What is Referral Marketing? Referral marketing goes by many names including “Refer a Friend”, “Introduce a Friend”, “Incentivised referral” and “Member get Member”. At its core it is about incentivising your existing customer base to encourage their friends to come and buy from you for the first time.
“Referral” and “Word of Mouth” marketing are often confused. “Word of Mouth” is the result of customers generally talking about a brand and convincing others to try it on the back of their recommendation without any prompting by marketing efforts. It is absolutely the best marketing channel because it is free and brings in customers predisposed to like you. The biggest challenge with “Word of Mouth” is that it is completely uncontrollable. Apart from being the best business that you can be there is little that a marketing team can do to drive it. When marketing teams want to boost “word of mouth” they usually turn to referral marketing and start to think how they can drive their existing customers to share more. That usually involves some form of incentivisation … although incentives are only a small part of the story when it comes to referral.
A study conducted by the Goethe University Frankfurt and the University of Pennsylvania, on referral programs and customer value which followed the customer referral program of a German bank that paid customers 25 euros for bringing in a new customer, was released in July 2010. According to Professor Van den Bulte, this is the first ever study published on the financial evaluation of customer referral programs. The study found that referred customers were both more profitable and loyal than normal customers. Referred customers had a higher contribution margin, a higher retention rate and were more valuable in both the short and long run.
On whether customer referral programs are worth the cost, the study says that it records “a positive value differential, both in the short term and long term, between customers acquired through a referral program and other customers. Importantly, this value differential is larger than the referral fee. Hence, referral programs can indeed pay off.” incentivise.
What is Referral Marketing