Referral Marketing: Definition, Benefits and Strategies

Updated June 3, 2022

Customer referrals are an excellent way for a business to grow its customer base and acquire new high-value clients. Referral marketing builds on positive word-of-mouth to gain greater market awareness. In this article, we discuss what referral marketing is and explore the benefits of referral marketing. We also provide ten effective marketing strategies to help you increase your referrals.

What is referral marketing?

Referral marketing is a marketing strategy that uses word of mouth and personal recommendations to grow a business's customer base. Unlike pure word of mouth, which happens organically, referral marketing programs are initiated and directed by marketers. The marketer's role is to influence the process and encourage existing customers to spread the word about a product or service by offering them incentives.

Referral marketing is one of the least expensive marketing strategies that a business can use to grow its customer base.

What are the benefits of referral marketing?

Although referral marketing requires promotional efforts and rewards to incentivize customers, it offers many benefits, including:

You’ll target a more precise audience

Your existing customers know both your product or service and the potential customer, enabling them to refer your product to people who they know will find it beneficial. As a result, you acquire high-quality targeted customers, who need the benefits your product provides, without an expensive advertising campaign.

You’ll gain high-value, trusting customers

Building trust in your brand is one of the biggest goals in marketing. Personal recommendations go a long way in building trust and are perceived to be more reliable than advertising. New customers who are referred by a close friend or family tend to be more trusting and loyal, making them high-value customers.

You’ll be able to measure customer satisfaction

You can use a referral program as a tool to measure customer satisfaction. Successful high-performing referral programs with large numbers of referrers often indicate high customer satisfaction levels. If you are struggling to get referrals, then there is a good chance you need to get feedback and improve your customer experience.

You’ll extend your market reach

Referral marketing programs have the potential to increase your reach in a short timeframe. Given the right incentive, customers will reach out to friends and family, in person or through their social media, dramatically increasing your reach. If an influencer or celebrity naturally recommends your product or service, it gives you exceptional coverage.

You’ll increase brand awareness

Referral marketing is an excellent way for customers to get to know your brand's story. Consumers are often selective about the brands they use. Brands perceived as being honest and authentic tend to be preferred. When your customers promote your brand and tell your story, it feels authentic, builds your reputation and resonates strongly with consumers.

You’ll be able to identify loyal customers

Customers like to feel appreciated and may move their business because of perceived indifference. Referral marketing programs allow you to identify, track and reward your most loyal customers by providing a more personalized interaction experience and making them feel appreciated.

You’ll increase conversion rate

Referral marketing increases conversion rates in several ways. Potential customers referred by someone close to them may be more likely to purchase something when they get to your store or sales page as they already trust your brand. Engagement on social media resulting from referral programs provides social proof that builds your reputation and encourages people to purchase.

You’ll increase customer engagement

Referral marketing programs tie in with other marketing efforts such as emails, social media and customer service. They give you a reason to communicate with your customers and increase engagement. Increased engagement helps to build relationships and strengthens your online presence. Referral programs enable you to engage and recognize customers on social media, encouraging further referrals.

Related: What Is Customer Engagement?

You’ll improve customer retention rate

Referral programs help build and nurture long-term relations with customers by providing insights into their motivations and expectations. As a result, customers who are actively involved in referral programs are more likely to stay with your company. It generally costs more to find and engage with new customers than to retain existing ones, making customer retention one of the top benefits of referral marketing.

10 effective referral marketing strategies

Referral marketing is most effective when managed efficiently and optimized to attract the right customers. Here are ten strategies you can use to increase your referrals.

1. Go the extra mile

Every time someone interacts with your business, they should have an exceptional experience. Going above and beyond and doing more than just fulfilling the customers' needs sets you apart, gets people talking and leads to referrals. This strategy requires a consistent effort from all of your customer service staff members.

2. Channel emotions

This strategy involves appealing to the emotions of your customers so that their interactions with your company leave them feeling happy and positive. You can channel these feelings to encourage someone to share their positive experience with others. For this strategy to work, you need to understand what your customers want and how you can best promote feelings of satisfaction so that they’ll be likely to make referrals.

3. Personalize your customer interactions

The more you personalize your customer interactions, the happier your customers will be, as it shows you care about them. Remembering personal information, reminding them of important dates or sending well-timed promotions all help build relationships. This strategy engages your customer base, making them more likely to refer your product or service to others.

4. Ask for introductions, not referrals

Many customers may not be sure what you are after if you ask them for a referral. However, often, what you need is an introduction. Asking for an introduction instead of a referral will facilitate understanding and accelerate the referral process.

5. Host an exclusive event

Hosting an event is an effective strategy, but for it to work well, your event needs to feel exclusive. High-end events provide an opportunity to ask your entire network for introductions to people who will get value out of the event. Customers feel special when they have the opportunity to get invitations for colleagues and friends to an exclusive event. By inviting both customers and high-level prospects, your top customers will begin selling for you.

6. Target with customization

Customizing your referral marketing incentive to be unique to your customer makes the campaign more targeted and can lead to higher engagement. A one-of-a-kind incentive makes customers feel special and appreciated. It could be a customized gift or a unique experience tailored specifically for the customer.

7. Offer tiered rewards

Referral programs that include various levels of rewards and incentives are more complicated. However, they drive repeat referrals and create opportunities for customers to become ongoing loyal members of your referral program. Tiered or accumulating incentives are usually based on the number of referrals and offer meaningful rewards for every referral. These referral programs start with smaller rewards that increase as a customer reaches set milestones.

8. Use "gift a friend" positioning

Offering a gift to a new customer, rather than the person who referred them, is also one strategy. Sometimes the reward of offering good advice is powerful enough for the person doing the referral, and the gift becomes an incentive for the new customer’s loyalty. Rewards can also improve the referral's reputation with the new customer.

9. Two-way discounts

Offering two-way discounts is a popular referral incentive strategy that rewards both parties. The referred person will receive a discount on their first purchase, and the customer who referred them will receive the same on their next purchase. Both parties feel they are helping a friend, and the conversion rate is faster as shoppers receive a discount and know a friend depends on their purchase to get the same discount.

10. Use a points system

Using a points system to incentivize referrers provides flexibility and allows you to offer a selection of rewards. Every time a customer refers someone, they receive points that they can redeem for rewards. This strategy encourages customers to send multiple referrals, and it allows them to choose a reward that has value for them.