Customer referrals matter more than you think

By Aaron Small|10 min read|Updated Aug 10, 2023

When a close friend or family member goes out of their way and refers a new product or service to us, we pay attention. A leading study published by Wharton shows that just by being referred, we’re more likely to buy from that company and stay loyal. (Van den Bulte, C. et al., 2018)

In a world bombarded with marketing messages, we trust people’s opinions more than any other medium.

For brands looking to acquire more customers and build loyalty, a referral program must be part of your growth strategy. By tapping into the power of trust and added incentives, you can reach new customers and accelerate growth for your bottom line.

But questions spring to mind:

What makes referral strategies so effective?
What types of rewards should you use as incentives?
Who gets paid?
What’s the ROI?

This guide explores the science and strategies of referral reward systems, and shares pointers before you launch your program.

Why referral programs are so good for business

The nonstop barrage of paid media leads most people to tune out to traditional advertising.

Instead, customers vastly prefer to make buying decisions based on the valued opinions of those in their inner circle, like friends and family.

According to Nielsen’s 2012 report, 92% of consumers around the world say they trust earned media, such as recommendations from friends and family, above all other forms of advertising.

A graph showing that 92% of customers trust recommendations from family and friends over all other forms of advertising.

Throwing incentives into the mix helps streamline the process, creating a referral reward program, or RRP.

Referred customers are:

Cheaper to acquire
More valuable in the long-term
More likely to spend

Hear how Casper's referral program 7x its marketing ROI

A smart ROI

Paid media works fast but eats up budgets. Referral programs are significantly cheaper, relying on your existing customer base to do the heavy lifting via word-of-mouth.

Customer referral programs are one of the most effective ways to acquire new customers at low cost.

Casper has seen massive success with their referral program — generating 7x higher returns than their average marketing investment. Tempo, selling at-home gym equipment, lowered customer acquisition costs while generating impressive new customers with their program.

And the campaign mechanics you need to get the ball rolling are quite simple: a landing page, referral codes, and some social share buttons.

So simple, and yet the added value can’t be overlooked. There are numerous studies indicating the high ROI of referred customers over non-referred ones.

“Word-of-mouth customers contribute nearly twice as much long-term value to a firm's overall customer equity.” (Villanueva, et. al (2008). In terms of actual numbers, let’s look at Schmitt’s 2011 study of a referral program run by a German bank.

“The value of referred customers in the six years after acquisition was 16% higher than that of non-referred customers with similar demographics and time of acquisition.”

With an initial reward incentive cost of only 25 euros, this implied an ROI of 60% over six years.

A see-saw representing that word of mouth customers have twice as much long term value as other customers.

When it comes to devoting marketing resources, putting in the effort to set up a smart referral program pays dividends.

More loyalty on both sides

Customer loyalty is a feeling generated by a string of positive experiences and high-quality products delivered over time. New referrals arrive on the loyalty fast track because they’ve been selected by your current satisfied customers as a natural match for your company.

Say you’re a rock climber obsessed with your new climbing pants. You get a branded email to refer a friend and earn a discount.

What do you do? You reach out to your close climbing partners and spread the word. Maybe you meet in person or in their DMs to discuss stretchability, durability, and colors – and share your referral link.

Customer bonding is nice. And it’s great for your bottom line.

“The co-presence of a fellow customer may also provide functional benefits. A referred customer expectedly exhibits higher sales or lower cost to serve and greater satisfaction than a non-referred customer.” (Van den Bulte et al., 2018)

Before we celebrate, studies point out that the referral process is risky for senders.

‘Metaperception’ is a concept that comes into play here.

In this case, when people refer a service to a friend, they deeply care how they come across to that friend. They don’t want to be seen as greedy or taking advantage of others.

A 2013 study about a rewards program run by a bank showed that:

Metaperception is the strongest and most significant driver of successful RRP participation, followed by the reward.
Credibility can be increased by design. It’s wise to provide an easy way for customers to forward the referral message, and add links to social platforms or other online sources so newcomers can learn about the product and company.

