Referral Marketing

Referral Marketing - toolshero

This article explains referral marketing in a practical way. After reading you will understand the basics of this powerful marketing approach.

What is Referral Marketing?

Referral Marketing is one of the oldest strategies used in marketing. It is a way of promoting services or products to potential customers through word of mouth, also known as referrals. These referrals can happen spontaneously or can be influenced by the marketing department of a company. There are different approaches to referral marketing. One way is by rewarding and encouraging customers and other contacts to recommend services and products to other consumers and or businesses, both offline and online.

Offline Referral Marketing

Offline Referral Marketing is ‘word to mouth’ in its physical form. When people get recommendations from the people they trust, they will be more likely to try that product or service. Also having an influential person wear or use a product or service can have others who look up to that person buy or use that product or service.

Online Referral Marketing

Online Referral Marketing goes through the internet and is focused on online interaction between customers. It can increase brand awareness, referrals and eventually revenue. Online, especially through social media, is where opinions on product favourites and experiences are being shared. This also includes a company’s website and social media accounts linked to these companies. Companies encourage this way of referral marketing by providing advocates of their products with unique referral codes and information on special offers. These referral codes or special links to the company’s website can be shared with the advocate’s friends, family and followers on social media. The company can then decide to give the advocates rewards whenever their family, friends and followers buy by clicking the link.

Another way of online referral marketing is by tracking the online behaviour of customers. This is done by using browser cookies and other similar technologies. It is possible for companies to look into their referral marketing return on investment, offered by many referral management platforms. Newer technologies are being developed for companies to track consumer behaviours that help companies to integrate referral marketing into their marketing plan.

A guide to Referral Marketing

Referral Marketing can help you to grow your business. Keeping your greatest assets, the customers, interested in your product or service and having them recommend it to friends and family can lead to big rewards for your company. When you decide to apply referral to your marketing strategy it will be necessary to consider a few steps.

How to apply Referral Marketing?

The first step in applying Referral Marketing to a marketing strategy is doing research which includes finding out what the customer wants. This research can be done in different ways.
The first one is by researching the buying habits of customers in order to discover their favourite products or services. Depending on the industry a company could then decide to offer discounts, add-on services or free products. The second research method is to find out what consumers prefer by making use of customer surveys. The survey can ask a consumer what it takes for them to take part in a referral program. This is usually in the form of a reward or incentive. Marketers would then include possible rewards with the survey or ask the customers to add alternatives.

The next step in applying referral marketing for de marketers is to decide on the procedure for referrals. Such as, how many referrals are needed for the customer to get the reward and how they can prove that there were actual referrals. The tracking of referrals could be done through a unique signup link for every existing customer. This way the company can track the referrals back to the customer and their unique link.

After this step the company will have to market the referral program to the public. This can be done by hanging signs in actual stores, such as close to the cash register. A company could also promote the referral program by creating and handing out brochures to customers. Promoting the program online is also a common way for a company to share information on the referral program. For example, through banner advertisement or e-mail marketing campaigns.

When the Referral Marketing program has started, it’s time for a company to focus on continued marketing exposure and activities to follow the success of the program. Tracking the success of the program will be done to find out which strategies lead to the most referrals and will be worthwhile to invest in. In order to track success the company will have to decide on how it will measure success. You could look at your share rate and how many of the existing customers are sending referral codes to family and friends. How high should that percentage be to consider the referral program a success for your company?

Referral Marketing can be effective for small companies to the large corporations in almost any industry. Any company that offers services or products can make referral campaigns part of the marketing strategy. Referral marketing is common among retail stores, restaurants, travel agencies, gyms and health professionals such as a doctor or dentist. Referral marketing is also used by online companies, often in combination with social media and sharing websites.

Other users of Referral Marketing strategies are nonprofit organizations. These strategies are usually applied to increase the organization’s publicity and to convince potential donors to support their work. One way referral marketing has been applied by nonprofit organizations is a joint venture, a partnership between a nonprofit and for-profit company. The for-profit organization then offers a part of the profit for each referral coming from the nonprofit organization.

