Does Your Business Need a Customer Referral Program?

August 3, 2011

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…
  1. 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.
  2. 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.
  3. 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.
  4. 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?

33 thoughts on “Does Your Business Need a Customer Referral Program?”

  1. Do you have a CRP Adam? I like this topic and the post, but unsure how I would structure it…a discount to the CRP member for ever lead? What’s worked for you?

    1. We have CRPs in the retail businesses, and those are quite effective. Volume businesses are easier, particularly ones that focus on limited offerings, as you generally know what product/service to offer as a reward — and for what referral action.

      I think it can be trickier for consultants and small agencies because referral programs are a percentage game. If the base of referrers is small and your offerings are varied, it can be tough to find a perk that would be worthwhile or desirable to each client. Maybe if you had a premium product or partnered with another client to offer something? No matter what, the referrer base has to be big enough to justify the effort of putting a program together.

      Great questions. Thanks for stopping by Erica!

  2. G’Day Adam,
    I’m a new subscriber to your blog. I think that we share a common target market: small-medium business.
    I’ve specialised in this field for over fifteen years.

    The issue of customer referral comes up repeatedly. But finding a solution is quite elusive. If you have some specific recommendations, I’d be glad to hear them/



    1. Hey Leon,

      Great seeing you here. We inhabit some of the same communities — like Casa Dietrich — and I always enjoy your comments!

      What works for customer referrals is really dependent on the business model. As I was discussing with Erica above, it really does take a certain a certain base to make it scale. The great thing is the Internet has made referral solutions fairly affordable for SMBs. While I haven’t used them personally, extole and urefer are two that I have researched before and are probably worth looking into.

      Thanks for stopping by and subscribing! Look forward to seeing you back again.

  3. I’ve seen customer referral programs done right work very effectively. Whatever your product or service, you want to have created a memorable enough of an event that the purchaser would be more than happy to refer you to their friends.

    A little different take on this is, I have been knee to knee with a prospect and it becomes obvious we are not going to do business together. However, they like what we have to say and realize it is a good model, but for whatever reason it won’t work for them. We then ask, ‘if you were in my shoes what would you do; who among your peers do you know that this might be a good fit for’? More times than not they are eager to throw you a bone just because they weren’t able to do business with you.

    This is our ‘low risk practicing’ approach because at this point, what do you have to lose, right? I’ve had people even pick up the phone and call for us…………….

    Good to see you Adam; hope you are having a great Friday. I’m sure I’ll be bumping into you……….

    Take care.

    1. Ah Bill… I always love the no-sale referral. And you are right, those usually aren’t the “referral program” type — they are the you’ve established some rapport and want to help each other type. Most certainly, a low risk activity. And very rewarding because they come without financial or other incentives.

      Awesome to see you as always. Talk with you soon!

  4. But, I like my unicorns!!!! Just kidding. 😉

    Referral programs are great advice, but it really does depend on the business. It is a lot trickier for service-based businesses, but much easier when it’s a uniform product.

    Like others have mentioned, I’d love to know more about what’s worked for you and your clients. Maybe some case studies? It would be great to see some examples.

    I smell another blog post! 🙂

    1. I’ve learned my lesson Laura… unicorns are a hot topic! 🙂

      As I mentioned to Leon, the size of the base, as well as the type of business, really dictates whether it is a good idea or not. My personal experiences with referral programs have been in retail and wholesale, not in B2B services.

      No doubt, it is tougher when it is a consultant/agency type service. I think for one thing, you really can’t offer the service as the reward in most cases. If you are in marketing, what do you offer 5% off the next campaign… or a free press release? How much do those things incentivize? I think you’re better off with a $x gift card, or a Kindle (obviously for a nice sized account), etc.

      1. Ah! Yes. It seems we’re working in totally different spheres. My experience is more in the service industry – some B2B, some B2C. Either way, yes, services are much arder to quantify.

        For me, personally, gifts are a great way to go. I’ve done gift cards, special gifts and little surprises for my best client. I think that definitely works better in my case.

