Did you know that 40% of U.S online retail sales come from returning or repeat customers? As an online seller, you know more than anyone how important it is to acquire new customers, but are you focused on getting the most out of the customers you do have? We’re not just talking about optimizing for repeat business. We're talking about leveraging your existing customers with the e-tailer’s secret weapon: referrals—something we've seen increase our customer sales volumes by 30-40%.
What is Referral Marketing? Successful referral marketing is getting a customer to recommend your product to someone in their network who in turn makes a purchase.
The laundry list of benefits for referral marketing far surpasses a one-time sale; it’s growth hacking at its finest. Like a self-sustaining chain reaction, referrals increase the breadth and reach of your network, while producing more loyal customers. According to a Wharton study, this loyalty is extended not only to the referrer, but to the recommended customer as well. “The lifetime value of referred customers, measured over a six-year horizon, was 16 % higher, on average, than that of non-referred customers.” In other words, happy customers who refer spawn a new breed of committed customers that spend more.
To save on word count and forego irrelevancy, we won’t get into the nitty gritty psychology of why referrals work. Instead, we’ll break down some key examples, and show how to best employ a program of your own.
But, if you are interested in the psychology behind referrals, this is a good read.
Referral Marketing is Two-Sided
Referral marketing can take on many forms. However, the most notable campaigns are based off two-sided referrals. This means that both the referrer (source) and the new customer (target) are rewarded with discounts, cash incentives, or other perks. When done properly, referral marketing has a great return on investment (ROI) and can drastically cut down paid acquisition costs. In addition, customer lifetime value (LTV) can actually increase as well. Before launching a massive campaign, understanding key metrics about your business like lifetime value and current acquisition cost is huge in determining the performance of referrals.
Here are some examples of trailblazing two-sided referral campaigns.
PayPal’s success with referrals in the early 2000’s was unprecedented. In fact, they set the bar for just how successful a referral campaign could be by achieving 7-10% daily growth during the peak of their “refer-a-friend” movement.
However, this achievement didn’t come without risking it all. In the early stages, PayPal paid referrers $10 and gave new customers the same sign-up bonus. With thousands of daily sign-ups, PayPal could have easily sank if users took the cash and failed to use the service. As they achieved their customer acquisition goals, the payment giant reduced the bonuses from $10 to $5, transitioned into a merchant-only referral bonus, and eventually eliminated referrals entirely. Throughout the program, PayPal proved that millions of customers can be earned organically when accelerated by an intelligent referral system.
Takeaway: Referrals increase your network and have viral potential. As your customer base grows, don’t be afraid to decrease incentives, or reorient your program to meet new goals.
Dropbox is the contemporary golden child when it comes to two-sided referrals. Rather than offer cash incentives or discounts, Dropbox brilliantly offered existing customers and the newly referred sign-ups additional storage space. This incentive program, arguably the most successful to date, grew users from 100,000 all the way to 4,000,000 in 15 short months.
The Dropbox referral program was extremely low cost, was relatively risk-free, and gave away something that allowed users to get more out of their service. The Dropbox campaign, inspired by PayPal, righted any of the wrongs of its predecessor, drastically reducing acquisition costs, while doubling the number of users every 3 months.
Takeaway: If possible, get creative with your bonus. If you can find something that’s low cost, and allows customers to get even more out of your product or service, that could be your multi-billion dollar idea.
For other interesting case-studies, checkout Groupon and Airbnb.
Every ‘Referral Rose’ Has it’s Thorns (aka Fraud)
Small holes in referral campaigns can become massive targets for customers and scammers alike. This is especially true when credit cards, cash rewards, and publicity is involved. Hotel Tonight is a good example of a two-sided referral program that was too easy to cheat, turning it into a stomping ground for petty fraudsters.
In Hotel Tonight’s campaign, both the source customer and the referred sign-up received a $25 credit. The source customer would get a cumulative credit and the target customer would receive a discount off their booking. There was no minimum purchase required to activate the discount code and no maximum amount of credits a referring customer could earn.
So, why did Hotel Tonight create a breeding ground for scammers?
Having no minimum purchase before the discount code activated (for both the source and target) meant zero obstacles for scammers setting up multiple accounts. As such, the primary source account could set-up numerous secondary emails, and get credited $25 when each of these fake accounts made (or even cancelled) a low-cost booking. By referring from more than one account and rotating which accounts made the booking, it became fairly easy to acquire hundreds, even thousands of dollars in credits.
Takeaway: Look out for multiple accounts with similar naming characteristics (e.g. email@example.com, firstname.lastname@example.org, email@example.com etc.), do your due diligence, and watch out for these red flags.
How to Create a Bulletproof Referral Campaign
For pre-order sellers, the likelihood for referral campaign fraud is diminished. Apparently when products don’t ship immediately, the instant gratification of pulling a “fast one” loses some of its punch (who knew!?). In saying this, it still happens, but just takes on a slightly different form than a Hotel Tonight-style scam.
Referral programs for most one-time purchase items (like Coin, a laptop or a $2000 robotic monkey) offer a checkout discount to the referred buyer and an after-the-fact refunded monetary discount to the referrer. For the source customer, this type of postmortem refund is the standard in referral campaigns. However, these partial refund systems are very susceptible to fraud, falling victim to the same incestuous ring of primary and secondary “fake” accounts. Simply, a scammer will make a purchase, share the referral code with multiple fake accounts, and make purchases using the code. In turn, the primary account will be incrementally refunded for each purchase made. Finally, the secondary accounts will then cancel all of the orders.
With large order volumes, this scam goes undetected and is rarely uncovered before the primary account has been refunded. Once the refund has been issued, it cannot be reversed, and the primary account holder often walks away with a free (or heavily discounted) product.
To avoid this type of fraud, Celery has built a patented “piggy bank” system called Celery Referrals. This new system gives sellers unprecedented control and flexibility over their campaigns. Instead of immediately refunding an order, Celery Referrals credits the primary buyer with an “IOU” reward. After a customizable timeframe—likely until a product is ready to ship—you can automatically (or manually) trigger the owed referral payouts. This delay is a turn-off for would be scammers, and gives you, the seller, way more observation time to uncover suspicious activity.
Your customers are your customers because they support what you’ve made. Referrals are one of the single best ways to make a process out of this support to increase your reach and sell more. If you’d like to be one of our first sellers to try out Celery Referrals, sign-up today, or email firstname.lastname@example.org.