Setting up a referral program for your business can seem daunting.
Referral programs have many different moving parts, and it’s very common for busy merchants to get stuck when setting up.
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One of the biggest hurdles for retailers is deciding on the referral incentives. Why?
- Overwhelmed by too much choice: There are many, many different ways you can choose to set up your referral program’s incentives, and retailers can get stuck in ‘analysis paralysis’.
- Desire to get it ‘perfect’: Referral incentives will impact your sharing rate (how many referral links get shared) and your referral conversion rate (% of referral link clicks that result in purchases). So some merchants spend a long, long time trying to pick the ‘perfect’ incentives.
- Resistant to ‘incurring costs’: Incentives have a financial cost– either in terms of cash paid out, or in profits forgone. The good thing, though, is that you only pay these out when successful referrals are made. So technically, it’s more costly not to act, because then you’re forgoing the new referrals you’d be getting.
We’re here to help.
Let’s quickly go over the two sides of referral program incentives, then go over the decision-making process of setting them up.
There are two sets of referral incentives for you to calibrate: the referral reward and the friend offer.
1: The referral reward is the reward you give to your advocates for successfully referring their friends to the store.
ReferralCandy allows you to pick from 4 different options for your referral reward: Cash, single-use coupons, multi-use coupons, and custom rewards.
2: The friend offer is the incentive you give to referred friends to make them more eager to make a purchase at your store.
For friend offers, you can use coupons, discount links, custom rewards or nothing at all.
1: Referral Rewards – Will your advocates make repeat purchases?
If your advocates are likely to make repeat purchases, give discounts.
If you’re in fashion or a similar industry, where you have regular customers who keep coming back to buy more, you’ll almost definitely want to go with discounts.
The reasoning is simple: Not only will you have a new customer in your system (the referred friend), your existing customer is now primed to make another purchase!
You’ll then have to choose between fixed discounts (Amuze gives advocates and friends $25 off), or percentage discounts (Clashist gives them both 10% off).
How do you choose?
Well, consider the Rule Of 100:
If your product costs more than $100, cash discounts sound more impressive. If your product costs less than $100, then a percentage discount sounds more impressive.
If your advocates are unlikely to make repeat purchases, give cash.
If your product is something that your customers are only going to buy once in a long while (a mattress, an annual calendar, budgeting software), then giving them discounts on future purchases will simply annoy them.
If you’re doing preorders, you can give a “cash discount”.
If you’re doing a crowdfunded/preorder type product, you might want to give your advocates a cash discount on their preorder.
Kitchen hardware startup Mellow gave advocates a $20 discount on their purchase for each new successful referral they made.
If you referred enough people, you’d get your own kitchen robot for free!
2: Friend Offers – What do your customers care most about?
Every merchant needs to figure this one out for themselves. Think about the motivation of your advocates and their friends. What do they care about, what do they want to do?
Greats, for example, choose to give $10 credit to both advocate and friend.
Here’s what their CEO has to say about referrals:
“It’s all about deeply understanding your core customer and why they share. Young, milennial, digital native. Loves style. Love to hook up his crew. They’re all about sharing. We give them social validation. Referrals just accelerate that, so they’re constantly referring people to the brand.” – Greats CEO Ryan Babenzien
In contrast, DapperTime gives $10 cash to advocates, because they felt it would be more novel and interesting to their customers.
“We’re actually trying to give you money here!”
Here are some examples to give you some context for thinking about your own referral program incentives.
Examples of businesses that use cash as a referral reward in their campaigns:
(The links below explore the specific referral programs in greater detail.)
- Mattress company Leesa knows that people aren’t likely to buy a second mattress right after they’ve bought their first one, so they give cash rewards instead– $50 cash Paypal’d to you, and $50 off for the friend you refer. The mattress typically costs $890, so that’s about a 6% discount.
- Watch company DapperTime gives $10 cash to advocates and 10% off their friend’s order (as long as the order exceeds $30). When chatting with DapperTime’s marketing team, we learned that they chose cash over discounts because it would be more novel and interesting to their customers. “We’re actually trying to give you money here.”
