Referral Marketing

Explore the Strategy of Referral Marketing

Referral marketing

The Word of Mouth Marketing Association reports that every day in the United States, there are approximately 2.4 billion brand-related conversations. People frequently talk about the products and services they enjoy, and the companies who offer them.

According to the New York Times, 65% of all new business comes from referrals. That means on average, two-thirds of consumers make purchases because someone they know recommended a particular product or service.

Recent findings from Nielsen support the remarkable potential of referral marketing, observing that people are four times more likely to buy when referred by a friend. Strategic use of referral marketing allows professionals to tap into the power of consumer recommendations to achieve exceptional results.

What is Referral Marketing?

Simply put, referral marketing is spreading the word about a product or service through a business' existing customers, rather than traditional advertising.

Word-of-mouth marketing, which occurs when others tell each other about a business, is also considered a form of referral marketing. Word-of-mouth is the principle behind things that “go viral,” like the Old Spice commercials featuring Isaiah Mustafa that were originally released on YouTube. This tongue-in-cheek campaign, with the tag line “The man your man could smell like,” became the fastest growing online viral campaign ever, with 23 million views in 36 hours—and generated a sales increase of 107% for Old Spice. (See also Word-of-Mouth Marketing)

Referral marketing produces the same effect, but is initiated and directed by a business. There's usually some form of incentive or reward offered for customers to refer other people. For example, DIRECTV customers who refer a friend that signs up for their service receive $100 in bill credit—and the newly referred customer also receives a $100 credit.

Referral Marketing Strategies

  • Asking for referrals. This simple and effective strategy involves mentioning a referral program to as many customers as possible. A computer repair company used this strategy effectively by stamping “We Crave Referrals” on every paper customers received—including newsletters, marketing material, and invoices.
  • Employee training. In conjunction with asking for referrals, many companies have a training process that equips employees with the knowledge to effectively market the referral program to each and every customer.
  • Joint venture referrals. Some companies partner with complementary businesses to cross-promote to each other's customer bases. This strategy involves each business offering discounts or other incentives to customers from the referring company, typically in exchange for a percentage of sales from referred business.

Who employs Referral Marketing?

Referral marketing is employed by a wide variety of businesses. These strategies can be effective for companies ranging from small single-owner and entrepreneur companies, to large corporations in nearly any industry. Many businesses that offer products or services can implement referral marketing campaigns.

Some types of businesses that typically employ referral marketing include:

Interesting Stats

  • 65% of new business comes from referrals
  • Customers are 4 times more likely to buy with referrals from friends
  • Referral programs are among the least expensive marketing strategies
  • Referred customers spend an average of 13.2% more than regular customers
  • Retail stores
  • Specialty stores
  • Restaurants
  • Automotive service companies
  • Airports, hotels, and travel agencies
  • Banks
  • Health clubs and gyms
  • Doctors, dentists, and health professionals

Online companies also use referral marketing. In fact, this form of marketing can be highly effective in an online environment because of the popularity of social media and sharing sites. Internet referral marketing can potentially spread faster and to a wider audience than most offline marketing strategies. (See also Viral Marketing)

Nonprofit organizations use referral marketing strategies to increase their publicity and convince more donors to support their cause. One of the most common referral marketing strategies used by non-profits is a joint venture, where an organization partners with a for-profit company who offers a percentage of profit for each referral.

For example, through H&R Block's nonprofit referral program, organizations receive a $25 donation for each new client who signs up for H&R Block services through the nonprofit.

A Successful Referral Marketing Campaign

Dropbox, an online file storage company that offers both free and paid services, implemented a referral program in 2009 asking users to tell their friends about the service. The program offered rewards for both sides of the referral coin—those who signed up for a referral link would get additional free space, and the person who referred them would also get more space.

By 2010, referrals accounted for around 35% of their daily signups, and Dropbox signups had permanently increased by 60% overall. The company estimated that within a 30-day period (April 2010), their users had sent more than 2.8 million direct referral invitations.

What kinds of customers are effectively marketed to with Referral Marketing?

Because referral marketing has so many potential benefits, this type of marketing strategy can be customized to reach a variety of target demographics.

Businesses must ask themselves: Who is motivated to refer business to us? Customers are more likely to refer friends and family when there is an incentive like a reward.

The more rewards a business offers for referrals, the more effort their customers will put into finding quality referrals. AT&T Wireless offers a referral program that provides opportunities for customers to earn up to $575 a year through referrals for different services, including high-speed Internet, home phones, wireless phones, and their U-verse packages.

How is a Referral Marketing plan developed and employed?

Research is an important first step for any marketing strategy. With referral marketing, initial research will often include discovering what customers want. If the incentives are worthless or undesirable to the company's existing customer base, the customers aren't interested enough to participate in the referral program.

