For some businesses, referral represents the largest online channel for their business. Dropbox manage to acquire 60% of their customers from their referral programme1. giffgaff, the UK mobile phone company, claim referral accounts for 35%2. These businesses achieved this level of referrals by building it into their product offering from an early stage. For more mature online and multichannel businesses that are adding referral as an incremental marketing channel, it should be driving a 10% to 25% increase in online acquisition. Amongst the Neoneyx client base we see businesses in different sectors with different business models and at different life stages all achieving these sorts of results.
Part 1: 10-25% The increase in customer acquisition that most businesses can expect from referral marketing 15-25% The increase in first order value expected from a referred customer Develop a strong case for referral
The potential of referral
Referral marketing represents a significant opportunity for most online businesses to boost their customer acquisition. At Neoneyx we believe that most businesses should be targeting an increase in acquisition of 10% to 25%. For mature businesses there aren’t many other channels that you could switch on and deliver that kind of an increase. There are some well-documented examples of businesses who have made referral perform even better than this benchmark. Dropbox generated 60% of new customers, giffgaff generated 35% and Uber is reputed to generate 50% of new customers from referral when entering new markets. For all of these businesses, referral has been a key part of the business from very early on and it was prioritised within the product accordingly. For businesses that already have an established model and marketing mix referral is likely to represent one of the best ways of materially increasing acquisition for a business.
The hidden benefits of referral
The number one benefit of referral is the number of new customers that it delivers to your business. However, what is often overlooked is the quality of the customers that are delivered. Since the new customers are the friends of your existing customers, they are a great match for your target market. Unlike some channels where you bring in discount hunters who are not in your target demographic and likely to only buy once, referred customers are usually right in your target demographic and tend to become great, longstanding customers. They’re also predisposed to liking you as a brand before they’ve even bought anything because their friends have been enthusing about you to them. As a result, from the data we see at Neoneyx… • They spend more on their first order – typically 15-25% more • They have a higher lifetime value, up to 200% that of customers who come in from other channels • They are three times more likely to become a referrer themselves
Avoiding the pitfalls of referral
The obvious question after seeing the potential upside is “If it is so valuable, why isn’t everyone doing it?” The answer, quite simply, is that it isn’t as easy at it might seem. For each success story there are more businesses that have tried referral marketing and found it didn’t live up to their expectations. Often teams end up thinking that it’s because the channel doesn’t work for their business whereas in most cases it’s because of how it was implemented. There are very few referral experts out there and most online marketing teams don’t have anyone with deep experience of the channel that they can call on in-house. As a result marketing teams often start with a hypothesis about how to approach referral that is not grounded in real experience of what works. The marketing teams then need to convince the business to dedicate the development resource to build a referral programme. For some businesses this is impossible (particularly if the business case is unproven). In others it is possible but it just takes time. In these cases, once it is scheduled, the development team build the solution to the marketing team’s hypothesis. Then once they’ve delivered the product they’re off working on other projects. If the marketing team’s initial hypothesis doesn’t work they tend to have very little scope to change anything. They need the development team to change creative, messaging, user experience and promotion points. Also if the initial offer doesn’t seem to chime with the audience then it’s very hard to test alternatives. The marketing team can’t just change an offer unless they’re willing for everyone who is sharing and receiving shares to see something different to what they were promised. As a result, marketing teams rarely manage to change anything after a programme launches and if it doesn’t work then they won’t promote it further. In this case the whole progamme tends to get labeled a failure.
Confirm referral is right for you
There are no hard and fast rules that can guarantee whether referral will work for your businesses. Success comes from a range of factors, and the most relevant factors for driving a good referral channel are:
Underlying customer satisfaction The happier your customers are with your product the more likely they are to tell their friends. A high Net Promoter Score (NPS) is a great indication that referral has the potential to work well.
Demographic Referral can work for any demographic but some tend to be more active. As a very general rule of thumb, women share more than men and under 30s share more than over 30s. That said, it’s not the be all and end all and we have seen referral work on brands that only sell to 50+ year olds. Whilst the older demographic tend to share less, the shares they make tend to convert better.
Proportion of existing customers If the majority of customers coming through a checkout are buying for the first time they tend to be less likely to share.
Talkability of the category Some categories lend themselves to discussion. For instance, clothing is often commented on, holiday plans are discussed with colleagues, hobbies are shared with other enthusiasts. If this dynamic is present it increases the share rate.
Impulse or considered purchase If your product requires consideration it will take longer to get a referral progamme off the ground as friends who receive a share may not yet be ready to buy.
Discounting environment If a brand regularly discounts heavily it makes it hard for a referral offer to stand out. If the referral offer is less generous than other offers in the marketplace then referrers will simply not bother sharing it because there is little point in sharing an offer if they know their friends will get better value elsewhere.
Economics You need sufficient gross margin for the referrer and the referee incentives to fit within your Cost Per Acquisition. If you can’t offer a compelling incentive out of the margin you have available then incentivised referral won’t work.