To reduce the risk of a metaperception meltdown, know your target before you prompt them to refer your business.

A graphic describing that metaperception drives successful RRP participation, while credibility can be increased by design, with simple ways to share.

Experts say to choose only your most satisfied customers. They’re the segment most likely to refer authentically.

“Customer satisfaction is a prerequisite for generating referrals through RRPs. An attractive referral scheme is unlikely to compensate for poor service or an inferior product.”(Van Doorn et al., 2010)

Word of mouth matters

Overall, there are two main approaches when running a referral program: you either pay people, or you don’t.

If all your customers feel delighted and enthusiasm is through the roof, then there’s no pressing need to provide incentives for referrals.

But for most companies, incentives matter.

And they help drive engagement. Ryu and Feick (2007) found that rewards increase referral likelihood regardless of reward size, especially for weak ties and weaker brands. A little goes a long way.

Both cash and product discounts are effective rewards for businesses to offer their satisfied customer base to generate referrals. But among a list of companies with successful referral programs, a majority of them reward with cash and gift cards.

And in an A/B test by Friendbuy, when gift cards were offered as the referral reward, they performed significantly better than discounts.

A slide showing that customers who received a $75 Visa card instead of a $30 discount shared referrals 58% more often.

Even when the discount is double the amount of the gift card, there was a 30% higher share rate. And an increase in conversion rate of 160%.

If you’re on the fence about offering cash or discounts, here are some scenarios where cash is king.

For one-time purchases. If you’re selling high-end gym equipment, you can expect people aren’t buying twice. So reward your referring and new customers with cash, in the form of a gift card. Giving them retailer options is nice, too. Tremendous partners with 900+ retailers for tons of possibilities.
For high-consideration purchases. Think mattresses or jewelry.
For regulated industries. Where discounts can’t be given, like insurance companies.
For limited SKUs. Items like teeth-alignment kits.
For low-consideration items. For “lower sensitivity” categories, like cell phone plans or clothing retailers.

There’s one interesting exception to the rule of high-end purchases.

Kornish and Li (2010) found that for products or services with higher sensitivity, like LASIK or fertility treatments, there’s an element of risk involved when referring.

A good outcome is great, but a bad outcome could be painful. Making money off a bad outcome feels bad.

So offer a discount on the product. And make it a sizable one, too.

How you communicate the reward amount also matters.

Jonah Berger, a marketing professor at Wharton, shares the “100 rule” in his book Contagious.

“Whichever number is higher, the better. For a $2,000 item, $500 off seems larger than 25%, which makes people more likely to purchase when they see the absolute dollar discount.”

When applied to rewards, especially for discounts, if the amount is below $100, it’s better to share the percentage of the discount rather than the absolute number.

A quote reading: "Whichever number is higher, the better. For a $2,000 item, $500 off seems larger than 25%, which. meakes people more likely to purchase when they see the absolute dollar discount."

Many paths to take

Let’s say you’ve decided to use gift cards as your incentive. Who gets what?

Reward Me: Your current customer gets a reward
Reward You: Your referred customer gets a reward
Reward Both: A rewards party for everyone.

Deciding the best approach seems to depend on company size.

A graphic displaying the different ways to reward people through referral reward programs. You can reward the current customer, or reward the referred customer.

If you’re a startup looking to drive adoption without breaking the bank, then a one-sided referral program that rewards only your current happy customers might be your best option for the short term.

If you’re a strong, recognizable brand and hoping to develop referrals among people with strong ties (family members or close friends), then rewarding both the recommender and the receiver is essential.

But remember the rule of metaperception: when money is involved, people care how they’re perceived by others.

If the recommendation seems out of left field or hard to justify, people will raise eyebrows and question the motives behind the referring: All this effort so they can make ten bucks?

