10 dos and don’ts for building an effective referral program
Growth Mar 10, 2019
While it requires some work to get referral programs running smoothly, when they work well they are magical. Here are some tips of the trade (based on years of experience) to help you get started.
1. Get into the mindset. Uncover what will motivate your referrers.
Motivation is critical for getting any referral program off the ground. Every referral program needs to focus on both sides of the referral equation — referrers & referral recipients. You’ll want to figure out early what will motivate your users to become referrers. These drivers of motivation vary based on type of business, so you’ll want to start by thinking about what’s unique with your business or your business model that you can use to your advantage.
In addition, on the referrer side, you’ll want to ask yourself if you have a network effect in your product, and how this benefits the referrer and recipient of the referral.
Let’s look at 3 different types of companies and how they might handle referral programs through network effects and referrer motivators.
In a typical social network a referrer gains value from the platform by seeing more and more of their friends/colleagues/contacts in the product. This is a classic example of the network effect — if a user has a phone but no one to call, the value of that phone is pretty low. By having more contacts in the product the referrer gains access to more information/content/news/updates, and, as a result the network (in this case the product) becomes stickier. In this way creating a viral loop is possible because the growth feeds on itself. New users are motivated to to add more connections and thus value in the product, and therefore are prime referrer candidates. In these B2C cases, viral referral growth is possible without any monetary incentive structure in place (aka, they benefit from “free” growth). Facebook and Twitter are great examples of companies that used non-monetary incentives to drive growth.
If you don’t have a network effect in your product, you may need to look at incentivizing the referral process. At Upside, we provide business travel services — not something that lends itself well to the network effect. But, based on our business’ economics — we are able to offer rich referrer incentives for our customer base through various premiums — sometimes monetary, sometimes non-monetary. We can also leverage our own product value (business trips), and offer our referrers value by giving them trip credit that they can redeem on our platform. Every company looking to incentivize referrers will need to take a hard look at their economics to understand what makes financial sense to their business.
Companies like Uber have a different type of network effect — but it’s tied to the ratio of supply (drivers) to demand (riders). Because of this, there isn’t an immediate value that the user of either side of the marketplace gets just from having more people in the network. However, as both demand and supply grow over time, the network becomes large enough to warrant rapid compounding growth (perhaps viral). In the case of Uber, referral rewards are often monetary based on the demand (rider) side to get more people into cars, and in return, Uber rewards referrers with Uber credit. On the supply side, riders and drivers are both incentivized to get more drivers on the road so that the supply to demand ratio is healthy.
Think about what type of company you have, and what you think the motivators will be for your referrers — and what value the recipient receives. Use this as your operating hypothesis as you build your referral MVP.
2. Think about what will move your referral recipients to act
What are the levers you can pull to motivate recipients of your referral offers? Similar to the above, you’ll want to think through what value you can immediately add to get them to try or buy your service or product. At Upside, we understand that there are perceived risks for business travelers when they switch up how they book their business trips. So for us, we need to both connect the value of Upside (we’ve got your back 24/7) as soon as the user sees our product, and also mitigate the perception of risk. We’ve tested all sorts of monetary and non-monetary incentives, and have settled on a core set of first-time offers that help counterbalance the risk of changing where they book their travel.
A SaaS business might consider offering a free trial or timed discount for referral recipients — leveraging the referrer as a credible source that the trial is worth it.
3. Test various incentives — clout/status, cash, gift cards, physical premiums
We’ve tested dozens of incentives to see how they impact our referral programs. And we’ve done so across physical and non-physical premiums (headphones vs travel goods, for example), gift cards, and various other tactics. One of our best performing referral programs that is our current “control” referral program is a “Give $100, Get $100 on Upside” incentive. The referrer receives $100 in gift cards on any referral they send our way, and the recipient receives $100 in gift cards on their first qualifying trip with Upside.
But what if you can’t leverage a monetary backed program, or have a very limited budget for doing so? Check out what one of our favorite companies, The Hustle, does with their referral program. They leverage status and a small budget backed program to drive their referral growth.
Think of ways to drive low cost referrals, test multiple types of offers before settling in on a control, and make sure you keep your retention metrics top of mind when running these programs.
4. Test the timing of your offers — does urgency work?
Another way to try to drive referral growth is to use urgency on both sides of the referral equation. Does sending a limited time referral offer work for your referrers? Does it help move the recipients to action? Or does it backfire? Your product and your brand will have its own set of drivers, and you’ll want to do a lot of testing around urgency to see how it can impact your referral program.
5. Don’t forget about retention
Not all referral programs are created equal — nor will they perform the same. Often it’s easier to drive first time use of your product through a rich referral offer — but be mindful that it could backfire. Those referrers who are sharing your brand and whom are doing so out of…greed, for example… will potentially bring in new users that may not be your ideal customer. Make sure that you run experiments that are healthy, and that drive long term retention. Otherwise, you probably see a lot of upward trajectory followed by stagnation and even churn. When laying out your referral program make sure you think about retention metrics and how to track those metrics fro the start.
Ok…so we covered a whole bunch of things to DO when starting a referral program. Now, here are some things to avoid!
6. Make it hard on your customers
In the beginning, you’ll likely be doing a lot of things manually to see what drives your referral growth. This is fine, but if you’re going to optimize in one area, optimize those things that make it easier for your users to become referrers. Give customers one click share options. Give them a unique and personalized referral code. Write the share copy for them. Ask them how you can help them refer more people. Make their life easier and they’ll be more inclined to act on your referral program.
7. Wait for perfection.
We covered a lot of this already, but launch an MVP. Don’t worry too much about your early referral programs. Assume they will fail. Assume you’ll need to run 10 tests before you understand what motivates your users to become referrers. Don’t wait to get a fully baked plan in place — just get started and force yourself to run a bare bones MVP if you can. Because you have to start somewhere and go from 0–1.
8. Launch without an understanding of how you’ll be gamed.
If you are running a referral program that leverages an incentive, expect you’ll get gamed. I repeat — if you are giving out an incentive [money, gift cards, physical products, credit…] you will get gamed, at least at the start.
When we initially launched our double-sided incentive based referral programs where both the referrer and recipient received monetary incentives — we got gamed. Big time. We iterated a few times, and got gamed again. Why? Because there are people that get on the scent of making money, earning credit, etc. who will try everything — literally everything — to game your system. It is likely unavoidable, so acknowledge that it will happen, and you’ll make smarter decisions when kicking off your program. Just make sure you learn when you get gamed and be nimble enough to plug any holes.
9. Forget about terms and conditions
This one is easy to brush aside, but it’s tightly connected to the gamer notes above. In a nutshell — you need to think about how you may be gamed as early as possible, and build in any terms and conditions that can help protect you as you scale your programs. At Upside, after a few ‘lesson-learned’ scenarios, we put terms in place that helped us guard against things we hadn’t foreseen initially — everything from fake users and duplicate accounts users who tried to refer themselves. Your T&Cs should be flexible enough that to can react to unforeseen circumstances but tight enough that you limit your risk when scaling the programs. A delicate balance, but one that is totally achievable with some time and experience under your belt. .
10. Obsess over one idea
One strategy might work when your customer base is small, but once you grow — you will likely find that your core offerings either no longer resonate, are stale, or just don’t work like they used to. So don’t get too hung up on one idea. Expect that you will need to switch out call-to-actions, offers/incentives, and even tactical things like how you produce referral codes.
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