Getting new clients is difficult, especially in a competitive market for many business industries. Both conventional storefronts and online retailers are experiencing increased acquisition costs, meaning businesses must therefore come up with more effective and affordable strategies for attracting new clients.
In this article, we will discuss referral marketing, types of referral marketing, and both advantages and disadvantages of using referral marketing for your business. This kind of marketing can be used for any type and size of business.
Letís look at some strategies for lowering acquisition costs and boosting client retention by employing a referral marketing strategy for your business.
What is Referral Marketing?
Referral marketing is a method of advertising in which customers tell their friends and family about your service or company. As you probably already know, one of the most effective forms of marketing is word-of-mouth. Why? Because individuals place a lot more trust in their friends and family than they do in any kind of brand advertising.
For your referral marketing to be effective, your referrers must also gain something from you. In order to promote your company to your desired audience through this type of marketing, you will need to offer incentives to them.
According to a report by Nielsen, a global leader in audience measurement, data and analytics, which questioned more than 28,000 Internet respondents in 56 countries, more than 90% of consumers worldwide say they trust recommendations from friends and family, above all other forms of advertising.
Why Does Referral Marketing Work?
Referral programs are effective because they are a straightforward and honest approach to advertising your company. Referral marketing initiatives, as opposed to conventional mass marketing strategies, encourage current and past clients to tell their connections about your goods and services.
Current customers are able to tell others about their own experiences using and enjoying your goods since they already do so. They probably also know people who are interested in your product because they have similar pain points.
Of course, the reward incentive is a key component of referral programs’ success. Businesses should reward their consumers for their referrals by giving them small gifts or a discount on their next product or service purchase. The likelihood that the recommended lead will make their initial purchase and stick around is increased when an incentive is also provided.
Types of Referral Marketing
Hereís a breakdown of the two main types of referral marketing types that your business can encounter as it grows:
1. Referral Marketing Based on One-Way Rewarding
This is one of the most typical referral marketing types out there. This occurs when you thank a consumer for referring a friend to your products or services, which is known as a one-way referral marketing type.
The existing customer, known as the referrer, may be eligible for discounts, exclusive deals, or freebies depending on the type of business.
2. Referral Marketing Based on Two-Way Rewarding
As you may have probably guessed, a two-way referral involves rewarding both the referrer and the referee. Another distinction is that only when the referee makes a purchase from your store can the referrer receive the incentive.
Advantages of Using Referral Marketing
Using referral marketing to draw in new clients is a great idea. Applying this kind of marketing strategy has a lot of advantages. The first benefit is that itís a fantastic approach to creating leads and start benefiting from word-of-mouth marketing. Second, it can assist you in cultivating relationships with clients and converting them into brand advocates. Plus, itís often easier to make the sale from someone who has been referred to you as their referrer has proven satisfaction from working with you previously.
The following are some of the main advantages of referral marketing:
Referral marketing campaigns can be started and maintained for a reasonable cost. You will always make money off of referrals if you keep your rewards well inside your profit margins.
According to Nielsenís Global Trust in Advertising report, people tend to trust recommendations from friends and family rather than any other type of advertising.
3. Precise Marketing
Giving referral benefits to your happiest clients motivates both highly qualified new customers AND encourages repeat business. In fact, 65% of customers claim that earning rewards affects how frequently they buy.
4. Client Retention Rate
The percentage of customers that continue to use a product or service during a given time frame is measured by the retention rate. While many product managers concentrate on quickly acquiring new clients, it doesn’t help the growth of the business if clients leave it just as soon as they arrived.
By employing referral marketing as a marketing strategy for your business, you make sure that your referred clients higher client retention rate.
Disadvantages of Using Referral Marketing
Referral marketing occurs both when you delight or disappoint a customer. The more alarming drawbacks of this type of marketing are caused by the latter circumstance.
Here are a few common disadvantages of using referral marketing for your business:
1. Limited Control
One drawback of referral marketing is that it might be difficult to control the advertising content. Word-of-mouth advertising is often unpredictable. You may try your hardest to make sure that your products and customer service are the finest they can be in order to mitigate part of this issue.
The objective is to produce happy customers. However, no matter how successful your business is and how many glowing client testimonials you receive, someone will always have a complaint. Even if the bad comments are untrue, it only takes a few outspoken disgruntled consumers to damage your company’s reputation.
2. Low Coverage
Another drawback of referral marketing is the low coverage. A happy client may refer one or even two friends to your business, who may then make use of your goods or services and tell their contacts. Typically, only close friends and relatives can receive this kind of advertisement. Spreading the message can often take longer than other marketing strategies.
3. Measuring the Effectiveness
The effectiveness of referral marketing is significantly more difficult to assess than that of conventional marketing strategies.
To determine whether there has been an increase in brand recognition, you might conduct surveys or track sales statistics. However, word-of-mouth occurs most frequently during casual talks between customers. It is challenging to tell whether company advancements resulted from word of mouth unless you are actively participating in the dialogue.
Some businesses implement short surveys during the checkout process, to learn about how new clients first learned about the company or services offered.
Examples of Referral Marketing
Let’s look at what clients want from a referral program, what works best for businesses, and how to differentiate yourself from the competition.
Here are a few examples of referral marketing strategies implemented by companies worldwide:
Western Unionís Referral Marketing Strategy
Western Union is a company that helps people and businesses move money around the world, quickly. Their referral marketing strategy is a good example of how you can also implement this strategy for your business.
The referral marketing strategy that Western Union utilises is based on the two-way rewarding type, and it starts with a referral link that can be shared with friends and family, and when they use your link to register and spend $100 or more within 30 days of their registration date, both the referrer and referee will be rewarded with a $20 Amazon.com e-gift code.
Asosís Referral Marketing Strategy
Asos is a global e-commerce website where people can shop for clothes, accessories and more. Their referral marketing strategy is also based on the two-way rewarding type.
The type of reward, in this case, is a discount of 25%. Their referral marketing strategy consists of three steps to get to the reward, you share the link with your friends and family and once they register, theyíll get 25% off their first order, and once they purchase the product, youíll receive a 25% discount too.
Referral marketing is an effective way to advertise your brand, it will enable you in acquiring clients in an inexpensive way and is suitable for the majority of business types, from start-ups to well-known brands.
It can be used to improve sales, brand awareness, and client loyalty. The objective is to make sure that your marketing strategy is successful in including customers in brand-related conversations.
As we noted above, it does have advantages and pitfalls, just like any other marketing method. But when used at the right time and right form, it can boost your revenue and help achieve the goals of your business.
Using referral programs to promote your goods or services is a wise move when wanting to expand your business since consumers are more likely to believe recommendations from friends and family than they do from other traditional marketing strategies.
Simply choose the referral marketing strategy you wish to use, then pick a referral tool that meets your goals and budget to get started.
We hope you now have a clearer idea of what to expect from word-of-mouth marketing for your business.