Referral Marketing: Definition, Types, and Examples

Considering the widespread use of social media, referral marketing become one of the highly influential business strategies.

But, what is a referral? As the name suggests, this referral strategy is done by “referring” or giving recommendations of products or services from a particular business to a broader audience.

According to Nielsen's Global Trust in Advertising report, as many as 92% of customers trust referrals from people they know. This is why many businesses are actively implementing this marketing strategy.

Learn more about what referral means and how to create it in the discussion below.

What Is Referral Marketing?

Have you ever purchased something just because you received a recommendation from a close friend or perhaps an influencer you follow on social media? In reality, such practices are a form of referral marketing.

Referral marketing is a word-of-mouth strategy carried out by encouraging customers to recommend products/services to people around them.

Through this strategy, those who provide recommendations will receive beneficial commissions in the form of discounts, purchase vouchers, or free products.

One of the goals is mainly to strengthen the base of loyal customers. With this referral program, businesses can invite a group of people to join digital campaigns and maximize brand awareness.

Why Is Referral Marketing Important for Business?

Referral is a suitable strategy when your business aims to attract new customers or client segments by leveraging positive customer experiences.

Furthermore, it also offers many other benefits, such as: 

1. Strengthening Loyal Customers Base

Customers or clients who are satisfied with the service and quality of products/services are more likely to recommend them to others.

When customers are willing to make referrals to their friends or acquaintances, it can create a stronger bond between the business and the customer. 

Having a loyal customer base is crucial for businesses to increase the chances of repeat purchases.

2. Optimizing Brand Awareness

According to statistics on referrals by Exploding Topics, the majority of customers are known to discuss a specific brand up to 90 times each week. 

This is why, referral is the perfect solution for businesses looking to optimize brand awareness since it is done through recommendation methods to reach a new audience through an existing customer network.

3. Increasing Sales 

Referral marketing is a proven word-of-mouth strategy to maximize sales figures. In fact, 91% of millennials decide to purchase something if the product/service has been recommended by someone they know. Moreover, they are also willing to spend up to 200% more than non-referral leads.

4. Improving Customer Retention

As this marketing strategy can strengthen the customer databases, it is also beneficial for maximizing the retention rate. 

By providing incentives to loyal customers who recommend products/services to their friends and relatives, businesses can maximize customer retention and build stronger trust.

5. Increase Engagement Rate

Referral programs are not limited to giving recommendations but also involve customers in positive discussions about a product or service. 

Through referrals, businesses can maximize the engagement rate as loyal customers can share their experiences and personal testimonials, helping new potential customers understand the benefits and value they can gain.

6. Expanding Market Share

One of the most advantageous benefits of a referral program is helping businesses expand into markets that may be more challenging to reach with conventional marketing methods. 

Referral programs enable businesses to leverage existing customer social networks, expand their influence, and increase visibility in the market.

7. Maximizing Conversion Rate

Referral marketing can be considered an extremely effective method to increase conversion rates as well as reduce marketing costs. 

Businesses that can effectively utilize this referral strategy can reduce marketing costs because this promotion is generally done through word of mouth, making it more cost-effective.

Types of Referral Marketing

Now that you understand what is a referral in marketing strategy, you also need to learn about some types that can effectively attract new customers. 

Explore the following types of referral marketing and determine which is most suitable for your business.

1. Direct Referral 

Direct referral is one of the proven types that effectively increases the conversion rate. 

It involves direct recommendations, which typically occur when customers are satisfied with your product/service and voluntarily recommend it to people around them. 

This type has proven to be effective in boosting sales for businesses even with low Cost Per Acquisition (CPA). 

2. Incentive-based Referral

This referral program promises commissions or incentives for loyal customers who successfully bring in new customers. 

The incentives offered vary, ranging from discounts, memberships, or product-related gifts.

3. Social Media Referral

As the name suggests, social media referral involves recommending products/services through social media platforms such as Instagram, Facebook, Twitter, or others. 

