The Small Business Guide to Referral Marketing

When starting a brand or business, one of the most important factors to consider is how you will muster interest among potential customers and gain a loyal audience.

Word of mouth is one of the most effective marketing strategies, simply because the customers who arrive through word of mouth have been referred to your brand by someone they actually know and trust.

But your customers won’t always feel motivated to send new customers your way—in fact, even though 83% of customers are willing to refer others to products and services they’re happy with, only 29% actually do, a marketing survey by Texas Tech found.

A referral marketing program aims to buck this trend by rewarding customers for promoting your brand. In the following guide, we’ll look at what referral marketing is, how it works and different strategies that your business can use to increase sales and drive traffic when you create a website.

What is referral marketing?

Referral marketing is a type of marketing in which companies turn their existing customer base into brand advocates. This can be done through a variety of tactics, though the goal is always the same: to incentivize customers to tell other people about you.

Referral marketing can refer to when individuals organically refer your brand to others using word of mouth, but creating a deliberate referral marketing program enables this outreach marketing tactic to be strategic and systemized for your brand.

How do referral programs work?

The basic formula for a referral program is as follows:

Make a referral —> Get something for free!

Customers should be able to join your program for free. Once joining, they should receive a unique code or custom URL. Then, if a purchase is made through that link or code, your customer should receive the promised reward.

Why referral marketing works

01. Referrals build trust

Referral marketing is often effective because of who is actually handling the advertising. With customers serving as the advocates, recommendations appear more genuine and trustworthy.

MarketingCharts.com published the following findings from Kantar Media on the correlation between referral source and trust. It’s clear that consumers follow the recommendations of friends and family more than any other source: 78% of consumers say they trust the information provided to them by people they know, versus only 54% trust the information that a brand provides on their own website.

So, your satisfied customers really can be a great advocate for getting over that trust hurdle.

02. Trust builds loyalty

As you’ll see, there are significant differences in how consumers engage with brands when there’s a long-standing trust. As evidenced by Edelman’s 2019 Trust Barometer Special Report, not only do customers buy more from these brands, but they also:

• Buy local

• Advocate on their behalf

• Defend them

If you can plant the seeds of trust with a referral marketing program, you could exponentially increase your brand’s sales, customer loyalty and advocacy.

03. Loyalty improves your CLV

Most businesses offer products or services that can be sold over and over again—or, at the very least, ones that can be up-sold or cross-sold. The goal is to become the go-to provider for your customers and to capture as much of that revenue over their lifetime as possible.

In order to increase the customer lifetime value (CLV) of your brand, trust and loyalty have to be earned as early as possible. One of the best ways to do that is when they grow to know and trust your brand—based on others who know and trust it—is the best way to do that.

Imagine what happens when all the customers you earn through referrals decide that they want to ‘pay it forward’ and start referring their own friends, family and colleagues. This is exactly how you go about lifting your customer lifetime value.

When launching a brand or business, it's essential to consider how to attract potential customers and build a loyal following. Word of mouth is a powerful marketing tool as customers referred by someone they know and trust are more likely to engage with your brand. However, customers may not always feel inclined to refer others, despite being satisfied with your products or services. A marketing survey by Texas Tech found that only 29% of satisfied customers actually make referrals, even though 83% are willing to do so.

To counter this trend, businesses can implement referral marketing programs that incentivize customers to promote their brand. In this guide, we'll explore what referral marketing is, how it works, and various strategies that businesses can use to increase sales and website traffic.

Referral marketing involves turning existing customers into brand advocates through various tactics that incentivize them to recommend your business to others. While word -of-mouth referrals can occur organically, creating a deliberate referral marketing program enables businesses to systemize and strategize this outreach tactic.

Referral programs typically follow a simple formula: make a referral and get rewarded with something free. Customers should be able to join the program for free and receive a unique code or custom URL. If someone makes a purchase using that code or link, the customer who made the referral should receive the promised reward.

Referral marketing offers three long-term benefits, including building trust, which is crucial for businesses. Recommendations from friends and family are more trustworthy than a brand's own advertising efforts. Customers who trust a brand are more likely to buy from them, advocate on their behalf, and defend them, according to Edelman's 2019 Trust Barometer Special Report. A referral marketing program can plant the seeds of trust, resulting in increased sales, customer loyalty, and advocacy.

Additionally, loyalty improves a business's customer lifetime value (CLV). By earning trust and loyalty as early as possible, businesses can become the go-to provider for their customers and capture as much revenue as possible over their lifetime. Referral marketing can help businesses lift their CLV as referred customers may continue to refer others, expanding the business's customer base.

Referral marketing can be a powerful tool for businesses looking to grow their customer base and increase sales. By incentivizing existing customers to refer new customers to your brand, you can build trust, loyalty, and advocacy among your target audience.

To set up a successful referral marketing program, it's important to make it easy for customers to participate. Offering a free and simple sign-up process, along with a clear reward system, can encourage customers to refer others and keep them engaged with your brand.

In addition, it's crucial to focus on building trust with your customers through your referral program. By emphasizing the genuine recommendations of satisfied customers, you can create a more authentic and trustworthy brand image that will resonate with your target audience.

Ultimately, a well-designed referral marketing program can help businesses to increase sales, build customer loyalty, and improve their overall customer lifetime value. With the right strategy in place, businesses of all sizes can leverage the power of referrals to drive growth and success.