  5. As a long time member of the hyper-competitive, recessionary economic environment, I am constantly surprised at the resistance to use marketing dollars for the very valuable CRP process. We all seem to know that referrals are a very cost effective way to accomplish business and we will spend countless dollars on ineffective marketing channels… but spend money to generate more referrals? Careful here… our ROI might shoot through the roof if we actually invest dollars in our best prospect data base! Good stuff.

    1. Alright Kevin, that first sentence made me laugh out loud! That resistance you mention is why I wrote the post; just interacting in the economy as a consumer I regularly run across companies that could benefit from a customer referral program.

      Welcome to the blog. I appreciate you taking the time to share your thoughts!

  6. Nice idea or information about the CRP.. Thanks a lot . It give me a new insight about your blog.

  7. I guess we always need referrals. Referrals could be the best thing and the worst thing. Best thing because if we did a great job it would be a good business for our company but sometimes some people being referred expect too much that they end up being disappointed and that is the worst thing.

    1. I think we always want to hope that referrals are positive. If they set the bar high, then I guess we should take that as a challenge. Thanks for the thoughts.

  8. Thanks for sharing about CPR.. the blog is so informative.. I find this program positive! many business needs this..

  9. Hi Adam,
    I found this post and am now following your blog. Buzz Referrals is putting together a white paper on referral programs using some data from our client’s programs, and I’d love to talk to you and see if you have any data or thoughts we could include. Perhaps we could also do reciprocal blog postings.

    Please contact me if you’d like to discuss!

    Jordan Linville

  10. It’s very good to have plenty of referrals but as business owners we have to make sure that those referrals are converted into customers as much as possible or else the effort will go to waster. Imagine getting 100 referrals in one day but you can’t converted anyone of them.

    1. Hi Mika,

      That is very true; referrals lose their value if you are not prepared to give them great service and turn them into customers.

      I appreciate you taking the time to share your thoughts!

  11. Vernessa Taylor

    I’ve almost always run service-related businesses. While it seems difficult to incentivize services, it actually worked well for me. I pretty much used a percentage with a cap, i.e., 10% of x dollars up to a certain amount. That was simply converted to a discount (dollars off current work or credit towards next project).

    This worked especially well for cash-strapped not-for-profit clients.

    Excellent points Adam, especially the one that reminds most businesses they can’t afford NOT to have some type of customer referral program in place. It’s certainly less expensive to acquire new business via existing clients than start from scratch.

    1. Hi Vernessa. As you can see from the comments, I think referral programs for consultants/solopreneurs are one of the bigger challenges. That’s great that you found a way to make it work!

      I am going to tweet this, so people can see the broad strokes you outlined.

      Thanks for taking the time to share your experience!

  12. I agree.. you have to make a good system of incentives so people will get attracted to refer to your site. I think you should also try to reach out and connect with more people who have strong social medial influence. Build relationships and engage in a broader network of marketers. Great post Adam 🙂

    1. Good point about broadening your network with people who have a social media presence. If you can target those influencers, it’s even more powerful.

      Thanks for stopping by Sab!

  13. Customer referral program does sound interesting. I think this is highly recommended for start-up businesses to help them spread the word. A good reward for this referral program would be some points or credits that can be used to purchase goods from you or pay for your business’ services.

  14. Customer referral programs are truly effective for most businesses. There are many companies and brands that are already getting all the advantages of running customer referral programs. Immediate targeting, social proof, pay for results and defined CPA are the most important advantages, and I think, there are still more benefits that we can get from referral programs.

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  18. Great post! I agree with your approach, however we’ve seen that turning the referral process into a transaction (by rewarding customers with financial incentives) can be less effective than social rewards, such as donating to a local charity on the customer’s behalf.

    We’ve actually just launched a business application for Facebook called Good Peeple that uses the power of your customer’s social networks to share their reviews of your business with their friends, generating referrals automatically. Check it out at


    1. Hi James, I appreciate the comment. I’ll make sure to check out your site. It sounds interesting.

      I would love to know more about the data behind how financial incentives are less effective than social rewards. Do you have anything you could share?


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