in the promotion of your referral program?
- Provide something of practical value.
This can be something physical like offering an mobile accessory or a free trial for a digital subscription service.
- It’s worth repeating this – stories!
You talk about movies right? And about your vacation? Why? Because these are all stories, and stories are easy to remember and share.
How to Increase Customer Referral Conversion Rates
The reality is, you can only nudge people who are willing to talk positively about you to actually start doing it, but you cannot create a referrer per se. What you can do is something every business should be doing: keep the promises you make to your customer, thus creating a valued customer experience. The truth of the matter is, very few unhappy customers will tell their friends and family to start working with you or to buy your product. Unless you make customers happy, they are not going to be your promoters.
So, good customer experience sows the seeds of a referral, yet it is often times not sufficient. What you can do is further nurture the seeds by making smart interventions along the way.
Here are a couple of ideas.
- Chose the right moment.
А telecommunications client of ours has come up with a brilliant simple and effective solution. After a customer gives a high score at a satisfaction survey, they get redirected a “refer-a-friend” landing page. The customer is in the right mindset and has just said that they would recommend you – not giving them the tool to do it immediately is a lost opportunity.
- Incentivize the receiver.
It may seem illogical at first, but studies show that programs offering benefits for the receiver have considerably higher conversion rates compared to programs which benefit the Researchers have established that they work in two ways. First, the referrer satisfies their need for social approval (Ariely, Bracha, and Meier 2009; Grant and Gino 2010) and belonging (Baumeister and Leary 1995). Second, providing an incentive to act to the receiver overcomes their initial barrier, be it a high price or simply the energy they need to spend to purchase the product they are referred to.
- Be specific.
Don’t just ask for a general brand referral. Ask them to recommend a specific product or service.
- Pre-fill messages to make it easy for people to recommend you.
This study gives two great example that can boost referral conversion rates depending on the outcome you are looking for:
- Increase popularity of a less-known product. In this case your templates need to contain Information that the friend bought it (e.g. “Just bought this, check it out”), to boost conversion rates by 11%.
- Increase uptake when you are giving away something free. In this case focus on communicating the mechanism and the free goodies you are giving out (e.g. “Buy this, then invite friends to get it for free”), to encourage 53% more referrals.
How to Set Up a Customer Referral Program That Works
If the efficiency and effectiveness of referral-based acquisition are so well studies and proven, then why are we not seeing more of those? Even more, why isn’t referral a central part of any marketing program? Two reasons come to mind:
- It’s hard to identify potential referrers
- Personalised incentives are the most efficient, but it’s hard to personalise at scale
While it’s fairly easy to identify which behaviour signals mean a customer is a potential referrer, choosing the right moment to ask for a recommendation is crucial for success. That’s why a lot of bring-a-friend programs depend on the customer filling out an NPS or other satisfaction survey as the first signal to activate a referral. The problem is these have very low response rates – 5-20% for most B2C businesses. That’s why in the past 3 years we have been working with one of the largest telecommunications groups in the world – Liberty Global – to solve this. We combine data about customer behaviour and attitudes to fill in the blanks and predict which customers are unhappy and which are not, even if they have never filled out a single survey. So now instead of relying on a limited-coverage survey to identify potential referrers they work with their full customer base. Think of it this way – if they do a survey with 10.000 customers but have 1.000.000 in their customer base, the predictive algorithm they use delivers a 100 times increase in the amount of people they can work with.
And if we predict customer behavior well, we can also suggest the appropriate actions and how to time them right to generate maximum impact.
Now, imagine an algorithm working on top of the ‘scale-up’ one – let’s call it ‘action-generator’. This latter algorithm can mine all previous actions you have done to activate promoters, can calculate the impact depending on hundreds of customer variables at the same time, and can suggest the actions that will have the highest impact on customers you haven’t reached out to yet.