Referral marketing relies on a brand’s existing customer base to increase its number of prospects. Companies identify their best “referrers” and encourage them to spread positive messages about their offer. This practice of word-of-mouth, under the influence of brands, is particularly adapted to modern marketing. What is this process? How does it allow you to hone your industry expertise? All the answers can be found below. At the article’s end, we will return to the central elements of a good referral marketing strategy.
- What is referral marketing?
- 3 advantages of referral marketing
- The 3 pillars of a good referral marketing strategy
According to Kumar et al, 2010, referral marketing uses word-of-mouth to increase its customer base through existing customers. The latter then push their friends and family to purchase by relating their experiences and relationship with the brand. Thus, this practice is close to the precepts of advocacy marketing.
However, we are not talking about classic word-of-mouth initiated by the customers. Here, the staff of a company is the source of referral marketing. Therefore, brands using this process can stimulate the spread of positive messages toward them. And by doing so, companies control the content of the message sent to the audience. This is at the heart of trigger marketing campaigns, a practice that simplifies customer conversion.
We want to distinguish two types of referral marketing. We have already distinguished between incentives to existing customers. However, sometimes customers spread the brand name via case studies or forums. These then increase their awareness online and refine their industry expertise. (Lee, 2012)
Differentiating between traditional and referral marketing
Referral marketing proposes a more modern vision than traditional marketing. Indeed, it seeks to understand current customers’ buying motivations to transform them into commercial arguments. So, it is radically opposed to traditional marketing methods to promote positive word-of-mouth. (Schmitt et al, 2011; Trusov et al, 2009)
Indeed, traditional marketing campaigns find their ambassadors among the brand’s employees rather than the current customer base. As for these marketing efforts, they are rather oriented towards consumers with a high customer lifetime value. Traditional marketing aims to retain them through reward systems to build loyalty over the long term.
Thus, the strategies of referral marketing differ completely from those of traditional marketing on several levels:
- the targeting to adopt
- the objectives of the campaigns (in terms of knowledge, finances, and so on)
- but also, the timing of their operational phase
A successful brand considers its customers as ambassadors above all.
Referral marketing is adapted to the problems of a modern company. It collects essential information about the marketing target. In addition, it encourages current customers to recommend the brand to their friends and family. In this sense, we detail below the workings of three key advantages of this marketing process:
- its effectiveness, compared to traditional advertising
- its superior reach
- and the measurement of customer satisfaction
More effective than traditional advertising
A product recommendation from someone close to you is more personal. Some researchers consider it more likely to succeed than a traditional advertising campaign. They consider that word-of-mouth efforts are more profitable than traditional marketing efforts. (Villanueva, et al. 2008)
Why is a recommendation from a friend or family member more respected than an advertisement? It is a question of reputation. Indeed, the relative put their reputation on the line by standing behind a brand. This becomes risky if the suggested offer turns out to be not very effective or even not adapted to the target.
The reach of referral marketing is considerable
Secondly, the recommendations powered by referral marketing allow access to new market segments. In this case, we are referring to a niche public previously difficult to reach with traditional marketing. (Berman, 2016)
Again, we will explain this by the centerpiece of referral marketing: the intermediary role of the “ambassador.” They know the brand just as well as the prospect. Therefore, they are in an ideal position to judge the compatibility between their loved one and the brand! This “commercial matchmaking” work is crucial. Indeed, we know today that customer conversions are more numerous thanks to referral marketing. They are also less expensive because of their low customer acquisition cost.
Useful for measuring customer satisfaction
Finally, we would like to return to an underrated aspect of referral marketing: its ability to determine customer satisfaction. Why use NPS (and its drawbacks) when you can assess the ambassador rate among your customers? Indeed, the measure is quite found:
- Few “referring” customers = prioritize customer satisfaction and loyalty for your next marketing campaigns
- Many “referring” customers = determine the reasons that drive your customers to recommend your brand and use them in your next marketing campaigns
Now let’s look at the best strategic practices for referral marketing. While there are many variations to consider, we will be selective. Here are the 3 main aspects of a good referral marketing strategy:
- identification of referrers
- selection of communication channels
- deep thinking about rewards
Identifying your referrers
Before anything else, a good referral marketing campaign must start by identifying future ambassadors. You must then focus on your customers:
- the most likely to testify favorably towards your brand
- and ready to contact a maximum number of prospects among their relatives.
For example, its ambassadors could be composed of current customers:
- conquered by the quality of the offer
- long-time customers
- but also, customers with an excellent reputation.
Walsh & Elsner, 2012 uses the term “market mavens” (or market experts) to refer to the best ambassadors. They pass on a lot of information to customers and are likelier to speak highly of a brand. So, they are great profiles for brands!
Focus on communication channels and content
Controlling the message spread is a key aspect of maintaining a good e-reputation. As we all know, digital channels are very effective for circling recommendations. Among other things, their omnichannel marketing is dear to the customers’ hearts. Indeed, they can share their customer experiences via many platforms. Among them, we find Facebook, Twitter, and personal blogs.
To maximize the impact of your marketing recommendations, propose between 2 and 4 channels to your ambassadors. We can imagine messages written by the brand itself, or personalized links to share with their friends.
Select rewards for referrers
Finally, think carefully about the rewards to set up for your “referrers.” We can find them in many different, even original, forms:
- free products, rewards that are generally a little expensive for brands
- loyalty points, a form of reward widely used in traditional marketing
- referral programs to introduce friends and family into the conversion funnel
- gift cards, one of the main motivations for re-purchasing
Why focus so much on reward content? Ryu & Feick, 2007 shows that rewards increase the likelihood of a recommendation, but that is not all: here, the reward size would not have a significant effect. The company’s size plays an important role: the impact of reward campaigns is stronger on weak brands.
- Berman, B. (2016). Referral marketing: Harnessing the power of your customers. Business Horizons, 59(1), 19-28.
- Kumar, V. et al. (2010). Driving Profitability by Encouraging Customer Referrals: Who, When, and How. Journal of Marketing, 74(5), 1-17.
- Lee, B. (2012). The Hidden Wealth of Customers. Harvard Business Review Press
- Ryu, G. & Feick, L. (2007). A Penny for Your Thoughts: Referral Reward Programs and Referral Likelihood. Journal of Marketing, 71(1), 84–94.
- Schmitt, P. et al. (2011). Referral Programs and Customer Value. Journal of Marketing, 75(1), 46–59.
- Trusov, M. et al. (2009). Effects of Word-of-Mouth versus Traditional Marketing: Findings from an Internet Social Networking Site. Journal of Marketing, 73(5), 90–102.
- Villanueva, J. et al. (2008). The Impact of Marketing-Induced Versus Word-of-Mouth Customer Acquisition on Customer Equity Growth. Journal of Marketing Research, 45(1), 48–59.
- Walsh, G. & Elsner, R. (2012). Improving referral management by quantifying market mavens’ word of mouth value. European Management Journal, 30(1), 74-81
Tags: marketing strategy, word-of-mouth