How to Create a Referral Marketing Strategy [+Definition] (2022)

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People trust the opinions of other folks in their lives and the recommendations of online influencers they respect way more than a paid ad that pops up while scrolling on the web. According to a report by Nielsen, “88% of global respondents trust recommendations from people they know more than any other channel.”

As a result, referral marketing, also known as word-of-mouth marketing, is a powerful marketing channel—especially for growing ecommerce brands.

Ahead, learn about the benefits of referral marketing and how you can build a referral marketing strategy for your small business. 

What is referral marketing? 

Referral marketing is a promotional strategy that encourages current customers to refer new customers, usually with an incentive.

What are the benefits of referral marketing? 

A referral marketing program raises brand awareness and can be a central pillar of your marketing efforts. Because it relies on word of mouth rather than paid tactics, it helps to lower your acquisition costs, attract people with a high intent to purchase, and start off your relationship with new customers at a higher level of trust.

Lower acquisition costs and raise lifetime value

Customer acquisition is the process of attracting new customers to your business. Customer acquisition cost is how much you’re spending to bring those people on. In the past five years, the amount that businesses have to spend to acquire customers has risen by about 60%.

Many businesses rely heavily on paid ads to bring in new interest, but it’s a channel that’s quickly becoming less effective and too expensive because of privacy changes and declining return on ad spend. 

A successful referral program can help lower acquisition costs and increase the value someone brings during their entire lifetime as a customer. Fifty-four percent of B2B marketers noted that acquiring customers through a referral was more cost-effective than other channels. They’re also likely to have a 16% higher lifetime value. 

Attract high-intent people

The referral process brings around potential customers who have a high intent to make a purchase. According to research, these customers are four times more likely to convert.

Think about it this way: A person tries out a new brand they’re interested in. Maybe they’ve heard about it on social media, seen it in an email newsletter, or read about it in a blog post. They decide to take a chance on it, and make their first order. They become a happy customer and have a great experience.

They see that the business offers a refer-a-friend program, where they can earn a reward for every new customer they refer. They think about their friend who has been looking for a product like this for a while, and send their referral link over. Their friend, who trusts them, makes a purchase.

This is a common trope for most referral marketing: the person who makes the first purchase likely has a friend who would enjoy or benefit from the same product. So instead of relying on a paid ad to do the work, the business can depend on its own customer base.

Build a higher level of trust between business and customer

When you serve someone a paid ad, write a blog post, or send a direct-mail campaign, your trust barometer with a potential customer is essentially at zero. But when you’re able to reach your target audience through a person they trust, that trust trickles over to your business.

How to create a referral marketing strategy

Here’s how referral marketing works. Existing customers fall in love with your products and find a refer-a-friend program on your website or through your marketing. The referral system you use generates a unique referral link for them. They send that link to a friend who’d love your products. The friend makes a purchase, and you or both of you earn referral rewards. That can be anything, like a coupon for $10 off their next order or a free sample or a cozy pair of branded socks. 

Usually that results in satisfied customers on both ends. These programs actually build customer loyalty for your existing customers because it gives them an incentive to shout across the rooftops about your brand (even if they were already going to do it anyway). It can lead to repeat purchases too. Let’s unpack how to create a program that your customers and prospects will love.

1. Decide what referral incentives you’ll offer 

Start by setting a customer acquisition budget and construct your referral incentive accordingly.

Then decide if you’ll be rewarding both the new and current customer for the referral. For example, underwear business MeUndies offers a give 20%, get $20 incentive to people who refer a friend. The friend gets 20% off their first order and the existing customer gets $20 once their friend makes a purchase.

Rather than a percentage discount, this could also be a free gift with purchase. Those on a tighter budget may choose to offer the reward only to the person making the referral, which can help lower costs.

2. Choose your referral marketing software 

In order to keep track of potential customers who come in as referrals (and to reward your loyal customers who refer them), you’ll need a tool to track referrals and issue rewards.

If you run your business on Shopify, these referral marketing tools are all available within the Shopify app store.

Bloop is a more affordable full-service referral program. The free version gets you a standard referral program with a referral page and pop-up. Or, sign up for the $20 monthly plan for extra features like a custom domain, watermark removal, custom branding, and 24/7 support. Currently it has five stars on the Shopify app store.

Cost: Free version includes standard referral tools; pay $20 a month for watermark removal, more advanced branding, and use on a custom domain.

What sets ReferralYard apart is that it’s a completely customizable platform. Change the font to match your brand font and add in your brand colors. It includes everything you need to run a successful referral program with a flat monthly rate that doesn’t charge based on the amount of orders or customers. 

Cost: There’s a 30-day free trial, and after that its Growth plan is $49 a month, which gets you a referral program for unlimited customers and orders, plus insights and reporting.

3. Provide a best-in-class product experience 

Great branding, an amazing unboxing experience, solid customer support, and of course, a wonderful product are what come together to create a great customer experience. And that’s what’s going to leave a lasting effect and inspire people to rave about your business to their friends.

A solid, repeatable customer experience is also what drives retention: if people know they’ll have a good experience shopping with you, they’ll be more likely to do it again and again.

Fewer Finer, a shop that sells curated vintage and new fine jewelry, offers multiple touch points along every step of the customer experience. From monitoring a text line for answering questions to offering customizations for any piece to the dark green boxes with handwritten notes that pieces arrive in, the business takes care of people no matter where they are in the customer journey. 

4. Communicate your values 

Customer loyalty stems from feeling a connection with a business, whether that’s your mission or values, the quality of your product, the style of customer experience you provide, or all of the above.

By communicating your brand values upfront and often, you can build a connection with the customers those values resonate with, building affinity and their likelihood of referring your business elsewhere. For example, skin care brand Saie communicates its values and standards on its website. It lists its environment-friendly certifications, the great ingredients it includes in its products and why, and the ingredients it won’t ever use.

Use this handy exercise as a guide to help you craft a compelling brand story and build a loyal audience through the power of storytelling.

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5. Advertise the program 

Once you establish what you’d like your referral program to be, let your customers know about it. Share information through your key marketing channels, like content marketing, email marketing, or social media.

You’ll also want to communicate information about the program via an easily accessible landing page on your website.

For example, customers can access Saie’s referral landing page in the footer of its website.

Referral marketing campaigns can also help you spread the word. Run a

How referral marketing fits into your overall marketing plan

Implementing a referral marketing program can be a great way to encourage growth by rewarding your target audience to talk about you. It can be a key way to acquire customers for a lower cost, and spreads the word about your business organically.

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Referral marketing FAQ

What is a referral in digital marketing?

A referral in digital marketing, also known as word-of-mouth marketing, is when people purchase products based on someone else’s opinion or influence.

What are the benefits of referral marketing?

Referral marketing can lower a business’s acquisition costs, get products in front of people more likely to make a purchase, increase trust between a brand and a new customer, and increase lifetime loyalty and value overall.

What is a referral marketing channel?

A referral marketing channel uses incentives to reward word-of-mouth referrals as a way to acquire new, high-intent customers at a lower cost.

What are 4 types of referrals?

There are several types of places where referred customers might come from. Those places include: 

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