Referral marketing is one of the best things ever. But it isn’t for everyone.
So let’s save you some grief in advance: When is referral marketing NOT for you, if you’re in ecommerce?
1: You don’t have satisfied customers.
This could be because you’re still just starting out, or because your business simply isn’t working.
When your ecommerce store is in its early, formative stages, you have much more important things to worry about than customer referrals.
First of all:
- Does your product work?
- Do people want to buy it? How are you reaching out to them?
- Are you solving a real need in the marketplace?
- Could you be doing that more effectively?
- What’s your conversion rate like?
- Does your site function effectively?
A referral program won’t save a lousy product or an unintuitive site.
No reasonable incentive is going to motivate someone to introduce their friends to something they don’t like.
Simplistically speaking, referral marketing increases sales, yes. But pay careful attention to precisely how it does that. It doesn’t magically create new customers out of thin air.
Rather, it amplifies your organic referral rate by nudging your satisfied customers to share your site with their friends. (83% of satisfied customers say they’ll refer their friends, but only 27% actually do. The magic of referral programs happens in the remaining, untapped 56%.)
If your base rate is minimal or non-existent, meaning that your product isn’t something that your customers are crazy about, asking for referrals will yield weak returns. totally not worth your time or money.
A good rule of thumb: If you’re not already getting natural, organic referrals, don’t set up a referral program.
Instead, figure out why you aren’t getting any referrals at all. Once you’ve got that sorted out, introduce the referral program to plug the leaks.
(To continue with the boat analogy- if you’re in a lousy boat full of holes, you’re probably better off getting another boat than trying to plug the endless leaks.)
2: Your satisfied customers don’t have friends (whom they’d refer your product/store to).
Consider how your customers might be hesitant to rave about your amazing constipation relief solution to their colleagues, family members and prospective partners on Facebook.
There are surely bloggers and communities who’d jump on it, of course. Ideally, you want to win them over on the virtue of your product, not the incentive of the referral program. The referral program is just a bonus. A good blogger should be more interested in adding value to her readers than in making a quick buck.
Still, know yourself, and know your product. Try and “map” out the potential referral pathways- who’s going to refer your product to whom, and how, through what channels?
The takeaway here is that there are variations in “referral elasticity” (responsiveness of likelihood of successful referral in response to change in some other variable, such as financial incentive) across products and even industries. Some products and industries are simply more “referral elastic” (or “referral sensitive”) than others.
We’ll explore this idea in a separate post!
So far we’ve been talking about referral marketing solutions for ecommerce stores. We’ve already established that there are circumstances in which referral programs can work fantastically– especially in online multiplayer games, p2p services like Dropbox, PayPal, Spotify, etc.
Do you have any thoughts about why major stores use affiliate marketing instead of referral programs? Why does McDonald’s use coupon discounts rather than loyalty cards? Let us know in the comments!