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The power of a customer referral program in e-commerce

Illustration of two people tapping their phones together and a phone screen that says ‘refer a friend, get 25 percent off.’

It’s no secret that acquiring customers is expensive. With customer acquisition costs amounting to 5 times more than the cost of retaining shoppers, it’s no wonder brands are doing everything in their power to combat acquisition fees.

For e-commerce brands, this means finding new ways that won’t eat into their bottom line to connect. Connecting with customers without the costs? Seems too good to be true! In 2023, mostly every touchpoint – email, social media, paid ads – has some sort of cost associated.

But, what if we told you there was a way to gather new leads from existing customers with minimal effort, completely taking out the acquisition fee equation?

There is: Customer referrals.

In this blog, we’re going to dig into what it means to have a referral program in e-commerce, why it’s important, successful referral program examples, and more. Let’s unpack!

Customer referrals: Defined

Customer referrals occur when a consumer from a brand’s current audience encourages a new customer to shop with the brand. It’s a form of word-of-mouth marketing, which happens to be one of the most effective ways to acquire new customers.

Customer referrals can look like a group of friends chatting at brunch about their favorite e-commerce brands or a family member showing off their comfortable shoes at a get-together. It’s typically very organic.

The thing is, when brands aren’t taking advantage of customer referrals that may be occurring within their community, they could be losing out on an opportunity to reward their most loyal customers and fully engage with their newer ones.

This is where referral marketing comes in.

What is referral marketing?

Referral marketing takes spontaneous word-of-mouth marketing and incentivizes it.

For example, a brand could provide its customers with a referral link that offers a 10% discount to any new customer. Plus, the referring customer might get a discount once they refer enough of their friends and family.

With referral marketing, a brand’s community becomes part of its marketing strategy by scoping out potential customers and encouraging them to become active participants in the purchasing journey.

And while referral marketing may take some of the spontaneity out of customer referrals, it not only rewards loyal customers but ensures engagement with consumers who are very likely to make a purchase.

What is a customer referral program?

A customer referral program is a specific strategy that works to incentivize recommendations from existing customers to new customers they think may be a good fit. Similar to how loyalty programs encourage repeat purchases, referral programs encourage referrals!

A customer referral program takes customer referrals and marketing and combines the two into an incentivizing strategy where everyone benefits: the brand, old customers, and new customers.

The best part about a customer referral program? They work. Why? Trust. 92% of consumers trust referrals from their personal networks. Advertisements have been losing their steam for years, and even big-time social media influencers are met with a skeptical eye these days.

But a personal recommendation from a friend? That’s a trustworthy source – one that could convince a consumer to try.

3 benefits of implementing referral programs in e-commerce

Expanded brand reach to the right type of customers

While a referral program will help brands generate leads that they may not have reached with traditional marketing, it does something else that’s even more vital: it connects brands with customers who have a higher purchase intent.

Think of it this way. If you’re an avid yogi who just purchased a new mat that has proven to be durable, non-slippery, and lightweight, you’re likely going to tell your other yogi friends about it. Or, you may have yogis from a group class asking about the new mat!

Either way, those potential customers are much more likely to engage with the brand and make a purchase than friends and family who don’t practice. And, with referral incentives, both the new and old customers will be rewarded – the ultimate positive customer experience.

More word-of-mouth marketing = boosted engagement and trust

Word-of-mouth marketing is no joke. On average, this type of marketing drives $6 trillion in revenue. Why? Because 90% of customers are more likely to trust a brand that’s recommended to them. This stat alone reveals just how important referrals are.

A successful referral program ensures that consumers are talking about your brand. Essentially, it guarantees highly-effective word-of-mouth marketing by encouraging your top existing customers to reach out to their friends and family to recommend your brand.

The results? More new customers who are likely to trust your brand and brand advocates who are further developing their connection to your brand.

Cost-friendly and time-effective

When it’s done well, marketing can be incredibly time-consuming. With different channels and many forms of content going out on a daily basis, e-commerce brands may find themselves struggling to keep up. The good news is that a referral marketing program is not at all similar to content marketing or paid marketing channels.

With messaging, incentives, and the backend in place – brands won’t have to do much more in order for their referral program to work. Once referral links are live and accessible to customers, it’s up to the customers to use them (with encouragement from the brand, of course!)

For e-commerce brands, referral programs are an incredible time and cost-effective form of marketing – something that’s increasingly more difficult to come by in 2023.

