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12 Reasons Why You Should Launch a Referral Program

Posted by Grant Robertson-Adams | Jul 6, 2021

Referral programs are a no-brainer when it comes to sparking growth within your business, whether well-funded or a bootstrapped startup. There are many ways that you can create and run a successful referral program, and even more reasons why you should launch one.

The Importance of Referrals in SaaS Businesses

“We take most of the money that we could have spent on paid advertising and instead put it back into the customer experience. Then we let the customers be our marketing. historically, our number-one growth driver has been from repeat customers and word-of-mouth.” Tony Hsieh, CEO

Referral marketing, putting it simply, works because people trust their friends and those close to them. It has become one of the most successful forms of marketing and can easily be adopted by businesses of all sizes. The core aim of it? To garner more clients through your existing client base by incentivizing them to do so. You are, essentially, getting your client base to do your marketing for you.

Revenue is just one of the reasons why referral marketing is important to your business. More clients generally means a larger revenue is generated, but it also creates a wider network of people who are engaged with your business, a larger group of people who are enthused by your services and a system that facilitates growth by design. Referrals aren’t just great leads, they’re your best leads. Here's what Forbes has to say about referral marketing:

  • 78% of B2B marketers say that referral programs generate good or excellent leads.
  • 60% of marketers say that referral programs generate a high volume of leads.
  • 54% say that referral programs have a lower cost-per-lead than other channels.

This isn’t even the extent of the benefits that a referral program can bring.

3 Benefits of Referral Programs

  • Sparks Word of Mouth Marketing: Getting people talking about your product or service in a positive way will always lead to an increase in customers. Referral programs create opportunities for that to happen within a far wider community than you may usually be able to reach. Remember that referral marketing is slightly different to word of mouth marketing.
  • Cost-Effective Customer Acquisition: Referrals are far more likely to be effective as you’re not the one doing the marketing. When the marketing is carried out by the potential customer’s friends and family they’re far more likely to convert. Any direct recommendation of your services is far more effective than an indirect, impersonal advert.
  • Higher Conversion Rates: Once the referred party is interacting with your business they are far more likely to convert to paying customers. Why? Because their friends are already paying customers, and have already shown them that they are enjoying your services and products.

12 Reasons Why You Need a Referral Program

The above are pretty compelling reasons to set up and run a referral program of your own but here are 12 more:

Rapid Movement Through Buyer Journey

The sales process is considerably quicker when the user comes through a referral than if they come through other forms of marketing. The reasoning behind this is that the part of the process where you have to slowly build up trust is already a long way there thanks to the inherited trust from the referral. As their friends have already vouched for your business and services or products, that social proof goes a long way earning your trust.

Easier to Convert

On average, the sales department in most companies close between 10-30% of their leads. That means that out of every 100 leads. 70 to 90 of them go to waste and don’t proceed. You might not close a lead for myriad of reasons but one thing we know for sure is that when that lead comes to you through a referral, your conversion rate increases to between 50-70%. The element of the buying process where people weigh up other options, consider trust and gauge viability is diminished a large amount thanks to the referral process.

You’re the Authority

Those who are referred to you will immediately view you as an authority on the product or service that is being offered. You have, clearly, already impressed their friend who has referred them to you and therefore must be good at and knowledgeable about the product and service in question.

If we refer to Dr Robert Cialdini’s 6 Principles of Persuasion, the authority principle dictates that we are more easily persuaded by those seen to be in a position of authority. There are various ways in which we display authority (such as looking authoritative, using the titles and trappings of authority) but simply being introduced as an authority figure is by far the most powerful option. Once in this position one is far more likely to turn prospective clients into long term paying customers.

Referrals Beget Referrals

If someone has successfully been referred to you through a referral program then they are, in turn, more likely to take advantage of the referral program themselves. This means that they will become a referral source for your business and therefore your referrals will grow exponentially. This element effectively produces a viral loop.

rollercoaster viral loop metaphor

The viral loop happens when a current user engages and likes your product, because of that they feel compelled to engage in your referral program especially when they could receive incentives for doing so, the user refers multiple people, those people go on to engage with the product and the cycle begins again. Having a referral program that has incentives too good to say no to will encourage the greatest participation.