The solution? Up the amount of the referral reward. And you’ll see even better performance when you reward both sides. (Jin, L. et al., 2014)

Key elements of successful programs

Want to get your referral program off the ground or troubleshoot your existing one? Here’s what to keep in mind.

Have a clear value proposition

Be straightforward and direct with what you’re offering customers who participate in your RRP.

Your CTA should be clear and enticing to drive participation.

So first, decide which type of reward you want to give. Going with gift cards? Great.

Gift card processing is easy to execute with Tremendous. You can send over 1,000 digital gift and prepaid cards to just about anywhere in the world, for free. Plus, you’ll have a central dashboard to buy and track everything.

If you’re looking for a creative alternative option, make sure that the reward fits your brand.

Say you’re in the shoe business. Rewarding your customers with teeth-whitening kits doesn’t fit. Instead, you can offer early access to new drops or special giveaways.

When framing your proposition, words matter. Your CTA will generally take two forms:

Selfish incentives that benefit the sender: “Get $20 off your next order when you refer a friend.”
Pro-social incentives that benefit the receiver: “Gift your friend $20 when they sign up.”

A graphic highlighting the differences between selfish incentives and pro-social incentives.

Both work well. But a large-scale study found that the call-to-action with kindness can be more effective to activate your customers. Here are some examples to explore.

A screenshot of a referral offer for $25 to Rapha customers.

Takeaways:

Maintain your brand consistency.
Posing the CTA as a question draws your attention, doesn’t it?
Reward both sides for higher engagement.

A referral offer from Chase, which gives customers a $500 cash bonus for referring a friend.

Takeaways:

Go big and bold with your offer.
Make the reward type match your audience. In this case, money talks.
Leave the details down below.

Make it easy to do

If your referral program has too many moving parts, people tend to jump ship. From design to copy, keep it straightforward to keep them aboard.

Spell out the steps.
Make your page easy to scan.
Make your program easy to manage.

This referral example by Google Workspace uses a clean design and a 1-2-3 format.

Remember to make the process user-friendly and shareable. Let your customers decide how to refer. Platforms like friendbuy allow customers to share via:

Autofilled emails
SMS
Personalized links
Social sharing

Lastly, make the whole process easy on yourself.

Tremendous makes it simple for companies big or small to buy, track, and manage incentives at scale. With us, you can instantly reward your recipients individually or in bulk with gift cards, prepaid Visa® cards, cash, and more.

And our easy-to-use dashboard saves you time and headaches. In fact, businesses that use Tremendous save 2 days a month.

Make it easy to do

A surprising number of referral programs don’t get off the ground for one reason – customers don’t know it exists.

So, first action item? Send out a launch email to your subscribers announcing the new referral program.

But don’t stop there. Make sure to dedicate serious real estate across your channels to keep their eyes on the prize. Add placements on:

Website main navigation, and top announcement bar
Pop-up windows
Post-checkout pop-ups
Post-purchase emails
Newsletters
Social media
Influencer partnerships
Podcasts

Podcasts have exploded as a mainstream medium. Edison Research states that 46% of listeners have made a purchase after hearing an ad on a podcast.

Podcasters can bring a layer of authenticity when promoting brands, strengthening the feeling of trust and credibility.

The strategy is simple: Podcast hosts promote your brand to their listeners with a unique referral link that also includes a discount on your product.

Case studies: successful programs in action

Dropbox: Free storage for everyone

Dropbox, the cloud and storage company, hit a home run with its referral program in 2009. They generated an impressive 3900% growth in just fifteen months. How did they spark so much customer acquisition?

By tapping into an insight: people will always want more space.

Whether it’s your kitchen, closet, or digital storage center, it’s hard to refuse more shelves. The startup seized the opportunity to reward both sides of the referral with more Dropbox space.

Even if you didn’t reach 16 GB of free space, it didn’t matter. The reward of 500 MB feels big and sounds exciting – all you needed to do was write down a friend’s email address.

But other aspects of the program helped fuel the fire.

