This is a guest post by Raul Galera, Partner Manager at ReferralCandy. Below, he discusses how and why word of mouth marketing is so effective, and analyzes some of the best referral campaigns and how they were implemented.
How often do you ask your friends and family for referrals when buying a new product? Every day? Once a week?
The truth is, we ask for referrals quite often. We talk about our favorite products and experiences when we’re out with friends. We share our favorite products on social media. In other words, we’re wired to share our experiences with our social network.
Although word of mouth marketing is not as flashy as video or creative advertisement, its results are phenomenal.
Take a look at the data:
The statistics show that one thing is clear:
Word of mouth marketing is a tremendously valuable driver of repeatable, scalable growth.
Why does it work so well?
Referral marketing creates a WIN-WIN-WIN situation.
Think about it this way.
If you love a product, you’ll encourage your friends to buy it. Not only because you want to share your experience, but also to make your friend’s life better. In turn, when your friend buys the product, the business gains sales.
In addition, word of mouth marketing is organic and genuine. After all, you wouldn’t recommend products that you don’t like, otherwise your relationships could suffer.
But how do you get customers to talk about your business? Should you just wait for referrals to happen naturally?
In recent years, marketers have tried to influence the process of word of mouth marketing with referral campaigns.
How do they work?
When customers sign up for a referral program, they receive a personal referral link. They then share the link with their friends. If a friend uses the link to buy the product, then the customer who made the referral will get rewarded. These rewards may include discounts, cash and exclusive products.
It’s a great concept, but how well does it work?
To prove the effectiveness of word of mouth marketing, we’ve analyzed some of the best examples of referral programs we have seen over the past few years, and what made them successful.
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Do you remember how you created your PayPal, Dropbox or Uber accounts? It is highly likely that you did it thanks to a friends’ referral.
If you were around in the early days of the internet, back in the early 2000s, you might remember how you set up the PayPal account you are still using.
PayPal created one of the most successful referral programs in history. It worked so well that it allowed them to get between 7 and 10% daily growth, growing their customer base to over 100 million users.
They were basically giving money away. After a month of activity, PayPal had 100,000 customers. When asked about their referral program, Elon Musk explained:
“We started off first by offering people $20 if they opened an account. And $20 if they referred anyone. And then we dropped it to $10. And we dropped it to $5. As the network got bigger and bigger, the value of the network itself exceeded any sort of carrot that we could offer.”
They ended up spending about 60 million dollars on their referral program. Although they also tried advertising and business development to acquire new customers, they found that $20 for each new customer was the lowest customer acquisition cost available at the moment.
This referral program worked so well that Elon Musk implemented it after he founded Tesla Motors. PayPal’s referral program also served as an example for Dropbox to catapult their word of mouth growth.
Dropbox’s referral program (which is still around) helped them get over 3,900,000 users in just over a year, by only offering free storage space. This helped them bypass traditional ad spend, about $233-$388 per customer for a $99 product.
Fast forward to 2012, when ridesharing app Uber started expanding outside the United States. 3 years later, there were Uber cars picking riders up in over 50 countries.
An important part of this growth lies in the power of word of mouth marketing, which Uber was able to channel thanks to their referral program:
Far from over, Uber’s referral program is still part of their marketing mix, offering free rides worth $15-20 USD:
However, you don’t need to be PayPal, Uber or Dropbox to benefit from having a referral program. At ReferralCandy we have seen thousands of small and medium online business run successful referral programs.
One of these businesses is Critical Pass, a company that built a referral program to channel the organic word of mouth they were already receiving from their existing customers.
Critical Pass sells flashcards that help students pass the most important test of their lives—the bar exam. But it wasn’t always easy to promote the product.
The company initially tried several different marketing strategies to get their business off the ground: SEO, influencer programs, social media, content marketing, etc. These methods helped them generate initial traction but, they quickly realized that organic word of mouth marketing was going to play a major role in their company’s success.
There are tons of online forum websites full of resources for those students preparing the bar exam. Most of these forums are used by students to ask for feedback or recommendations on study techniques.
Many of these students were already talking about their experience using critical pass:
Critical Pass’ CEO, Nathan Kleiner, decided to channel these reviews in a way that he could reward loyal customers and attract new clients by offering a discount.
They designed a referral program that gave a $10 reward to advocates (existing customers sharing their experience with fellow students) and a $10 discount to new customers. When asked on how they set up these rewards, Nathan responded:
“By and large, people who are taking the bar exam aren’t making an income. It’s 3 months of 9-5 studying. So we thought giving a dollar reward would motivate people to share with their friends and fellow bar exam takers.”
Critical Pass’ referral program is very easy for customers to remember: Give $10, Get $10. It helps customers not just remember who they are, but also get rewarded for inviting their friends to a service that they find value in using.
How did it work?
Well, since its implementation, Critical Pass was able to multiply its initial investment by 24. Today, Critical Pass’ referral program accounts for over 10% of their orders and revenue.
If you are running an eCommerce store with a decent-sized customer base, and have a recurring number of sales every month, it is highly possible that you already have a loyal base of customers talking to their family and friends about your products.
And, more importantly, it is very possible that these conversations are turning into more sales revenue for you.
In fact, according to Kissmetrics, small and medium online businesses get, on average, 60% of their sales thanks to referrals.
However, if you don’t have a referral program implemented in your store, it is impossible to calculate:
You also won’t be able to reward your most loyal customers, which could make them more vulnerable to switching over to your competitors.
Implementing a referral program can not only solve these problems, but also allow you to make decisions to empower your word of mouth marketing.
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