They’re an Enjoyable Way to Do Business

With referrals the people who are engaging with you genuinely want to work with your business, after all they’ve taken the first step and reached out to you. This is a far more enjoyable way to conduct business with people, if only for the fact that you don’t have to consider prospects to be cold anymore. It means that after you introduce yourself in that first email or call, they actively want to respond and already have placed a great deal of trust in you and your business.

Customer Interaction with Your Business

When running a referral program, your customers essentially become part of your marketing team. They’re going out, talking about your business, sharing information about your business and encouraging their friends, family and acquaintances to work with you. While they might not have a formal agreement with you, nor will they have a contract with you as their employer, they will feel like they are actively part of your business. Building relationships comes with massive benefits, both for your business and the customer.

This is a feeling that you should look to nurture as best you can, therefore where possible you should be showing gratitude and sharing your thanks with them for what they do. If you’ve built a relationship with a larger referral partner (a YouTuber for example) then great, but remember that the average person likely has nearly 500 connected people across their social network.

Overall, people like to feel appreciated, and if they feel appreciated for the referral work they do for you, they’re far more likely to continue doing so.

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It Looks Good for Business

People will usually only refer others to businesses that they have had a positive experience with. It’s highly unlikely that one would refer someone to a business they didn’t enjoy working with. And it’s because of this that the referral system is simply good for business. It means that your good reputation is being spread even with those that you have yet to interact with.

Research has shown that, “83% of satisfied customers are willing to refer products and services. But, only 29% actually do.” This means that solid, profitable referrals are being left on the table and not used. One could hypothesize that one reason why the 71% who don’t enact on referrals is because they don’t have the means to do so, and that if they were provided a robust referral program they would go on to participate in it.

More Retained Customers

One of the biggest reasons that businesses fail to maximize profitability is because they’re not retaining customers or they’re not making the most of their current customer base. Customer retention is worth a massive amount of revenue to businesses, especially when considering the long term. Huify looked into the stats (originally published by Invesp) and found that “The success rate of selling to a customer you already have is 60-70%, while the success rate of selling to a new customer is 5-20%. Increasing customer retention rates by 5% increases profits by 25-95%."

customer retention meeting

By working with your current customers and retaining a mere 5% of them you stand to make massive increases in profits. This is even more important when we consider that the customer acquisition cost of a new customer is at least 5 times more expensive than retaining an existing customer. But it is still new customer acquisition that is the core focus over retention for the majority of businesses.

A referral system, when combined with incentivized rewards, enables you to better retain customers. They might not necessarily be purchasing from you on a regular basis but they are interacting with your business regularly and will be driving new customers to you for a fraction of the potential cost when compared to traditional marketing methods such as paid advertising.

Increased LTV

The LTV or lifetime value of your customers is an important metric to track within your business. For product based businesses, it’ll be how many times people return to make additional purchases. For service based businesses, it might be how many times they reuse the service or how long they keep their subscription going. In either circumstance, it makes sense to increase the opportunity for higher lifetime value.

Thanks to the increased trust, high level of positive attitudes towards your business and increased levels of knowledge around the benefits that you can provide them, referred customers are far more likely to engage with your business over a longer period of time. In fact, referred customers are “18% more likely to stay with you than other customers, and that gap (does) not fade over time.” In the same study, conducted by Van den Bulte, it was found that a German bank that offered €25 per referral given by its current customers amounted to a 60% ROI over 6 years.

Build Social Media Noise

When building a referral program, it makes sense to encourage those participating to take their purchases and referrals to social media. They could be sharing their referral links and codes to their network via platforms such as Facebook and Instagram, which, even if few people follow through, naturally increases your brand awareness. Couple this with the fact that 71% of people are more likely to make a purchase based on social media referrals.

It is worth considering building in additional rewards and incentives into your referral program if participants share their experiences and purchases on social media, especially as it was found that 55% of customers are happy to share their purchases.

Easily Monitorable Campaigns

Thanks to the stats that referral campaigns afford (such as participation rate, share rate, conversions, conversion rates, lifetime value, and return on investment) you are able to easily track, analyse and optimize a running campaign efficiently and effectively.

Through this tracking you can identify groups or even individuals who you might consider approaching for a more formalized partnership. At this point you can offer them exclusive rewards and incentives, or offer them a tiered system to encourage them to scale up their referrals.