This type of referral can be executed in various ways, from producing recommendation content with links to using referral codes, which are usually more attractive to new customers. 

This type of referral is commonly applied by businesses targeting social media users with specific segmentation.

4. Business Referral E-mail

This type of referral is characterized by sending email messages to existing customers, asking them to recommend a product/service to people in their network.

5. Review-based Referral 

Review-based referral is a strategy conducted by writing positive reviews on a business website. Customer reviews play a significant role in brand authority and can attract many potential new customers in the future.

Referral Marketing Examples 

To ensure you fully understand what referral is, consider the following referral marketing examples through the following analogy.

GracefulGlam is an e-commerce business that sells beauty products, and Amanda is one of the loyal customers on the platform. One day, Amanda's friend, Sarah, expressed interest in trendy beauty products.

Without hesitation, Amanda then recommended GracefulGlam and shared her positive experience with Sarah. She explained all the advantages of transacting on the e-commerce platform.

Because Sarah trusts Amanda, she feels confident to try products from the business and decides to make her first purchase through the referral link provided by Amanda.

In this case, GracefulGlam then gives discounts to both Amanda and Sarah to provide them with a price reduction on their subsequent purchases.

From the example above, it can be concluded that the trust that customers have in recommendations has a positive impact on the purchasing decisions of others.

Referral Marketing Strategy

Now, it's time to learn the effective referral strategy to maximize business revenue. cmlabs has summarized 6 easy steps for you to follow. Here they are:

1. Use Net Promoter Score to Identify Customers

As a business practitioner, you undoubtedly want definite results, right? Therefore, before implementing this strategy, you need to identify the customer segmentation you are targeting.

This is to ensure that loyal customers can know who to invite and who not to. To simplify determining your target customers, use the Net Promoter Score (NPS) approach. 

NPS contains a metric from 1-10 used to assess the customer satisfaction level with a business.

• Promoter: Customers who like the product/service, leave positive reviews, and are willing to recommend the product.
• Passive: Customers who give positive reviews but are not willing to recommend it.
• Detractor: Customers who leave negative reviews about your product/service.

2. Utilize Referral Software

To ease the execution of this program, there are several software options you can use, including:

• ReferralCandy: Equipped with automation features for spreading email marketing or providing rewards. Additionally, this platform allows HTML and CSS editing.
• Referral Factory: Features drag-and-drop functionality, comes with over 1000 templates, and has a flexible factory API.

3. Determine Suitable Rewards

According to LiveAgent, more than 70% of customers are more interested in brands that offer rewards, bonuses, or discounts. Therefore, you need to determine incentives based on the following considerations:

• Rewards will only be given to referral customers.
• Rewards will only be given to customers who recommend goods/products.
• Rewards will be given to both customers.

Also, determine the type of reward that is suitable and aligned with your business. If your business offers products, the reward could be a bonus product. 

However, if your business is in the service industry, the reward could be a discount for a subscription or other similar incentives.

Once you have completed these three steps, you can start implementing this strategy, following the guide below:

• Create concise and clear terms and conditions for participating in this referral program.
• Explain the workflow, from registration methods to the distribution of links or referral codes.
• Write a referral message with an attractive Call to Action (CTA) that aligns with the business objectives.
• Provide a brief explanation of the brand and Unique Selling Proposition (USP) of your product/service, especially if potential customers are not familiar with your brand.

This concludes the discussion on what is a referral in marketing, its benefits, types, and how to create it. 

Referral marketing is a suitable strategy when your business aims to strengthen awareness and brand authority. 

In addition to referrals, you can also utilize search engines to maximize business performance digitally.

If you need professional assistance in this regard, SEO Services by cmlabs can help you achieve business goals such as increasing organic traffic, establishing your brand as a topical authority, and much more.

Level up your SEO game and achieve business success with cmlabs. Let's collaborate now!