This initial research could be done in a number of ways. Marketing personnel might study the buying habits of their customers to find out what products or services they enjoy the most, and offer either discounts, free products, add-on services, or bill credits, depending on the type of industry. (See also Promotional Marketing)

Another way companies research what consumers want is through customer surveys. Most of these surveys simply ask the customers what rewards or incentives would be most likely to get them to participate in a referral program. Marketers brainstorm a list of possible rewards to include with surveys, and also ask customers to offer their own alternatives.

Marketers must also plan the procedures for crediting referrals, the number of referrals needed to claim the reward, and any other tools for proving that the referrals actually happened. For example, phone service company Vonage offers two months of free service for each successful referral, and one month free for the new signup. To track which customers should receive referral credits, the company provides a separate signup link for the Refer-A-Friend program, and new customers enter the phone number of the person who referred them during the signup process.

The next step in a referral marketing strategy is to publically market the program. Some businesses place signs in physical stores, typically near the cash registers that invite customers to join the program. A common strategy is to create brochures that customers can take with them, containing information about the referral program, offering consumers a physical reminder of the program.

Internet marketing is also a popular way to spread the word about referral marketing programs, both for physical and online businesses. This can be done through e-mail marketing campaigns, banner advertising, or even e-mail signatures with links to a referral program sign-up page.

When the referral marketing program is in motion, the company's marketing department engages in continued marketing exposure for the program, as well as follow-up activities to track the success. Usually this process involves figuring out which strategies are generating the most referrals, and concentrating efforts on the best strategies.

What types of careers work with Referral Marketing strategies?

Advertising Manager

What they do

An advertising manager is responsible for overseeing all the advertising activities of a business. In general, this position directs an in-house advertising or marketing staff, though for some types of companies the advertising manager may work with an outside ad agency that is contracted through the business.

Salaries of Referral Marketers

  • Advertising Manager
    Median income: $103,350
    Top earner: $186,630
  • Marketing Director
    Median income: $126,190
    Top earner: $166,400
  • Marketing Consultant
    Median income: $75,000
    Top earner: $109,900

Sources: US Bureau of Labor & Statistics; Indeed.com

The responsibilities of an advertising manager include conceptualizing advertising strategies, implementing advertising campaigns, and supervising departments related to advertising.

Education and experience

Most advertising managers hold a 4-year bachelor's degree in advertising, though a related field such as marketing or journalism can serve as well.

The position of advertising manager is usually a senior one, so people who hold this job typically have several years of experience in lower-level advertising positions before being promoted to this level.

Marketing Director

What they do

A marketing director has strong leadership skills and an understanding of consumer behavior. They also typically have contacts in their industry that further the reach of their marketing efforts.

The role of marketing director is an important one. They may work in-house for the marketing departments of large organizations, for advertising or marketing firms, or for nonprofits or schools. These professionals are responsible for promoting products or services, and duties include conceptualizing and analyzing marketing strategies, overseeing market research efforts, and tracking demand for products or services.

Education and experience

Typically, marketing directors possess at least a bachelor's degree in marketing, or in related fields such as business, accounting, statistics, or economics. Some marketing directors hold advanced degrees, such as a Master of Science in Marketing or a Master of Business Administration in Marketing.

However, a degree is not enough to land a job as a marketing director. These positions are generally held by people who start out in an entry-level marketing position, and acquire several years of experience—including industry contacts.

Marketing Consultant

Most marketing consultants are independent contractors who are hired by businesses to advise on existing marketing strategies, or formulate and implement new strategies.

Marketing consultants collaborate with advertising or public relations departments at various client companies to come up with marketing strategies. Other duties may include researching consumer behavior and buying habits to increase the effectiveness of marketing tactics.

Education and experience

While it is possible to become a marketing consultant without formal education, most businesses prefer to hire consultants with at least a bachelor's degree in marketing, advertising, business, or communications-related fields.

Because marketing consultants are independently contracted, credentials count—and so does experience. Many consultants have internship or entry-level experience as sales representatives or market researchers in order to reassure employers that they understand the practical applications of marketing.

How can a marketing school help you succeed in a company that uses Referral Marketing?

A marketing degree program provides the foundation and background knowledge about consumer behavior, market strategies, and effective communication in advertising that professionals need to use referral marketing to their advantage. The skills acquired in marketing programs allow candidates to view the big picture, and make sure all the elements of a referral program come together for success.

Courses in consumer psychology help professionals understand how their target market thinks, and what makes them most likely to buy. This helps marketers choose the best rewards and incentives for referral programs. When it comes to getting the word out about referral marketing, the skills learned in media strategy and market research courses can strengthen the ability to reach customers effectively.

To learn more about how earning a degree in marketing or advertising can help to develop and implement successful referral marketing programs, request further information from schools that offer these marketing courses.

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