Close monitoring also enables you to clearly see the return on your investment. Setting up referrable programs may take a considerable investment up front, therefore being sure that the return on investment is at a place where you’re making profit is essential.

Once You’ve Started They’re Easy to Operate

Referral programs might seem like a lot of administrative work initially, but they are less complicated than they might seem and the time investment (once set up) is relatively low. Especially when you consider the overall ROI. With the right software and processes in place from the start, you’ll be in a position where the majority of the program runs in an automated way.

The majority of your time thereafter will be spent monitoring, evaluating and optimizing the program going forward.

Why It’s Time To Start A Referral Program

Above you’ll have read a plethora of reasons and benefits related to setting up a referral program, but it can still be a big and daunting task. If you’ve read this article, and you don’t already have a referral program in place, you might be wondering when it’s the right time to start one, and if that time is now.

We’ve considered those who have worked with GrowSurf and where they were in their business journey and found these common themes:

The Business Didn’t Like Asking For Sales

It’s definitely a step out of the comfort zone to simply ask someone for their business and many people aren’t confident in doing so. It can also be difficult to ask for referrals, as finding the right time is somewhat awkward. There are plenty of opportunities where those who haven’t become full customers (for whatever reason) may have actually enjoyed working with you through their customer journey and would be willing to recommend and refer future clients your way.

If you have a referral program in place, especially one which automates referral links and/or codes, then you enable those people to make referrals without you having to ask them to. The only thing you need to do is ensure that the referral program is easily accessible, has clear and achievable incentives and the referrals will begin to fly in.

Customers Wanted A Referral Scheme

There’s a chance that your customers already want to participate in a referral scheme. This is most prevalent in businesses where referrals are already happening. You might question, therefore, why you would want to provide incentives if they are already referring business to you. The answer would be that putting a referral scheme in place encourages them to do so even more and activates the opportunity for the viral loop and future referrals as noted above.

Even if you’re not ready to launch into a full referral program, you could start with a spreadsheet, list out customers, share a link or code with them, tell them your incentives and see what happens. If you begin to see that people are participating then you know that the demand for a referral scheme is there.

Customers Say They’ll Refer But Don’t

Without a planned referral program in place, people often offer the best intentions (“Oh of course I’ll recommend you!”) but don’t necessarily follow through. After all, chances are it’ll just be in passing anyway, as there’s no real incentive for them to remember to make referrals other than goodwill.

Creating a referral program, especially an automated one with regular email or notification reminders, is a far more effective way to request referrals. When your customers are reminded of the benefits they could receive just for sharing a link or code they are far more likely to make the effort.

The Business Wanted To Increase It’s Conversion Rates

Everyone wants as high a closing rate as possible. A higher closing or conversion rate means more sales, which means more revenue, which means a growing business. If you’re not currently 100% happy with your closing rate then chances are that a referral scheme will massively increase that bottom line. If your business is currently cold calling then you might be working with tiny percentages of closing (the average closing rate of a cold call is 1%...) whereas if you have a robust referral program, referral leads can close at a rate closer to 80%.

Why Referral Programs Work

Bill Cates (Not the Microsoft guy), writer of Beyond Referrals - How to Use the Perpetual Revenue System to Turn Referrals into High-Value Clients calls missed referral opportunities “forgotten gold”. Missing those referral opportunities is like leaving pots of gold out in the open, ready for other businesses to take advantage of.

Referral programs are successful thanks to the human predisposition that we put the word of our friends and family higher than that of those we don’t know. Makes perfect sense. Why would a person trust a random business over their best friend? If you were to take the same product, service or offer and present it to a potential customer as a business and then as a referral from a friend, they would be more than twice as likely to think about it after hearing it as a referral.

Unfortunately, these aren’t programs which you can install, build and forget about. They will take some investment, both time and money. But once the process is in place, and referrals begin to drip, flow and fly in, the business will benefit from increased customers, sales and reputation.

  • Referral programs allow quick and succinct movement through the customer journey and are far more likely to close at the point of sale
  • Referrals lead to referrals which lead to referrals which lead to referrals which… There is opportunity for viral loop style referrals
  • Retaining customers through a referral program leads to increased lifetime value and reduced customer acquisition costs
  • The metrics associated with referral programs are easily tracked, analysed and optimized so that you know what’s working, what isn’t and what can be improved.

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