Referral marketing is a form of recommendation marketing that is actively initiated by companies. Existing customers of a company recommend a product or service, e.g. to their family or friends. The company usually offers an incentive or reward for the referral. Companies use various communication channels to generate referrals. The Internet in particular has established itself as a channel for referral marketing.
According to the Word of Mouth Marketing Association, there are an average of 2.4 million conversations every day in the U.S. alone that are about brands. And according to Nielsen, 84% of people consider recommendations from friends to be the most trusted source when it comes to purchasing decisions. No wonder people are four times more likely to buy a product if it has been recommended to them. These numbers show the great potential of referral marketing for businesses.
Referral marketing is a process designed to generate more referrals via word of mouth. Word-of-mouth refers to the expression of opinions between consumers about brands, products and companies. This can be achieved by rewarding customers for recommending brands’ products to others – whether online or offline. Referral marketing works so well because people generally trust the opinions of their friends, family or acquaintances more than they do traditional advertising.
Referral marketing can be very effective, especially in the online sector. It can spread faster on the Internet than most offline marketing strategies. The reach via social media that can be achieved via a Facebook post, a tweet or a picture on Instagram, for example, has played a major role in making referral marketing even more significant in recent years. By tracking buying behavior online, referral marketing can also be used to increase brand awareness and ultimately generate more sales through more referrals.
Because referral marketing today is often Internet-based, recommendations from social media influencers and bloggers also play an important role for companies. Many companies therefore try to generate referrals via social media and use recommendations as a purchase trigger. To this end, they actively call for reviews and testimonials in groups and forums, for example. Online reviews can also lead to referrals and have a positive impact on companies’ referral marketing programs.
Costs and value of referral programs
A study by Goethe University in Frankfurt and the University of Pennsylvania found that customers acquired through referral are more loyal and profitable than others. They also generate more revenue. Referred customers are thus the more valuable customers.
As a rule, companies offer rewards for referrals. Referral marketing programs therefore initially involve costs for companies. However, referral marketing is often worthwhile despite the initial financial outlay because of the high value of the customers acquired, according to the findings of the Goethe University study.
Companies can engage in online referral marketing through a variety of avenues, including:
- Email marketing campaigns
- Banner advertising
- social media
- Influencer marketing (e.g., via bloggers, YouTubers, Instagrammers, etc.)
- Referral page links in employee email signatures.
A prerequisite for successful referral marketing is a good customer base with trusting relationships. Only then will customers recommend a brand to others. A positive buying experience and good customer service are particularly important for this. Customer loyalty programs, such as loyalty points, rewards, discounts, etc., are also helpful. It also makes sense to train employees in referral marketing.
The referral traffic of a website can be viewed in Google Analytics. This is the traffic where users come to a page via links instead of by directly entering the URL (direct traffic) or via search engines (SEO traffic). Referral traffic can be used to analyze which pages (e.g. blogs) bring users to a company’s website. It is also possible to analyze which external websites bring qualified leads to the site and are therefore particularly important for a company.
Examples of referral marketing
Referral programs exist in all industries. In particular, many banks and fitness centers as well as companies in the e-commerce sector rely on referral marketing.
In Germany, for example, Comdirect Bank and ING-DiBa pay a 20-euro bonus to each customer who refers a new customer, or give the referrer a gift.
The cloud provider Dropbox is also a well-known example of successful referral marketing. Back in 2009, the company implemented its referral program and offered users more storage space for each successful referral. The referred customer also benefited from additional storage space.
Customers of the U.S. television satellite operator DIRECTV who successfully referred a friend received 100 U.S. dollars in credit. The new customer also received 100 US dollars in credit.
Even if the success story of the online design store Fab.com seems to be over for the time being: Fab managed to gain several million users in a very short time, also thanks to its referral program. Thus, the referrer and the new customer each received a shopping voucher.
Referrals have a major impact on companies’ business. Referral marketing is therefore considered one of the most successful marketing strategies for companies.
Referral marketing programs are widespread in many industries and have gained popularity especially through social media channels such as Facebook and YouTube as well as referral sites.
Experts advise investing in referral marketing, especially for complex and high-priced products. By relying on referral marketing, companies can increase brand awareness and accelerate the buying process.
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