- Supplements company Powder City gives a 6% cash reward to the advocate upon successful referral, while offering the referred friend 10% off their purchase.
- Payment gateway Paypal literally gave away cash as a referral incentive in the early days. Similarly, e-wallet company MatchMove gives its customers $3.88 of credit for each referral, up to $500.
- Stock Video brand Videoblocks gives advocates $20 per successful referral, and 90% off (!) their annual subscription (down to $99.)
- Budgeting software app YouNeedABudget gives both advocate and referred friend $6 cash upon successful referral. The software costs $60, so that’s 10% value.
Examples of businesses that use discounts or credit as referral rewards:
- Airbnb and Uber give credit towards their services– $10 off your next Uber ride, $25 off your next Airbnb stay, $75 cash if you rent your place out on Airbnb.
- Footwear brand Greats gives $10 credit to both advocate and friend– which works out well for them, because happy sneakerheads often purchase multiple pairs of shoes.
- Designer fashion portal Amuze gives both advocate and referred friend $25 off their next purchase.
- Dropbox gives 500MB free storage to both advocate and referred friends, up to a limit of 16GB. So you can get rewarded for referring up to 32 people to the service. (Pro accounts get double that– 1GB per referral up to 32GB.)
In general, businesses use discounts or credits as referral rewards when they expect their advocates to be repeat customers.
- If your advocates are likely to make repeat purchases, give discounts to encourage them.
- If your product costs more than $100, a flat discount is usually more enticing ($500 off a $2,000 laptop)
- If your product costs less than $100, a percentage discount is usually better ($10 off a $50 t-shirt is better phrased as 20% off)
- If your advocates are unlikely to make repeat purchases, give cash.
- If you’re doing preorders, consider giving cash discounts on the advocates’ existing preorder.
- Remember to focus on your customers’ interests and motivations.
Should you use two-sided incentives?
How should you allocate your referral incentives? Is it better to split the rewards, or give them all to one party?
To frame it in concrete terms, is it better to give $25 to each party, or is it better to give $50 to one of them?
Obviously it would be better still to give $50 to both advocate and friend, but if you’re willing to spend $100, then the question becomes– is it better to give $50 to each, or $100 to one of them?
A 2007 study by Pittsburgh and Korea University has some answers.
The study was conducted with approximately 300 mobile phone subscribers of 3 telco companies in Korea.
One telco was stronger (53% market share), while the other two were weaker (31.5% and 15.5% market share).
The subscribers were offered a choice between two referral programs:
- A one-sided Reward Me (approx. $50 in free calls)
- A two-sided Reward Both (approx. $25 in free calls to the advocate and friend each).
Note that the total value for each condition is the same: $50. (Also, they weren’t given the option of “Reward My Friend”, where they could forgo their reward to double their friends’.)
Here’s what the study found:
1: Offering a reward increases reported referral likelihood.
This is a no-brainer– incentives work, and people are likelier to do something if there’s an incentive to motivate them.
2: The impact of reward programs differs depending on the type of social relationship between the recommender and the receiver of the recommendation.
“For a recommendation between strong ties (e.g., close friends), rewarding either the new customer or both the new and the existing customer can increase referral likelihood (though not by much), but rewarding the existing customer does not.
That is, they found that close friends seem more interested in giving their friends a reward than in making money off their friendship.
“Conversely, rewards are important for increasing referral likelihood between weak ties (e.g., casual acquaintances). In such cases, to increase referral likelihood effectively, the recommender should be rewarded.”
So if you expect advocates to refer close friends, you’d want to reward the friend, or both parties.
If you expect advocates to refer primarily acquaintances, you’d want to reward the advocate.
Remember, incentives only go so far in modifying people’s behaviors.
The extrinsic aspect (cash, discounts) should sweeten the deal, but the most important thing is that your advocates must personally want to make the referrals in the first place.
- An Epic List of 47 Referral Program Examples
- How To Setup Your Referral Program
- How To Promote Your Referral Program
- How To Increase Referral Rates