The Psychology of Referral Marketing: Why Referrals Work

It seems like the effectiveness of customer referral programs has nothing to do with rationality and everything to do with basic human psychology. In what manner? Read on and find out!

According to research by McKinsey, word-of-mouth marketing generates more than twice the sales of paid advertising, and these customers have a 37% higher retention rate. This underscores the immense value of tapping into psychological drivers to foster authentic referrals from happy customers.

Have you ever subscribed to an online magazine or video streaming platform that you didn't even need? Have you ever bought a product just because a friend recommended it?

If yes, then you've been influenced. 

But don't let this information make you feel bad about yourself – we've all been influenced at some point in our lives.

Here's the truth: 

According to experts, it's basic human psychology that inherently motivates people to say "yes." In short, the behavior is hard-wired into our brains. 

And that's exactly why customer referral programs are so effective in 2021. They are based on basic human psychology that still exists today. Chances are, customer referrals will still be effective 100 years from now.

In a nutshell, if you want to learn:

Then you'll love the detailed information in this post!

Let's dive right in! 

What Are Customer Referral Programs?

Customer referral programs incentivize existing customers to recommend a company's products or services to friends and family. By offering rewards like discounts, cash, or other perks, businesses tap into customers' social networks to acquire new leads and customers through trusted referrals.

Referral programs work by leveraging customers' personal networks and the psychological principle of social proof. When someone recommends a product or service, it carries more weight than traditional marketing because the referral comes from a trusted source.

However, simply asking customers for referrals without incentives often yields poor results. Successful programs offer attractive rewards that motivate people to take action and spread the word about a brand they love.

As referral marketing statistics show, referred customers have a higher lifetime value and are more loyal than other acquisition channels. This makes referral programs a wise investment for businesses aiming for sustainable growth.

In reality, the most successful referral programs are those that offer something in return.

A prime example is Dropbox's wildly successful two-sided referral program. The company incentivized both the referrer and referee, rewarding existing users with bonus storage space for every friend who signed up using their referral link. This created a win-win scenario where both parties benefited.

The program was so effective that Dropbox grew from just 100,000 registered users in 2008 to over 600 million by 2019, with 14.3 million paid subscribers. According to ReferralRock, the program generated over 3.4 million direct referral sign-ups and an estimated $48 million in revenue.

Sounds impressive, right? 

Source: Dropbox

The Proven Benefits of Referral Programs

Customer referral programs offer numerous proven benefits for businesses:

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The Psychological Principles Driving Referral Marketing

At its core, effective marketing taps into fundamental human behaviors and psychological drivers. The world of marketing may appear complex on the surface, but successful strategies ultimately come down to understanding what motivates people and creating campaigns that resonate with those deep-seated desires.

One of the most renowned experts on this topic is Dr. Robert Cialdini, the author of the seminal book Influence: The Psychology of Persuasion. In this groundbreaking work, Cialdini outlines six universal principles that govern how people are influenced and persuaded:

These principles form the foundation of how to ethically influence human behavior, which is key to designing effective marketing campaigns like referral programs.

In the following sections, we'll explore each of these six principles in depth and examine how they specifically apply to the psychology behind referral marketing. Understanding these core drivers is crucial for creating programs that truly resonate with customers and compel them to become brand advocates.

Let's dive in!

Social Proof: The Power of Following the Crowd

The principle of social proof stems from our deep-rooted desire as humans to fit in and be part of the crowd. We often look to the behaviors and choices of others, especially those in our social circles, to guide our own actions and decisions. This herd mentality manifests in everything from the products we buy to the trends we follow.

The desire to fit in with the rest of the crowd is one reason why referral programs are so effective. 

Let's make this concept a little easier to understand by using an example.

It's your first day in Italy, in a little town called Alberobello. You just walked 12,000 steps and took hundreds of amazing pictures. Now you're starving and are looking for a cool place to dine. Do you go into the restaurant that's bursting with people or the one in which not a single soul can be seen?

Let me guess: it's the former. 

The same thing applies when you're deciding on purchasing a product or service. 

In other words, people want proof from their friends and family or unbiased third parties, not the brand selling the product/service. If a friend tells them they've tried an exceptional product, they're more likely to make a purchase than, let's say, if they see your brand in an ad.  

The Authority Principle

If you look up the term "the authority principle," you'll get a line that says:

The authority principle refers to a person's tendency to comply with people in positions of authority, such as government leaders, law-enforcement representatives, doctors, lawyers, professors, and other perceived experts in different fields.

But how does this concept work in a referral program?

Well, in the world of marketing, the authority principle doesn't refer to police officers or lawyers. Instead, it refers to people who are more knowledgeable on a topic than us – that's why we're more likely to take their advice.

For example, let's imagine that a friend of yours is a super-skilled interior designer. You're renovating your home and need some advice on living room furniture vendors. Will you go to them for help, or will you ask someone who's never renovated a living room before?

It's the former, of course. 

If you have customers who share your product or service with friends and family, they will trust it – especially if that person is well-informed on the topic. A referral from this type of person is as valuable as an endorsement from a celebrity. 

The Reciprocity Principle 

Reciprocity is another term in social psychology. 

In short, humans are hard-wired to react positively to a gift, even if they didn't ask for it or need it. Even more, they instantly feel indebted to the giver. 

Precisely this basic survival mechanism is responsible for the effectiveness of referral programs. 

When you're giving something to your customers, whether that is more storage space or a $50 voucher, you're basically creating a social obligation for them to return the favor. 

And how will they do that?

By spreading the good word. 

The Scarcity Principle

The scarcity principle is simple:

People think opportunities are more valuable when their availability is limited.

This activates FOMO (Fear Of Missing Out) which motivates people to take action in fear of losing an opportunity. Customers end up buying the product because they feel like time is running out. 

