Why choosing referral incentives is important – and difficult
Over the years, merchants have shared their struggle with choosing referral incentives. When we delved into their problems, the answer fell into one of three categories:
- Desire to get it ‘perfect’: Referral incentives will impact your sharing rate (how many referral links get shared) and your referral conversion rate (% of referral link clicks that result in purchases). Set your referral offer too low, and customers may be uninterested, but set it too high and it can quickly get costly. Some merchants spend a long, long time trying to pick the ‘perfect’ incentives.
- Overwhelmed by options for offers: Flat amount or percentage? Store credit or cash? There are many, many different ways you can choose to set up your referral program’s incentives, and retailers can get stuck in ‘analysis paralysis’.
- Resistant to ‘incurring costs’: Referral program incentives have a financial cost– either in terms of cash paid out, or in profits foregone. The good thing, though, is that you only pay these out when successful referrals are made. So technically, it’s more costly not to act, because then you’re forgoing the new referrals you’d be getting.There are also costs to managing a referral program. One way is to manage it digitally, using referral program software, but these come with associated fees and a cost in time. That can look imposing for merchants.
We’ll deal with these in the article, and going over how to make decisions while setting up the program. But first, let’s complicate it a little: there are actually two types of referral program incentives to calibrate: the referral reward and the friend offer.
The two types of referral program incentives: Referral Reward and Friend Offer
The referral reward is the reward you give to your advocates or happy customer for successfully referring their friends to the store. You’ll want to dangle something that’s attractive enough to nudge someone into taking action.
The friend offer or referral offer is the incentive you give to referred friends and new customers to make their first purchase at your store. Again, you can think of it as a little sweetener or push to get them more ready to try and buy.
How to Choose Referral Rewards – Will your customers make repeat purchases?
If your advocates are likely to make repeat purchases, give discounts.
If you’re in fashion or a similar industry, where you have regular customers who keep coming back to buy more, you’ll almost definitely want to go with discounts.
The reasoning is simple: your existing customer is now primed to make another purchase. Plus, he or she is likely to make a bigger purchase to make use of the value of the discount. As an added bonus, you now have a new customer in your system (the referred friend)!
If you’re setting up a referral program for subscriptions, an industry trend has been to offer a free month of subscription, which helps you retain your customers and deepen their brand loyalty, like Threadbeast.
When deciding between fixed or percentage discounts for referral coupons, use the Rule of 100
A fixed discount is a flat amount (for example, Bevel Shavers offers $30 off), while a percentage discount applies on the customer’s next purchase (MATTER apparel offers 15% off all products). Which is better?
Some part of it depends on the economics and operations of your business – but in presenting the referral offer, we suggest you make use of the Rule Of 100:
For a $25 product, $10 off and 40% off comes to the same value – but wouldn’t you agree that 40% off looks much more attractive (I mean, it’s practically half priced!) The same goes for a whopping discount of $250 off over a 10%. There’s no trickery here – it’s just good copywriting.
An easy rule of thumb – if your product costs more than $100, the ‘flat’ discounts sound more impressive. If your product costs less than $100, then a percentage discount sounds more impressive.
If your advocates are unlikely to make repeat purchases, give cash.
If your product is something that your customers are only going to buy once in a long while (a mattress, an annual calendar, budgeting software), then giving them discounts on future purchases will simply annoy them – it’ll be too long until they can use it again.
Instead, we’ve found cash rewards are always going to be in season.
Mattresses should be replaced every 5-10 years, but cash – or donations – are always in season.
If you’re doing preorders or early access, you can give a “cash discount”.
If you’re doing a crowdfunded/preorder type product, you might want to give your advocates a cash discount on their preorder. Kitchen hardware startup Mellow gave advocates a $20 discount on their purchase for each new successful referral they made.
The referral program helped catapult Mellow to $200,000 preorder sales in less than a month
Even in pre-sales, it was a win-win proposition: excited customers could get their preorders for free if they referred enough people, and Mellow got a bunch of new customers and pre-orders!