Referral prompts appeared when new users signed up for Dropbox, leveraging their excitement for the product.
“Thank You” emails were delivered to recommenders whenever their receiver signed up.
A personalized dashboard allowed users to track their referral progress, and see how much space they’d racked up so far.
Cute aliens and astronauts.

When building your program, ask yourself:

What reward can you give customers that’s unique or relevant to your primary service?
How can you dial up the fun and make the referral journey more friendly?
Where can you personalize the experience for customers?

Uber: Racing for more riders and drivers

Uber created a frictionless referral program to scale up the number of drivers and riders. With an emphasis on user experience and dual-sided incentives, they surged past the competition to lead the market. Here’s how they did it.

Uber launched separate referral programs for riders and drivers. With an in-app program, they made it highly accessible.

Riders saw ‘Free Rides’ from the main app navigation – a more compelling CTA than the standard ‘Refer a Friend.’

From there, they were prompted to share the app and earn a reward. Both sides earned Uber ride credit.

Uber made another clever play: free credits were spread over multiple rides – ensuring more activity within the Uber ecosystem.

The driver program operated similarly, and the customer journey was simple to operate.

Drivers send referral codes to their friends from the app itself, personalizing the message.
Drivers can track their referral activity on their dashboard or in the Driver app. Uber also automatically follows up directly with status updates.
Senders earn their reward only once their invitee completes a certain number of trips. This helps reduce fraud and creates a psychological milestone for new drivers to hit.

In the race for ridership, the Uber referral program was a huge success. In May 2023, Uber accounted for 75 percent of U.S. rideshare spending.

When building your own program, keep these in mind:

How can you simplify your sharing and referral process for customers?
Writing is design. How can you craft your referral CTA to be more inviting and engaging?
How can you follow up with your customers throughout the journey?

Airbnb: Growing an empire one home at a time.

Testing and iterating ideas can make all the difference. In 2013, Airbnb decided to relaunch its underperforming referral program.

Going with a mobile-first strategy, they made a few significant choices.

Vary the rewards. Referring hosts received cash, and referring guests received credit.
Personalized invites. In the referral email, Airbnb included a profile photo of the sender, which added a touch of humanity to the process and helped reduced dropoff.
Test the language. Gustaf Alströmer, Growth Product Manager at Airbnb, swapped headlines to see if a social or selfish headline would improve engagement. The team discovered that the idea of ‘giving’ was more sticky and led to more invitations being sent.

In 2022, the global revenue of Airbnb was 8.4 billion U.S. dollars. In January 2023, Airbnb.com was the third most visited travel and tourism website worldwide.

When building your own program, keep these in mind:

Do your customers prefer store credit or cash? What will lead to a higher rate of retention?
Once you have a framework in place, where can you iterate?
How can you personalize the experience?

Conclusion

Referral programs are cost-effective strategies that yield high-margin growth for your business.

As Samantha Samuels, head of partnerships at FriendBuy put it: “Every customer you acquire through referral is one less you need to acquire through a paid channel. “

Referrals also identify your best customers, tapping into the power of word-of-mouth between friends or family members who already know and trust each other.

And the high customer lifetime value can’t be overlooked. Referred friends convert faster, and their value can be 3x or 4x more than a standard customer.

If you’re looking to scale up your business sustainably, referral programs must be part of your arsenal. And Tremendous is ready to partner with you to help you launch it. Why go with us?

Transparent pricing: Tremendous is free to use.
International coverage: Send rewards to customers in more than 80 countries. We handle conversions easily.
Bulk ordering: Need to send 500,000 digital gift cards tomorrow? We’re fully capable to handle rewards of that size.
Customize rewards: Build a cohesive brand experience with custom designs and messaging.
Flexible platform: Manage multiple teams and budgets — on one account.
Automate rewards: Connect to the Tremendous API to automate reward distributions.

We partner with organizations both big and small, from Google to Pinterest to United Way – saving them time, money, and hassle and helping them grow their business at scale.