In fact, the tactic is widely used by offline and online businesses, as it's low-risk and easy to manage.

The Commitment Principle 

The commitment principle states that once a person has made a choice or taken a stand, they will feel pressured to behave consistently with that commitment. 

For instance, let's say that you committed to run your first marathon that's happening three months from now. You shared the news with your friends, and they were highly excited for you. It's precisely this public announcement that will motivate you to not give up on your plans and train more consistently. 

This tactic works great in the world of marketing, as well.

In fact, businesses often leverage the principles of commitment and consistency to increase loyalty and sales.

One example is committing to leave your email or phone number to stay up to date on campaign news. After some time, you'll start receiving more and more requests from the brand. You started as a simple website visitor and have progressed into a fully committed community member.

The Liking Principle 

The liking principle states that we are more likely to accept recommendations from people we like and want to be like. The more we like someone, the harder it becomes to say no to them.

It's the #1 reason why companies use celebrity endorsements to promote their products or make their most loyal customers brand ambassadors.

Three principal liking factors influence consumer behavior:

1. Physical attractiveness : attractiveness suggests honesty. 

2. Similarity : we like people who are similar to us in terms of personality traits, background, lifestyle, etc. 

3. Compliments : we love receiving compliments and feel attracted to people who compliment us. 

Now that we explained the six pillars of social psychology, let's see how you can use that knowledge to make your referral programs more effective. 

How Can You Make Customer Referral Programs More Effective?

1. Offer Incentives Before You Ask For a Referral

Here's a good tip: give something to the customer even before you ask for a referral.

By giving something before asking for something, the customer will already feel indebted to you which increases the likelihood they will share your product/service with their friends. 

For example, you can offer a 10% discount the moment they land on your website or give them a reward after they have successfully completed their customer account. 

To keep the reciprocity going, give birthday rewards and VIP perks to encourage your customers to spread the good word in the future.

Source: DodoCase

2. Offer Two-Sided Referral Program Rewards

As we mentioned earlier, a two-sided referral program differs from a one-sided program. A two-sided program gives a reward not only to the person sending the referral, but also to the person receiving the referral.

But why is this tactic so powerful?

The referrer doesn't just get a reward, but they also get to give something to their friend. And as the two parties have something to gain, they're both more likely to get your product. 

So if you were giving away $50 in your one-sided referral program, consider offering $25 to the user and $25 to the person who was invited.

Source: Girlfriend Collective

3. Highlight Success Stories From Customers

Here's a great way to boost your referral program: highlight success stories from your existing customers. 

For instance, consider sharing how some of your users have used the reward or gained an online income.

When people see real proof of the success stories of your customer referral program, they'll be more likely to recommend your product/service themselves. 

A good idea is to create a dedicated page where you'll showcase positive customer feedback about your referral system.

You can even emphasize the popularity of your program and say something like: 

"Our referral program keeps on growing! Join 1,000 other customers who are referring our product to their friends and get rewarded!"

4. Leverage Influencer Marketing

Get this: 

For every $1 that brands spend on influencers, they are getting an ROI of $5.78.

Yes, influencer marketing is a big thing in the industry nowadays and has everything to do with the liking principle. 

Although a pricier tactic, it's a sure way to reach new audiences, promote brand awareness, and get new customers faster. 

Simply team up with a blogger, a social media influencer, or a podcaster with a large group of followers. But the number of followers is not the only thing to keep in mind. Make sure the influencer has an audience that aligns with your target market .

You don't want a beauty influencer promoting your tech product, am I right? So choose carefully.

The Lagavulin campaign featuring Nick Offerman is a great example of influencer marketing: 

https://www.youtube.com/watch?v=LS-ErOKpO4E  

5. Use FOMO to Your Advantage

Since you now know the power of FOMO, why not use it to increase the effectiveness of your referral program?

After all, it's easy, it's simple, and it doesn't cost much. 

For example, create a unique referral reward to customers but set expiry conditions. Customers will have from Friday until Sunday night to earn it. 

Another referral program idea is to offer a reward that customers can't get in any other way. It can be a limited edition product or a customized gift.

Here's one way how to do it:

Source: Getaround 

6. Enhance Social Capital

Let's make this simple:

Social capital in marketing means making users see how your program enhances their social capital.

In other words, your referral program has to build the user's image in the eyes of their peers. If sharing your product or service means that the user's strong connections with other people will lower, they will steer clear of making any referrals. 

For example, let's say that you recommended a video streaming platform to a close friend. However, the platform keeps on crashing, and your friend hasn't been able to contact customer service. When they finally got in touch with someone from support, they refused to offer a refund. 

In your friend's eyes, you're now a person who lies to their friends and recommends terrible products. Your social capital is reduced.

What your company can do is brand your product/service well. In addition, focus on creating fantastic content such as blogs and guides, offer high-quality products, and ensure your customer service, website experience, and refund processes are all working correctly.

Now It's Your Turn

We humans may seem complex beings with puzzling thoughts, weird behaviors, and elaborate emotions upon first look. 

In reality, our thoughts, behaviors, and emotions are driven by ancient social psychology principles that have existed since prehistoric times. 

We may live in a world of space exploration and virtual realities, but we still have the mentality of Stone Age hunter-gatherers.

And only by understanding this mentality can you manage to create effective customer referral programs and supercharge your marketing processes. 

For instance, knowing how the reciprocity principle works, you'll manage to leverage reciprocity in your referral program the right way – for example sending customers a welcome bonus. 

Or, being aware how people are more likely to trust the people they like, you can use influencer marketing to your advantage. 

With that being said, now it's your turn!

Which principle of influence will you incorporate first into your program? 

The ball is in your court!

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