Customer referral programs are nothing new. As consumers, we have been inundated with offers for referral perks by everyone from our dentists to our auto mechanics. The reason is simple: customer referral programs work.
Customer referral programs (CRPs) come in as many variations as there are businesses to create them. While a CRP is not an appropriate solution for all businesses, a huge portion of business can benefit from them.
What Are the Advantages of a Customer Referral Program?
To begin, we should clarify what we mean by a customer referral program. A CRP refers to referrals generated from existing customers who are familiar with and endorsers of your product or service. This is a different animal from affiliate or commission type referral programs.
Four significant advantages of Customer Referral Programs…
- Immediate Targeting – As existing customers, referrers know your business and who in their social network might stand to benefit from your product of service. Forget detailed psychographic analyses to segment your target market, your clients do so innately.
- Social Proof – When a customer refers your business, an implied endorsement accompanies the recommendation. The referrer is telling the prospective customer that they have used your product and liked it.
- Pay for Results – A beautiful aspect of customer referral programs is that you only pay for the business you get. Assuming you structure it well, in most cases the reward to the referrer should be triggered by some sort of revenue generating action from the prospect, not just an introduction.
- Defined CPA – A referral program enables you to define your cost per acquisition. You can specify exactly how much you are willing to pay – whether dollars, services, points, etc. – for a specific action. If the client signs up for your silver service, that is worth X; if they sign up for the platinum package, that is worth Y.
A Customer Referral Program Won’t Work for Us Because…
Despite the popularity and ubiquity of CRPs in certain industries, many small businesses seem reluctant to implement refer a friend programs in their businesses. A few objections are worth noting:
I can’t afford it…
>> Affordability is a great concern, particularly for small businesses and solopreneurs. However, as mentioned above, risk can be managed by pegging the reward to revenue. As long as the program administration is not cost prohibitive, you can make sure you only pay if a referral generates income. Be creative, and setup a program that minimizes financial risk and out-of-pocket costs?
My customers refer us because they love us, we don’t need to pay them…
>> We love that you live in a world with fuchsia clouds and magical unicorns; for the rest of us, we live in a hyper-competitive, recessionary economic environment. If 1 of 10 clients recommends us because they love us, we want to incentivize the 3 more out of 10 who love us but need some cajoling to take action on our behalf.
It is also important not to confuse your customers with your network, even if they overlap. Customers/clients can often have a transactional outlook. They have paid you for your services; as far as they are concerned, the relationship is limited to the bounds of that transaction. (Harsh, I know, but also very true.) Sometimes they need a reason to reengage on your behalf.
A formal referral program won’t work in my business because of X, Y, and Z…
>> This might very well be true. A formal referral program is not a good match for every business. Your business might be new and not have enough customers to justify putting energy into a formal program or your service might be so specialized and infrequent that natural referrals based on quality of work and relationships are the only kind that work. If you feel that a CRP is not a good fit for your business, it is important to differentiate between excuses and valid reasons.
Customer referral programs can be powerful tools. In a competitive economic environment, referral marketing eliminates much of the risk associated with other advertising and marketing channels. The benefits are high, and unless you invest heavily is the administration of a program, the risks are fairly low.
Not every business will benefit from a CRP, but the upsides are such that every business should take a serious look at whether or not a program can enhance its business.
Do you have a customer or client referral program? Have you entertained implementing one? Have you ever participated in one as a customer or client that was effective?