Referral Marketing 101

Ah, referral programs. While completely unassisted organic distribution is every marketer's dream, an effective referral marketing program is likely a close second.

Why?

• Potential virality.  Referrals are a combination of the Paid Growth Engine and the  Viral Growth Engine (from Lean Startup)—they won't happen automatically, but they do have the possibility for compounding returns. In other words, if set up correctly, each new user could lead to one or more new users.
• Efficient spend. Another great element of this kind of system is that there are no wasted dollars. Unlike channels where the old adage is true—“Half the money I spend on advertising is wasted; the trouble is I don’t know which half.”—you only pay for a referral when it's successful. And if you're using product-based incentives (discounts, extended trials, etc), you may not have to pay anything out of pocket at all.
• Higher quality users or customers. Not only are there advantages when acquiring your new users, but referred users often turn out to be better users, in terms of activation and retention. Which makes sense: If one person is trying your app because they found you through an Instagram ad, and one person is using it because their friend convinced them... which do you think is more likely to stick around?

Which brings me to an important part: Referral marketing should not be your first step! The foundation of any good referral marketing program is a great product. If you want people to recommend what you're doing to their friends or family, the value you provide and the overall experience need to consistently meet—and probably exceed—their expectations.

I'll also say: Before trying paid referral marketing, you should consider whether you can convince your audience to spread the word on their own. Like I said at the top: The only thing better than a solid paid referral marketing structure is a solid free referral marketing structure! Adding incentives will accelerate your growth rate, but will (obviously) cost more, and could potentially shift your users' mentality from a social norm to a marketplace norm, meaning that they'll only refer people if they get paid, from here on out.

So, with those caveats out of the way—you want to get started! What does that look like?

The most important first step is: Start small and keep it simple. If you’re excited about getting started with a referral system, it’s tempting to get ahead of yourself and try to put all of your eggs in that basket. (In fact, that’s true for most growth channels—which is why the Bullseye Methodology is so helpful). But take your time and you’ll reap the rewards, in time.

For a long time at Peak Money, our referral program was completely manual. Although it was much more labor-intensive, this provided a lot of valuable insights and we were able to optimize our system much more effectively because we were so close to it.

So, while you can create a set-and-forget referral marketing plug-in, I'd recommend doing it yourself, first. If you're in, here are a few key things that I wish I’d known when I was first getting started:

Choose the right hook

What are you going to offer your users or customers, to incentivize them to spread the word? I've seen two directions on this:

For one, you can go with something that is universally appealing: Amazon gift cards are probably the most common example of this.

But I would recommend the second direction: Offer something that your audience can't get anywhere else. Whether that's company swag, access to unique features, or VIP treatment (conversations with the team, early access to new products), let these potential referrers know that their support in this way is uniquely valuable.

Reduce friction

If you've convinced someone to help you spread the word, the last thing you want is for them to have a hard time doing so. And, on the other side, if someone is referring a friend, that friend shouldn't have major obstacles to accepting the referral invite.

The steps involved will really depend on your audience and product, but try to include as few steps as possible, while still getting the information you need to complete the referral. At Peak, we used a Typeform survey that collected the contact information, sent out the invites, and then tracked completed conversions via email addresses. This was (again) very manual, but also very simple for the users.

Measure impact

So, your new referral program working? While your general analytics dashboard should tell you whether you're growing or not, take the time to do both quantitative and qualitative analysis of the referral program, itself.

On the measurement side, set up a funnel dashboard that shows the conversion rates for each major step in the process: What percentage of users are seeing the referral prompt? What percentage are starting the referral process? Finishing the process? And then, what percentage of people who receive a referral are actually signing up for your product? And, finally, what are the important downstream metrics to be monitoring for these new users (for example, future purchases, engagement rates, or making referrals of their own)?

Qualitatively, spend some actual time with users who are consistently referring others. Reach out to these individuals and set up an interview—check out Andy Johns' amazing Guide to Conducting Customer Research for some guidance on this. And remember: These people are the best kind of customers for you, so cherish them. Use these interviews to not only understand how well (or not) your referral program is working—but to try to understand what motivated them to use your product in the first place. And when you're done chatting, be as generous as possible: Aside from the stated incentives, provide a little surprise & delight for them and give them some extra goodies.

So that’s it. Referral marketing can be incredibly powerful, but needs to be set up the right way. I hope this guide will get you started in the right direction, but this is a big topic. If you’ve launched a referral program, what have been lessons you've learned? If you're just getting started, where are you getting stuck?

Shoot me an email and let me know!