4 customer referral programs that work

1. Peloton

Peloton banner to refer friends.

The worldwide interactive fitness company, Peloton, has its own referral program where customers can refer a friend to purchase products like the Peloton Bike or Tread. The referred friend gets $100 off their new purchase, and the friend who does the referral is rewarded with $100 off Peloton apparel.

The best part about the Peloton refer-a-friend program? Peloton enthusiasts can refer up to 6 new customers per year. That’s a whopping $600 off their Peloton apparel purchases (and more brand reach for the company!)

2. quip

Banner on quip’s website for their referral program.

‘Keep referring, keep earning!’

Global oral care brand quip has a simple and generous referral marketing program. Existing customers who share a free $5 credit with friends or family will earn their own $5 refill credit, as long as the code is applied to a purchase.

Plus, there’s no limit to the number of referrals quip customers can offer – $5 can add up, especially when you’re paying for monthly refills of dental products. It’s a win/win situation for both the existing customer and the new customer.

3. Airbnb

Airbnb’s referral program.

Since the Covid-19 pandemic, Airbnb’s referral program has ended; however, while it was active, customers were able to earn ‘travel credits’ toward their future bookings simply by referring friends to become new users on the home-away-from-home app. For a community full of travel-lovers credits that could be applied to future travel was a perfect way to entice existing customers to refer Airbnb to others.

4. Amazon

Amazon influencer referral program banner.

The Amazon influencer referral program is more geared towards influencers and brands rather than friends and family. It was designed to help influencers monetize their traffic to Amazon with easy affiliate links or storefront links. Essentially, influencers can build a ‘storefront’ of their favorite products to share with their community and encourage purchases.

This program has found major success, particularly among social media influencers like those on TikTok who cater to users searching for specific bargain products or products in specific categories, such as travel or fashion.

How to start a referral program in 2023

Know your audience and determine rewards

Knowing your audience is the key to any successful customer referral program. If you can figure out what makes your customers tick, you’ll be able to incorporate it into your referral program for engagement. For example, you may find that your customer base is much more interested in free products than they are in overall discounts. Instead of offering the ‘wrong’ type of reward, you’ll have a good sense of what works for your unique audience that will generate the highest referral rate.

Of course, there’s a fine line between a reward that’s incentivizing and a reward that actually disrupts profits. Brands can’t go sending out free products every time a customer referral is made. It’s up to your business to develop a strategic approach to delivering valuable assets that satisfies your customers and financial team alike. For many merchants, figuring out which rewards their customers will engage with the most is a lengthy process, full of trial and error.

Set your goals

Without clear goals, businesses may lose valuable insights into how their referral program is doing: whether it’s impacting customer retention, how referred customers are behaving, etc.

Ask yourself the following questions:

  • What’s my ideal referral rate? What’s the referral rate in my industry?
  • What effect do I want my referrals to have on customer lifetime value (CLV)?
  • How many customers do we want to actively participate?
  • What does the ideal engagement rate for this program look like?
  • What defines a successful referral?
  • How many successful referrals are we aiming for each month?

The list goes on and on.

A strong customer referral program touches many parts of the business, so it’s vital to ask the difficult questions now to set goals for the future. Once brands have strong goals in place, they can continuously optimize their referral process to make sure they’re getting the most out of the program.

Engage your customers

Last but not least, engaged customers make a referral program work! Once your referral program is ready to launch, you’ll need to inject it into your communication with your audience.

This can look like emails with personalized referral links, a landing page with all the program details and rewards, an announcement on social media, and much more. Essentially, you’ll want to let your customers know that you’ve created a program that can pave the way to rewards and savings.

Again, this type of communication should be determined based on your audience’s unique preferences. For example, if your customers spend most of their time on social media, you’ll absolutely want to have a post go up about your referral launch. Whereas, if your customers are highly engaged via text, you might opt for an SMS.

Are customer referrals the next best sales tool?

No matter the industry, the verdict is clear: customers trust recommendations more than any other form of outreach. Long gone are the days where paid advertisements rack up the most sales revenue.

The approach in 2023 is simple: customers are looking for trustworthy brands and brands are looking for cost-effective ways to connect with high-intent customers. In e-commerce, this means having a stellar referral program could be the key to not only bridging the trust gap and boosting sales, but also building a community of loyal, repeat customers along the way.

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