There are several compelling reasons for your small business to include a customer referral program in your marketing strategy

According to a study published in Harvard Business Review, customers who are referred can be more profitable. Researchers Schmitt, Skiera, and Van de Bulte studied customers of a large German bank and “found that customers obtained through referrals are both more loyal and more valuable than other customers.” Researcher Dr V. Kumar also found that referred customers are likely “to have higher retention than other customers” and are found to have a higher “contribution margin” than traditionally referred customers.

Start by examining your existing customer base and sources

Do you ask customers how they found you? If not, you might want to start. Understanding your customer acquisition paths (where your customers come from) can guide your marketing efforts. If you are looking to start referral marketing, it can be helpful to hear where your referrals are coming from – who are your brand advocates? are they coming from a specific subset of customers? Do you know who they are? And what type of customers seem to be coming through the referral channel? This information can help you determine what process and incentives might be best for your referral program.

Pro tip: Systematically collect data on where your new customers come from. You can add a question before checkout or collect data at the register. The more systematic and organized your data, the easier it will be to study and draw insights from.

Determine the best kind of referral marketing program for your small business and then amplify it

There are several ways to implement a referral marketing program. In fact, you probably have one without even knowing it – your most loyal customers are already repping you through word-of-mouth referrals! This is the most basic kind of referral program and there are ways you can amplify it off the bat – if you know who your serial referrers are, encourage or incentivize them. Check in with them often, ask them how your business can improve, and what would incentivize them to refer more customers.

You can enhance your referral program by adding more process and tracking to it.

You can track referred customers and referrers with something as simple as a spreadsheet or a more robust customer relationship management (CRM) system that may have an out-of-the-box referral feature. You can also magnify your referral program by creating a marketing campaign around it: add it to your checkout process, create a unique referral landing page, print it on your receipts and invoices, post it to your social media. Some companies mention their referral program in all of their email marketing or create unique email campaigns for their program. Make sure your current customers – and more importantly your happy customers – know about it! Remember that referral marketing is a form of advertising, so be sure to put thought, time, and even money behind it.

Another way to amplify your program and engender customer loyalty is to introduce referral incentives.

There are lots of incentive models for referral programs and the best way to figure out what works is to look at what your competitors are doing and then do your own pilots and tests. One example of a company with a referral incentive is Airbnb. Airbnb allows users to invite friends by sharing a unique link. The referred friend receives “up to $55 off their first trip,” and the referrer gets $20 credit for every successful referral. For instance, you might consider a double-sided incentive (give the referrer a discount and give the referred customer a discount), or a single-sided incentive (give just the referrer or just the referred customer a discount). One business owner, Alex Nowak of Workout Depot, tried a single-sided incentive but discovered that a double-sided incentive was more effective. Originally, they offered half price fees to the referrer but not to the new customers. “We received good feedback regarding the scheme, with sellers saying it provided a good incentive for them to refer friends. However, sellers were also quick to comment that it could be improved considerably if we offered the same reward for new sellers joining our platform via the scheme. Not only would it give new sellers a further incentive to join our site, but sellers felt better knowing that both parties were getting the same deal. In a way, it made our referral scheme more fair, which we were big supporters of. Since implementing this change, we’ve seen a big improvement in the referral scheme with more seller actively promoting the site and sharing their referral codes.”

When launching a referral program, you also might consider an absolute discount (e.g. $20 gift card) or a percentage discount (e.g. 10% off) or even a free item (e.g. Free Month, Free Bag, Free Bonus Item). You can also consider gamifying the process, enabling customers to collect points that can be redeemed, or give referrers the chance to enter a raffle for a big ticket item.

Important note: some industries regulate referrals and kickbacks. Check your federal, state, and local laws and consult with an attorney before launching a referral program. For example, most states prohibit realtors from paying referral fees to unlicensed persons.

When launching a successful referral program, there’s a few best practices to keep in mind

Your most loyal customers are a great asset when launching your referral program.

Unless you are a new business, you probably already know who your most satisfied customers are. Reach out to them and ask for their suggestions when building your referral program – what process would they prefer? What kind of incentive do they think is best for your type of business.

Make the program easy to use and comprehend.

Place a visible and clear “Call To Action” (CTA) on your website or at your checkout counter so that customers know about your program and how to use it. Educate your employees so that they can mention the program to customers and answer questions about it. If your company is ecommerce, consider including an FAQ that addresses some of the finer points of your program. If you are including an incentive, describe it clearly so that customers can do a mental calculation about how they’ll be rewarded if they refer a friend. On top of the incentive, be sure to harness a customer’s own sense of wanting to help and spread the good word – use positive language e.g. “Excited for your [product]? Get a discount on your next order by sharing with a friend!”

Think about ways to automate the program so that the customer experience is smooth.

Design your referral program in a way that minimizes clicks/steps and tracking (for you and the customer) and that welcomes your new prospective customers without cumbersome redemption procedures or conflicts. This can increase the conversion rate for your program. Make your program a pleasure to use, seek feedback from customers, and continuously improve it! Greg Bond, the CEO of RE320, a property management firm in Pittsburgh, pays referral fees to realtors who refer customers. He learned the need for automation and organization first hand! “At first, it was just word of mouth and a handshake transaction. When volume increased we became very disorganized. This led us to setting up a form online that would allow us to track who was sending us referrals and create systems to make a much smoother process for the realtor referring us business.”

Set terms and conditions carefully.

Many companies have terms and conditions for referral programs on their websites – so you can review their examples to get a sense for best practices. Some companies limit discounts only to new customers, others cap the maximum amount of credit that can be generated, some use unique referral links. Others allow credits or discounts to be used under specific circumstances. Think about possible ways your referral program could go awry – could a serial referrer generate thousands in referral credit that you might not be able to fulfill? Some companies have had issues with fake bots that can general referral credit or customers that use multiple email addresses – so be sure to anticipate any issues and protect your program. Ahmed Mir, the founder of Nature and Bloom, a direct to consumer CBD brand, uses a third-party plugin for their referrals. They switched from offering 15% off for every friend referred to 20% in order to gain momentum. Ahmed pointed out that referral programs can be misused – they had a small minority of customers “repeatedly create email addresses to refer themselves and re-order at a discounted rate twice.” Ahmed discovered this by cross-referencing manually. Despite this challenge, Ahmed said that the number of customers who did this is small and he still saw a significant revenue gain from the referral program (“14% of all sales are referrals,” he explained). Seek the guidance of a licensed attorney when crafting your terms and conditions so that you cover all your bases.

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