Everybody has had the experience of asking a friend or family member to recommend a business or a product. Whether you’re in the market for a new dentist or a new appliance, you’re more likely to trust a recommendation that comes from somebody you know. While many referrals happen organically, it can be useful to encourage referrals.
At Select Funding, we understand the power of referrals and know how useful they can be as a method of fueling business growth. If you’re not already familiar with referral marketing, you may be interested to learn how it works. Here’s the information you need plus six examples of effective referral programs for small businesses.
What is Referral Marketing?
Referral marketing is a type of marketing that relies on people who are already familiar with your business recommending it to people who are searching for products or services you offer. Said another way, it’s a structured form of word-of-mouth marketing. In most cases, the person making the referral has an incentive to do so.
Referral marketing can be done on a personal or business basis. Consumer referral marketing comes from your existing customer base recommending your business to their friends, family, or coworkers.
Business referrals may come as the result of a partnership with another business and are most common when two businesses share a target audience but don’t offer the same services. For example, a wedding planner might have referral partnerships with florists, party rental companies, or catering companies.
How Does a Referral Program Work for Small Businesses?
Referral programs for small businesses work by incentivizing your loyal customer or business partners to recommend your business to the people they know. While a certain number of referrals may happen organically, you’ll need to talk to your customers about your referral program to maximize the program’s success.
The most common way that referral programs work is by providing the person who recommends your business with a reward for doing so. The reward is usually tied to a specific result. Here’s an example to show you what we mean.
A business owner has a company that sells accounting software. An existing client recommends the product to another company, who engages with the sales team. If the company that was referred doesn’t buy the software, there would be no reward. However, if they become a paying customer, the person who made the referral would get a reward.
Referral programs can have a variety of structures and you’ll need to think about the structure that makes the most sense for your business.
What Are the Benefits of a Referral Program for Your Small Business?
Now, let’s review some of the most important benefits of having a referral program for your small business:
- Referred customers spend more money than other customers. There are statistics that show that the lifetime value of a referred customer is up to 25% higher than the lifetime value for the average customer.
- Referred customers are loyal. Customers who find your brand thanks to a referral are more likely to remain loyal to your company and serve as brand advocates than other customers. In fact, the customer retention rate for referred customers is 37% higher than the average.
- Referral marketing is cost effective. Unlike traditional marketing campaigns, there’s little up-front cost for referral marketing. You’ll need a system to track referrals and rewards but many CRM platforms include referral marketing software. In most cases, the rewards for referrals don’t need to be large or costly to be effective.
- Referral marketing increases word of mouth marketing. As we said above, referral marketing is a form of word of mouth marketing. One of the biggest benefits of having a referral program is that people who are referred to you and become satisfied customers are far more likely to refer others to you. The result can be a significant wave of new customers who come to you because they heard about you from existing customers.
- Referral programs build trust. Many things influence the way existing and prospective customers view your company. Because most consumers trust a recommendation from someone they know, your referred customers will come to you with trust as a jumping-off point. The more people talk about and recommend your business, the more likely it is that you will be perceived as trustworthy.
Referral programs are effective and they don’t cost much. They represent one of the easiest and least expensive ways to attract new customers to your business.
6 Examples of Referral Programs for Small Businesses
Referral programs can work in a variety of ways and not all require a tangible incentive. Here are six referral program ideas to consider.
#1: The Feel-Good Referral Program
A feel-good referral is one where the person making the referral doesn’t get a reward from you but rather, reaps a reward that makes them feel good. While not ideal for every business model, this type of program can work well for businesses in the health and wellness industry.
For example, a fitness center or gym could have a referral program that touts the benefits of working out with a buddy. Many people do a better job of achieving their fitness goals when they work out with a friend, so you could try a feel-good program to encourage referrals.
#2: The Give-and-Receive Program
One model that can work well for online retailers is the give-and-receive program, which encourages existing customers to give a freebie or discount code to their friends and receive something of the same value in return.
An example might be an apparel company offering customers an opportunity to give their friends $20 off their first purchase and receive a $20 store credit in return. The key here is to specify the requirements for the first purchase ($20 off your first $100 purchase) to make sure that everybody understands the program.
#3: The Charitable Program
Not all rewards need to go to the person making the referral, which is where the charitable referral program comes in. There are many consumers who prefer to buy from companies that contribute to worthwhile causes.
For example, a company that sells children’s clothing might make a donation of pajamas or shoes to kids in the foster care system for every referral they receive. A catering company might make donations to a local food bank.
#4: The Dedicated Link Program
While referral programs are a form of word of mouth marketing, not all referrals need to happen in person. One option that businesses catering to younger consumers may want to consider is providing a dedicated link that customers can share with their friends. This type of program marries referral marketing with affiliate marketing.
Any referral who clicks the dedicated link and makes a purchase earns the owner of the link a store credit. A dedicated link program may be most useful for online retailers and those who have a lot of Millennial or Gen Z customers.
#5: The Social Media Program
Social media referral programs combine referral marketing with influencer marketing. In this type of program, businesses ask their social media followers to share their content on Facebook, Instagram, or TikTok.
For example, you might ask people to share your posts and offer them a free product if they make three successful referrals. You’ll need to make sure you ask referral customers how they heard about you or use some kind of tracking system.
#6: The Service Discount Referral
Service businesses need to think outside the box to deliver referral rewards. One way to do that is by offering your clients who make referrals a discount on your services.
For example, a software company that provides SaaS solutions might offer a free month or even a free year of subscription. In the case of the latter, you would probably want to require multiple successful referrals to earn the referral reward.
Best Practices for Starting a Referral Program
Here are some best practices to follow as you start your own referral campaign:
- Choose rewards that tie back to your business in some way. Retail companies may want to focus on incentives that bring the person making the referral back to the store.
- Lay out the terms of the referral program clearly. It’s essential to be sure that your customers understand what you expect of them and what they’ll get in return for their participation.
- Include a clear call to action. Having an enticing CTA is one way to get people to participate in your referral program.
- Make it easy for customers to make referrals on social media. Including share buttons for multiple social media sites on the page for your referral program will eliminate guesswork and make the process simple.
- Use a referral tracking system. Using a system to track referrals is always a good idea and crucial if you are requiring multiple referrals to earn a reward.
- Deliver referral incentives promptly. People participate in referral programs to get rewards, so make sure you have a system in place to deliver rewards as soon as possible after a successful referral.
Using these best practices will increase the likelihood that your new referral program will live up to your expectations.
Grow Your Business with a Referral Program
Starting a referral program can help you attract new customers who are highly likely to turn into loyal buyers. It can also cement your relationships with your existing customers and increase your sales and profits.
Are you ready to invest in referral software for business growth? Select Funding is here to help! Click here to learn about our small business financing and begin the application process.
