How & why to offer a referral discount

Referral programs work as powerful word-of-mouth marketing tools. Asking your loyal customers to spread the love for your small business, in exchange for a discount or reward, can make a big difference for your bottom line. By some estimates, referral marketing can increase profits by 16%; and overall, 92% of customers ask for recommendations from people they know before they buy.

Not convinced that a referral program is for you? Consider these data points:

• Customers who are referred to you are four times more likely to buy.
• Referred customers are 18% more likely to stay with you over time.

Like any loyalty program, a referral program that incentivizes loyal customers to spread the word must balance discounts and rewards with profit. What can you offer your referral program to increase your foot traffic (with old and new customers) without devaluing your products or hurting your bottom line?

Here’s how to offer a referral reward program to maximize profit and gain new customers.

Determine the value of a new customer.

For any rewards program to be profitable, the discount or incentive you offer must be less than the value of a new customer to your business. For example, pretend you run a $5 off campaign, and earn $1,500 during the promotion. Add up the number of customers who redeemed their $5 off coupon. If only 30 people redeemed their $5 off offer, your cost for the campaign was $150. The ROI is $1,500 divided by 150, multiplied by 100: in this example, that’s an ROI of 1000%. When you factor in that referral customers are 18% more likely to become loyal customers, that return starts to look even better.

The best way to determine the value of a new customer is to use a code to “tag” new customers who come through a referral. This gives you the ability to see their lifetime value, as well as adjust your discounts if you see your program is losing you money.

Find a low-overhead way to keep track of referrals.

Referral programs work best when they don’t cost money to implement. Plastic loyalty cards or punch cards can drain your operating budget. If you’re implementing a referral discount that counts on bringing a certain number of people through the door, you will want to think through a budget-friendly way to keep track of your referrals.

An app like Clover Rewards can give you the ability to tailor your rewards to specific customers, thereby saving in ways that might not have high visibility to other customers. Alternately, a customer referral reward app such as BuyFi makes it easy to track and reward those who spread the word about your business. You simply collect your customer’s email address at the end of a purchase and the program will email the referral offer out for you. It’s an efficient process: the customer refers you to friends, and if the friends buy, they all get rewards.

Be creative with your rewards.

Referral rewards don’t need to be solely financial. Be creative about what the perks are for bringing in a friend or family member. Discounts or freebies are nice, but what about something more in-depth? Offer an exclusive experience that resonates with your brand, a service that doesn’t add to your costs…be creative! Non-cash incentives, like a session with an in-house stylist or an invitation to an exclusive event, tend to be more effective. A study by the University of Chicago found that non-cash incentives are 24% more effective at boosting performance than cash incentives.

Reward the new customer—not just the referrer.

If your budget can handle it, expand your referral program to reward not just the initial referrer, but also the referee (i.e., the new customer that visits on a recommendation of the other customer). Both Airbnb and Dropbox have set good examples of how to make this work. Airbnb’s referral model gives a $20 credit to the customer, and when the friend signs up, they get a credit toward their first trip. Dropbox offered additional free storage to any referrers whose network signs up as a result of their recommendation. When shopping at your store is a win-win for everyone, it makes it easy for customers to share their love for your business.

Monitor what works.

Many business owners feel awkward asking for referrals from their customers. If you’re hesitant to get started, start with a limited time referral offer to judge how the program performs. Use analytics to inspect performance, see who is using it, how, and learn how much your incentives really cost. If the program seems successful, it can always be extended. Broadcasting that this is a limited time offer has the added benefit of boosting activity up front; create a sense of urgency and see how your customers respond!

Editorial Team

Customer service, Loyalty, Marketing

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