Referral Marketing: Know The Facts Instead Of Myths

Technology giants such as PayPal, Dropbox and Uber have shown the way: They have launched global campaigns for user acquisition and used the power of incentive-based recommendations to their own private network to increase the number of their customers into the millions. Using the five most persistent myths about referral marketing, we show the real potential of this acquisition channel as an additional part of the marketing mix.

Myth 1

Referral marketing isn’t as effective and doesn’t reach the target audience as directly as influencer marketing

Influencer marketing is in vogue, investments by companies are growing, the advertising market was 6.5 billion US dollars in 2019, according to Statista, it was only 1.7 billion in 2016. But do the collaborations with the so-called influencers really bring the desired results? Basically, influencer marketing is based on the same principles as recommendation marketing – namely, trust and recommendation. But influencer marketing also has disadvantages: It is only effective for a short period of time, e.g. for a campaign. With long ranges, it is very costly and for these reasons has a less lasting effect.

Influencer marketing can be a powerful tool for generating quick sales. But the campaign only pays a short-term contribution to the business relationship between the company, influencer and customer.

Referral marketing, on the other hand, is a long-term strategy. Because it is based entirely on recommending products and services to those people who are just like a company’s existing customers: their friends and families. Recommendation marketing creates a sustainable channel in which the social proof is high: Customers make recommendations to their closest friends and family and thus strengthen trust in the company or the brand.

Because nobody would recommend something that they are not convinced of themselves. The investment in referral marketing quickly pays off if one referrer is followed by three others. Initial costs are amortized in a very short time if the number of customers increases continuously.

Myth 2

Referral marketing is the same as affiliate marketing and affiliate is dead

Like affiliate marketing, referral marketing relies on the power of incentives to increase revenue from new customers. However, the two methods are based on different strategies. The main difference between the two disciplines is: Affiliate marketing builds on paid relationships with outside advocates or influencers to promote a brand and attract potential customers to the company. Recommendation marketing, on the other hand, starts with incentives for existing customers to place a brand or product with friends and acquaintances.

The cornerstones of referral marketing are the multidirectional relationships between the brand, customers and their networks. The key and potential of referral marketing is to Rewarding customers for a recommendation and giving their friends an incentive to buy. This strategy can be very successful if it is implemented and implemented professionally. Corporate customers who use professional technology often increase their sales by more than 20 per cent, simply through successful recommendations.

Myth 3

Referral Marketing is nothing more than a customer cashback program

A typical cashback or payback program is usually designed to reward a customer’s loyalty. The reward – be it cash, loyalty points or kitchen appliances – creates an incentive to buy certain products. Recommendation programs, on the other hand, create an additional, self-reinforcing channel for acquiring new customers. Existing customers are rewarded for their recommendation, new customers receive incentives for their purchase decision.

In this way, recommendation marketing has a lasting effect and can promote the growth of brands in company-relevant areas: customer acquisition, customer loyalty and sales. Tip: Cashback campaigns are fully compatible with referral programs, which means that all new customers are effectively and automatically referred to.

Myth 4

Recommendation marketing only brings one-off purchases through enticement offers and not loyal customers

Nielsen’s consumer report shows that the most trustworthy form of advertising is a friend’s recommendation. 83 per cent of those surveyed trust their source when making purchasing decisions. The report also shows that a friend’s recommendation is four times more likely to make a purchase than any other advertising channel. In addition, incentives for referrals and purchases through rewards promote loyalty.

If trust is rewarded for a recommendation, customers show themselves to be extremely loyal and loyal to the brand instead of being interested in the competition. A study by the Wharton School found that recommended customers churn 18 per cent less than non-recommended customers. If the reward is in the form of money for a later purchase.

Myth 5

Referral marketing is more expensive than other acquisition channels because it is too complicated and difficult to implement

This myth can actually come true. Because it can be expensive if companies set up their own internal recommendation programs. The development and implementation take between six and twelve months, and expenses quickly run into the hundreds of thousands of euros. And mistakes can easily creep in due to a lack of experience, which contributes to a below-average end result.

The use of technology from specialized providers, on the other hand, saves your own resources. Referral marketing, then, can be an extremely cost-effective strategy for customer acquisition. Why is that? The company decides for itself the amount with which it would like to reward a recommendation. As a rule, this results in 50 to 80 per cent lower customer acquisition costs (CAC) compared to other channels.

In addition, the loyalty of customers won through referrals is over 30 per cent higher. But why should you pay extra for satisfied existing customers to voluntarily make recommendations to good friends? The prerequisite for voluntary recommendation is excellent service or a really excellent product.

In these cases, you can be sure that satisfied customers will recommend the brand to friends. With referral rewards, however, customers can also be motivated who would otherwise not have referred their friends. The latter are usually in the majority.

Do that satisfied existing customers voluntarily give recommendations to good friends? The prerequisite for a voluntary recommendation is excellent service or a really excellent product. In these cases, you can be sure that satisfied customers will recommend the brand to friends. With referral rewards, however, customers can also be motivated who would otherwise not have referred their friends. The latter are usually in the majority. Do that satisfied existing customers voluntarily give recommendations to good friends? The prerequisite for voluntary recommendation is excellent service or a really excellent product.

In these cases, you can be sure that satisfied customers will recommend the brand to friends. With referral rewards, however, customers can also be motivated who would otherwise not have referred their friends. The latter are usually in the majority.

The interesting thing is that the return on investment (ROI) of the referral program increases over time because referrals lead to conversions when buyers become customers. This growing pool of new customers not only increases sales but also continuously increases the number of new referrers for the program. This constantly expanding network of satisfied customers drives up conversions, increases sales and acts as a strong sales force.