Published November 20, 2006

How to Build the Best Referral Program: Create an Effective Referral Program

Businesses need to get new customers and keep them. If a business only ever strives to get new customers without working hard at keeping the old customers, they run the risk of spending a lot of money and effort on marketing and sales. Every time a customer comes back again, the average marketing-dollars-spent-per-customer goes down.

We've talked a lot about keeping customers and tactics to do this successfully include differentiation, niche marketing, improving customer service, and creating a sense of ownership among customers.

Referral programs are another way that you can get customers coming back. Referral programs offer some kind of reward or enticement to have one customer recommend the business to another customer. Typically, these rewards still cost less than marketing cold to a group of prospects so the marketing-dollars-spent-per-customer still goes down.

Referral marketing is really effective because people listen to their friends, respect their advice, and act on it. It's an "easy sell" when someone walks into your store and says, "My friend bought from here and she was really happy. I'd like the same thing."

How do you create an effective referral program? Here are some ideas:

  • The best referral program is simply when customers are thrilled with your service and they tell others about you. This comes from providing more value than they expected and better service than anyone else around. Although there is no reward in the actual telling, customers are (theoretically) so "blown away" by how good you are that they tell others. In order to get customers to this point you have to really wow them... a lot.
  • Another way to get referrals is to offer a unique experience that no one else offers. If all other doctors' waiting rooms are boring and filled with old magazines, your waiting room should be a fun place to go with free babysitting and snacks and entertainment and maybe it should look like a cafe rather than an institutional room.
  • If you are going to create a referral program that includes rewards, make sure your rewards are appropriate. Unless you are building a referral program with a loss leader to earn market share, make sure your referral program is not so generous as to eat up all the profit you potentially make from the sale of your product or services.
  • Your reward, although still allowing you to generate a profit, should be substantial. I've received invitations to refer my family and friends to businesses I've used but the effort in telling my family and friends to go was greater than the reward offered.
  • Make the reward contingent on a purchase but not so difficult that it seems unlikely to happen. I've seen rewards that were simple: "when your friend comes in and buys from us we'll send you $100." I've also seen rewards that were too complex to be beneficial: "The friend has to visit twice and make two purchases each over $50 before we'll send you your bonus." Essentially this program needs to be summarized in a single sentence by your front line staff in order to be effective.
  • Make sure you have buy-in from your staff. If the reward is too generous to the customers and your staff feels underpaid you may experience push-back. If the reward isn't compelling or takes too long to explain, your staff may simply let the program fade into the background.
  • Avoid a referral program based around luck (such as scratch and win tickets). The perception, even though it is false, is that no ticket is a winner: all tickets say try again and the company is just pocketing the promised winnings.