Custom Referral Rewards – What is something only your brand can offer?
We’re getting into extra credit territory here, but custom referral rewards are something to think about. ReferralCandy allows for custom referral rewards that the retailer or merchant must fulfil, but that opens up many interesting options for referral incentives. For example:
- Riff Raff & Co, makers of cute sleep toys, offer free shipping for the friend offer. The advocate gets nothing for a successful referral, but five successful referrals wins them a free Riff Raff & Co sleep toy. It’s perfect if you think about it: the second toy can be for a younger sibling, or a spare while the first is in the wash, or even as a gift.
- Tesla’s referral programoffered advocates and friends $1,000 in credit for referrals. It may seems like a lot (rule of 100!) but even Elon Musk pointed out that a Tesla cost between $70,000 and $150,000.The real referral reward comes at a higher tier; five successful rewards meant an invite to the Gigafactory for a party, and ten rewards unlocked an exclusive, limited-edition “Founder Series” Model X.
- As part of their launch, Girlfriend Collective gave away free leggings for anyone who shared their post (and paid for shipping. You can’t say no to that – and as a side-effect, their launch was covered by plenty of publications and raved about for months after.
- Marketing automation software GetResponse offered $30 off their bill for each successful referral – but hit 3 referrals and the reward is a digital marketing certification worth $200 to burnish the CV of any marketer.
Your customers love your brand and want to tell their brands about you – a custom reward allows you to create a unique, branded experience for your customers. That’s something money (or $10,000 in referral rewards) can’t buy!
How to Choose Friend Offers – What do your current customers care most about?
Every merchant needs to figure this one out for themselves. Think about the motivation of your advocates and their friends. What do they care about, what do they want to do?
Greats, for example, choose to give $10 of store credit to both advocate and friend.
You get $10, I get $10, and we can both discuss which sneaker to buy
Here’s what their CEO has to say about referrals:
“It’s all about deeply understanding your core customer and why they share. Young, milennial, digital native. Loves style. Love to hook up his crew. They’re all about sharing. We give them social validation. Referrals just accelerate that, so they’re constantly referring people to the brand.” – Greats CEO Ryan Babenzien
In contrast, DapperTime gives $10 in cash to advocates, because they felt it would be more novel and interesting to their customers.
Literally giving money away.
Still considering? Here are some examples for how to set up your own referral program incentives.
Examples of businesses that use cash as a referral reward in their campaigns:
- Mattress company Leesa knows that people aren’t likely to buy a second mattress right after they’ve bought their first one, so they give cash rewards instead– $50 cash Paypal’d to you, and $50 off for the friend you refer. The mattress typically costs $890, so that’s about a 6% discount.
- Watch company DapperTime gives $10 cash to advocates and 10% off their friend’s order (as long as the order exceeds $30). When chatting with DapperTime’s marketing team, we learned that they chose cash over discounts because it would be more novel and interesting to their customers. “We’re actually trying to give you money here.”
- Supplements company Powder City gives a 6% cash reward to the advocate upon successful referral, while offering the referred friend 10% off their purchase.
- Payment gateway Paypal literally gave away cash as a referral incentive in the early days. Similarly, e-wallet company MatchMove gives its customers $3.88 of credit for each referral, up to $500.
- Stock Video brand Videoblocks gives advocates $20 per successful referral, and 90% off (!) their annual subscription (down to $99.)
- Budgeting software app YouNeedABudget gives both advocate and referred friend $6 cash upon successful referral. The software costs $60, so that’s 10% value.
Examples of businesses that use discounts or credit as referral rewards:
- Airbnb and Uber give credit towards their services– $10 off your next Uber ride, $25 off your next Airbnb stay, $75 cash if you rent your place out on Airbnb.
- Footwear brand Greats gives $10 credit to both advocate and friend– which works out well for them, because happy sneakerheads often purchase multiple pairs of shoes and talk about them to their friends
- Engineering toy brand Goldieblox offers advocates & friends 20% for each successful referral – and since every toy set is different, satisfied customers would be happy to make repeat purcahses.