Referral Marketing Strategy

There exist different referral marketing strategies. Which one you will use depends on your industry and customers, but most importantly your marketing strategy. Here are some generally used strategies and steps to guarantee better results.

Company’s employees

The best ambassadors a company can have for referral marketing are its employees. When the employees support a company’s services or products, it shows that they are taken good care of by their employer and that they believe in the product or service. When employees promote the company’s products or services this could lead to a growing profit and may eventually reflect on the salary of the employee. Resulting in benefits for both the company and the employees. A company which has its own employees promoting the product or service could also save the company marketing costs because it doesn’t have to hire extra employees for marketing.

Company’s customers

An important group for referral marketing is the company’s customers. This strategy focuses on keeping existing customers satisfied and working with them by giving them incentives for their referrals. An incentive could be cash or offering customers who contribute through referral an extra and exclusive product or service for free every time the company gains a new customer through referral.

Partner up with complementary businesses

Some companies that enter a new market decide to apply the referral strategy by working together with businesses that already have a good reputation. The new product or service will be launched through such businesses. That way the new product or service is more likely to be accepted by customers and will have a good customer base to work with. An example of referral marketing through partnerships is for example a life insurance company launching its products through a well known and trustworthy bank.

Good product or service

For a referral campaign to succeed it’s important to have a good service or product and customer service. Offering good quality will make customers more likely to refer others. Recommending a product or service to friends and family that a customer doesn’t like is less likely to happen.

Achievable targets and appealing rewards

A company that applies referral marketing should set targets that do not seem impossible to achieve. Setting a lower target number of referrals and offering appealing rewards will make customers and employees more likely to take extra effort. There also should communicate a time period in which a customer or employee will receive the reward.

Referral friendly website

For a company to boost its referral campaign it’s useful to have a website and social media channels that are suitable for sharing content and rewarding referrals. One suggestion would be to make a button on the website, such as ‘invite’ or ‘share’, which makes it possible for a customer to share with friends and family in just one click. There are also special apps that make it easy to implement referral marketing on the website. When it comes to referral marketing and social media, these are channels through which it has been made easier to share promotions and special offers. Businesses also use big data analytics which helps them to target the right audience with the right offers.

Referral Marketing for Small Business

Referral Marketing programs can be beneficial for small businesses. As a small shop owner or a start-up, it’s always helpful to gain new customers. This form of Mareting can help small businesses to grow bigger by expanding their customer base. When a person wants to try something new, friends and family are often the first to hear and therefore to recommend a product or service. It can also help a small business to get a head start on its competition. Especially social media will be that business its best friend in sharing the referral program. Sharing on social media goes rapid because it only takes a click on a button. A small business using referral as a marketing strategy together with the influence of existing customers could lead to remarkable results and growing business.

It’s Your Turn

What do you think? Do you recognize the practical explanation of referral marketing or do you have more suggestions? Have you ever applied referral marketing to your business or have you ever taken part in a referral program? If not, would you use referral as a marketing strategy? Why would you use it or why wouldn’t you?

Share your experience and knowledge in the comments box below.

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More information

  1. Biyalogorsky, E., Gerstner, E., & Libai, B. (2001). Customer referral management: Optimal reward programs. Marketing Science, 20(1), 82-95.
  2. Buttle, F. A. (1998). Word of mouth: understanding and managing referral marketing. Journal of strategic marketing, 6(3), 241-254.
  3. Reingen, P. H., & Kernan, J. B. (1986). Analysis of referral networks in marketing: Methods and illustration. Journal of marketing research, 23(4), 370-378.
  4. Schumann, J. H., Wangenheim, F. V., Stringfellow, A., Yang, Z., Blazevic, V., Praxmarer, S., … & Jiménez, F. R. (2010). Cross-cultural differences in the effect of received word-of-mouth referral in relational service exchange. Journal of International Marketing, 18(3), 62-80.

How to cite this article:
Van Velden, E. (2020). Referral Marketing. Retrieved [insert date] from toolshero: https://www.toolshero.com/marketing/referral-marketing/

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