The science behind referral marketing: Your pathway to generating higher quality leads in 2021

With the invention of sophisticated marketing automation tools, capturing “more leads” seems attractive. But “more leads” is rarely the answer.

In fact, a bunch of low-quality leads would do more damage than good. You need high-quality leads that are easy to convert into customers. That is where referral marketing can help you. 

The concept of referral marketing is not new. Satisfied customers have been referring solutions to their friends for a long time. And today, it is an excellent way to leverage word of mouth to build a lead engine that runs itself. 

If you’re interested, here’s a peek into the science that makes referral marketing work.

People are more likely to buy through referrals

Have you recently bought something because your friend recommended it?

Given that 83% of people trust others recommendations, it’s least surprising. Humans are social beings who seek the cooperation needed to survive. The most common “help or invite a friend…” referral message addresses this need for humans to be social.

Interestingly, your customers buy from you based on three main factors:

1. The logical side: Your solution addresses a pain point. There is a rational justification.
2. The emotional side: They feel special. Your solution adds value to their life.
3. The social side: Your solution impresses their friends. You add value to their social circle.

Referral marketing campaigns help your leverage all three factors.

Let’s take a look at a simple example. The “Love With Food” referral campaign offers a free box of healthy snacks to the value of $10 for using a referral link. They let you help a friend by promoting healthy eating while you earn $10 on top. If you carefully notice, this is a campaign crafted to trigger all three factors - the logical side by giving your friend advice on something that is useful, the emotional side, by showing you care about them, and the social side, by impressing them with your inside information. Even though this is quite a standard campaign, it is effective because it works across these three levels.  

Referrals let you laser-target the right audience

Unlike a PPC campaign, referral marketing comes with a “done for you” advantage. Your existing clients recommend your offerings to those who need them the most. You don’t have to worry about wasting your entire ad budget (or throw everything and pray that some will stick.)

This means referral marketing automatically makes you a “trusted and recommended” option. With the built-in amplification, social media channels would help you further your cause. You reach hundreds of potential high-quality leads in seconds.

Consider Fashion Nova, an example of referral marketing done right. It’s a fast-growing women’s apparel company with 20 million followers on Instagram alone. Their Instagram feed has customers’ selfies placed right next to Cardi B and Kylie Jenner. It’s like fans can wear identical clothes and walk with the big celebrities.

There’s also an incentive (40% off for referring two friends) to join their referral program. The company is using Instagram to reach the kind of customers they want. Fashion Nova is leveraging the laser targeting attributes of social media through referral marketing.

Referrals deliver a lower user acquisition cost

The traditional means of advertising are becoming expensive as we speak. The average cost per action for Facebook ads across industries is 18.68 USD.

A new prospect needs to be targeted (and retargeted) with complex ad campaigns. Businesses get stuck competing with top brands on costly pay-per-click ads. Referral marketing is the better way.

Referrals allow a prospect to become a recipient of an invite from someone they already know. The referrer also offers a giant vote of confidence, which is a powerful social proof. Compared to paid ads, this is an inexpensive method of getting new customers on board.

By leveraging current customers to refer others, you could drive down acquisition costs. Second, you get to maintain autonomy from more expensive advertising platforms.

Plus, your current customers are also filtering your leads. They only send invites to those who are more likely to see value in your product or service. That’s your way to invite quality leads who are already motivated to become long-term clients.

A perfect way to leverage proven laws of commerce

The law of reciprocity: You could be doing your customers a favour by giving them a monetary reward or a discount. At the most basic level, it’s an attempt to help another human being. A favour they feel bound to reciprocate by giving you referrals. It feels good to them that a solution they introduced makes anyone’s life better.

On a more superficial level, they’d put in a good word and sing your praises. This is an absolute win-win as you gain happy leads along with great testimonials. This is the law of reciprocity in action.

The law of compounding: Compounding is one of the most powerful forces in the universe. In a business context, a company can grow by making small changes to interrelated parts of the overall business.

Referrals lead to high-quality leads. More leads mean a higher number of opportunities to convert. Better conversion means more revenue, and so on.

When everything adds to the company’s bottom line, it is the law of compounding in action.

Five top brands that grew through referrals

Elysium

Promoting supplements requires trusting voices. It’s a competitive space. That’s why Elysium decided their current customers could refer new leads.

The marketing team decided to create a simple two-phase referral system. They offered $50 for someone who subscribes to their dietary program. An extra $100 was provided for every ten referrals. Referrals instilled trust, which could’ve been difficult through advertising and educational content.

MVSN TV

MVSN TV is a streaming platform for professional fighting events. They used Referral Factory's easy to use platform to build a referral program where fans could refer their friends to get the streaming link to watch an upcoming fight.

MVSN TV also invited 200 fight-influencers to join their program and this gave it the boost they were looking for - generating over 9000 referrals in the first week! The best part is, they were able to track which influencers referred the most people using our platform – no tracking scripts, no complicated analytics setup.

Roku

Roku is a video-streaming device for television. The company offered rewards to customers who sent referrals through social media.

The email campaign offered incentives for both the referrer and the newly-referred customer. The marketing team provided a month of Netflix for someone who tries Roku. The newly-referred also get a 10% discount. This offer was communicated through a targeted email campaign. It was a success with as many as 70 percent referrals of all sales in the program.

Evernote

Evernote rewards its existing customers for every new user they successfully refer. This way, users can win a chance to earn their service for free.

It’s a successful natural referral program that maximizes platform growth. Even better, the referral program was not a significant investment for Evernote. Although Evernote is far from being perfect, it’s a great referral story. Evernote’s 75 million users and $1+ billion valuations prove things are on track.

Harry’s

Harry’s is a shaving products company that adopted a referral program even before its launch.

It was a straightforward approach. An incremental rewards system incentivizes people to refer more people to get rewards. Refer five friends, get free shaving cream. Refer 50 friends and get free shaving for a year. 

The referrals added to the hype, and Harry’s garnered 100,000 email subscribers. It was a profitable program to help spread the word and gain a customer base.

Conclusion

Is referral marketing a replacement for traditional lead generation campaigns?

No, but its benefits are almost always understated. A successful referral program can attract quality leads for years to follow. These are prospects who want to buy what you’re selling. They have already heard about your solution and are likely to be a perfect fit. They are referred, so they haven’t looked at your competitors. So you have a better chance of converting them. A win-win all around.

Given that most marketing is ineffective, referral campaigns can attract high-quality leads like a bear towards honey. If you'd like to give it a try, you can register for a free trial over at Referral Factory - once registered you can build and launch your own branded referral program, without writing a line of code. You'll also get access to over 1000 templates of pre-built referral programs for you to copy and use as your own, this means getting up and running is now faster than ever ??