- Designer fashion portal Amuze gives both advocate and referred friend $25 off their next purchase.
- Dropbox gives 500MB free storage to both advocate and referred friends, up to a limit of 16GB. So you can get rewarded for referring up to 32 people to the service. (Pro accounts get double that– 1GB per referral up to 32GB.)
In general, businesses use discounts or credits as referral rewards when they expect their advocates to be repeat customers.
- If your advocates are likely to make repeat purchases, give discounts to encourage them.
- If your product costs more than $100, a flat discount is usually more enticing ($500 off a $2,000 laptop)
- If your product costs less than $100, a percentage discount is usually better ($10 off a $50 t-shirt is better phrased as 20% off)
- If your advocates are unlikely to make repeat purchases, give cash.
- If you’re doing preorders, consider giving cash discounts on the advocates’ existing preorder.
- Remember to focus on your customers’ interests and motivations. What do they want?
Speaking of that some customers also ask us how to allocate your referral incentives. Is it better to split the rewards, or give them all to one party?
Should you use two-sided incentives? And, do you give more to the referrer or the friend?
To frame it in concrete terms, is it better to give $25 to each party, or is it better to give $50 to one of them?
Obviously it would be better still to give $50 to both advocate and friend, but if you’re willing to spend $100, then the question becomes– is it better to give $50 to each, or $100 to one of them?
A 2007 study by Pittsburgh and Korea University has some answers.
We wrote about the study and conclusion in a separate article but in summary, a study was conducted with approximately 300 mobile phone subscribers of 3 telco companies in Korea. One telco had a much stronger brand (53% market share than the other two (31.5% and 15.5% market share).
The subscribers were offered a choice between two referral programs:
- A one-sided Reward Me (approx. $50 in free calls for the advocate)
- A two-sided Reward Both (approx. $25 in free calls to the advocate and friend each).
Note that the total value for each condition is the same: $50. This was then compared to a “No Reward” scheme where neither party got any rewards for a successful referral. The results of the referral study were as follows:
1: Offering a reward increases the likelihood of making referrals
This may seem simple, but now we have proof: in all cases, referral incentives work, and people are likelier to do something if there’s an incentive to motivate them. Both Stronger Brand and Weaker Brand benefited from referral programs, although Weaker Brand benefitted more.
2: Stronger Brands should offer equal, two-sided rewards. Weaker Brands should consider offering Referrers more, or equal rewards
For the Stronger Brand, Reward Both worked better than Reward Me. Researchers speculated that this could be due to existing customers of the stronger brand being less price sensitive, or customers already having a high affinity for the brand (and likely to refer anyway), or the one-sided reward being perceived as unfair.
For the Weaker Brand, rewarding the referrer performed slightly better than rewarding both equally. Researchers believe that their customers were more price-sensitive, and therefore more likely to value the bigger referral reward more highly.
If your brand is strong, you should offer two-sided rewards, inclined towards new customers, since your existing customers are already less price-sensitive. A more attractive friend offer may also incentivise your new customers to switch to your brand.
If your brand is newer, or less strong, it may be worth offering a bigger reward to existing customers, both to deepen their brand loyalty and motivate them to make the referral.
Remember, referral incentives only modify behaviours
The extrinsic aspect (cash, discounts) should sweeten the deal, but the most important thing is that your advocates must personally want to make the referrals in the first place. The study also found that referrals are influenced by the relationship between the customer and the referred friend.
“For a recommendation between strong ties (e.g., close friends), rewarding either the new customer or both the new and the existing customer can increase referral likelihood (though not by much), but rewarding the existing customer does not.
That is, they found that exiting customers seem more interested in giving their close friends a reward than in making money off their friendship.
“Conversely, rewards are important for increasing referral likelihood between weak ties (e.g., casual acquaintances). In such cases, to increase referral likelihood effectively, the recommender should be rewarded.”
After reading all that, it’s time to try Referrals.com
Still need a little more help? You can reach out to us and we’ll be able to assist you.