11 Reasons Why Referral Marketing Works

by | Mar 13, 2020 | business

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Referral marketing (more commonly known as ‘word-of-mouth’ marketing), is one of the oldest forms of marketing and is still effective even today.

For a little more insight on what referral marketing is, think of it this way: Your friend is looking for someone to take their wedding photos. You happen to be a wedding photographer yourself, so you mention this to them, and show them your portfolio.

You get hired, and your friend and their spouse enjoy the photos. Because of this, this then causes a ‘word-of-mouth’ chain reaction. The friend then recommends your business to another person searching for the same service, then that person recommends it to another, etc.

Referral marketing helps small and big businesses alike, being an effective strategy to help save time and money. With that being said, here are the 11 reasons why that is:

1. It’s Considered the Most Trusted Marketing Strategy

The various statistics prove it. According to an article by Disruptive Advertising, a person is 4 times more likely to buy something because a friend or family member recommended it.  

In another article by DCR Strategies, the statistics showed that 80% of buyers ask for advice on a product before they buy it. The most commonly referred to the article, done by Nielsen, they came to the conclusion that 92% of customers will trust recommendations from the people they’re familiar with.

In an article by Talkable, studies showed that 76% of businesses with referral programs consider referral marketing as their low-cost method of getting more customers.

2. It Helps Grow A Business

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Like mentioned earlier, someone is more likely to get business via referrals. Believe it or not, this is how big businesses stay in business. One common example that is used is the referral program of ride-share company Uber.

With Uber, the person referred to the company can get their first ride for free. If they liked the program after using the free ride, then they are inclined to use it more, leading them to give an invite code to their friend.

In an article from Oberlo, one example they mention is of cloud-based program Dropbox. The company went from having 100,000 to 4,000,000 users within 15 months. It was due to the fact that they implemented a referral program.

In an article by Influitive, it states that at the beginning of electric car company Tesla, you could receive $1,000 if you refer them to a friend. It has changed in recent years due to an increase in customers – if you refer them to multiple people, you are eligible to win multiple prizes.

 In that same article, they also make mention of the company behind note-taking software Evernote. Their referral program awards point to the customers that make a referral. These points can also go towards Evernote’s premium features.

3. It Helps Reach an Audience

Most of the time, a customer recommends something they trust. Whether it is a product they’ve used for a long time or something new that they have found that works for them.

It is most likely that the person is going to tell their friends or family about that product. Therefore, leading the customer to look into that company and the company gains a potential new customer.

Another way it reaches an audience is if the company feels strongly about something and extensively promotes that belief. One example is a non-profit organization, To Write Love on Her Arms. The organization strongly believes in providing help for individuals that suffer from mental disorders, such as depression and anxiety.

 Another example, provided once more by the Oberlo article mentioned earlier, is a shoe company, Toms. The company has a specific business model – for every pair of shoes that are bought, a pair goes to individuals in need. The same goes for clothing company Tentree – for every clothing item bought, 10 trees are planted. Tentree also implements the referral marketing- sign up for their newsletter and get 10% off your first order.

4. It Can Be A Critical Marketing Strategy for Someone Starting A Business

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Image Source: https://www.disruptiveadvertising.com/marketing/referral-marketing/

It can be very critical for someone to start a business. The more people that are told, the more potential customers. And if those people are rewarded (ex: X% discount off of first purchase), the more they’ll be inclined to share with others. Here are two scenarios to help with this point:

Scenario One:

You are looking to start a photography business. You have a portfolio ready to show people and are actively seeking out clients. You use social media as a way to promote your photos, but you do not receive any messages from people saying they want to book you. You are not receiving any emails either.

It continues for a while, but then one day, you stumble across referral marketing. You read more into it and decide it is something you want to implement. You then sit and analyze what incentives you are going to use.

You decide to give a 10% discount for the first 15 people that book a photoshoot. You also tell your friends and family about this offer to help them tell more people.

Another Scenario:

You own a small bakery. You have noticed a decrease in people coming into the store, therefore a decrease in sales. Once again, in this scenario, you strumbled across referral marketing and chose to implement it.

You then decide to offer a discount card of 5% off the customers’ first purchase, and it counts towards anything on the menu. You then give the discount cards to the customers that come in and also tell them to spread the word.

This not only drives the new customers in, but it makes them want to come back and use the discount card, should they decide not to use it that day.

Small businesses are more in need of referral marketing, as they spend most of their money and time on the advertising of their business, which is gone more in-depth in reasons number 5 and 6.

5. It Helps the Company Cut Down on Advertising Costs

According to an article by Small Biz Trends, 1% of a business’s budget is spent on marketing. With referral marketing, the company can reduce that 1% easily.

An example given by the Small Trends article is that if businesses’ sales are $500,000 annually, then the spending on the advertising would be $5000.

Another example, from the previously mentioned Talkable article, it states that companies that implement referral programs have seen an 86% growth in their revenue within a span of two years.

In an article by Lyfe Marketing, businesses using services like Google Ads as part of online advertising can spend up to $100,000-$120,000 a year just on advertising.

Referral marketing can help reduce those costs, leaving more money for employee pay, supply restocks, maintenance, and space rent (if the business has a physical space).

 It would also help with the expense if the company decided to expand (example: social media sharing platform Facebook buying another social media platform, Instagram.)

6. It Isn’t as Time Consuming

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Image Source: https://dsim.in/blog/2017/08/18/20-referral-marketing-stats-to-shake-up-your-strategy/

In another article by Small Biz Trends, it is said that small businesses spend 20 hours a week on advertising. Those 20 hours being mostly poured into online advertising, due to the decrease in traditional advertising such as newspaper ads, television ads, etc.

Referral marketing can help the small business owner cut those 20 hours a week. It would contribute more time to their personal life, time to be able to focus on the products/services that they’re providing.

It also helps the small business owner with time to put in orders, answering customer calls, etc. It can also be spent towards being able to interact with the customers that come in (if there are a physical location and following the business). It could also give the business owner more time to have a personal life.

7. The Rise of Social Media

While ‘word-of-mouth’ is effective enough already, social media has made ‘word of mouth’ become an even broader marketing tool. With the rise of ‘social media influencers’ and people making videos for YouTube, it creates yet another pathway for a company to get its name.

In recent years, various social media sites have given way to becoming more promotion- based. An example is popular social media site Instagram changing their ‘explore’ page to having a ‘shop’ tab, where people can browse through and also have a direct link to that company’s website and product.

Another example of this is when a company has a note in their packaging, encouraging the customer to share the item they received on social media. It also leads to the afore-mentioned ‘influencers’ to do an unboxing video for YouTube, or simply share a picture on Instagram, and ‘tag’ the company.

 The same goes for when people use ‘hashtags.’ The ‘ad’ hashtag on Instagram has 11,678,454 posts and counting. Using that, as well as ‘tagging’ the company in the post, it is bound to initiate the ‘chain-reaction’ effect of referral marketing.

8. It Helps Narrow A Company’s Incentives

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Image Source: https://resources.workable.com/hiring-with-workable/successful-employee-referral-program

To help understand this better, we are going to present a scenario, like in reason number 4:

Let’s say there is a clothing company, and they are promoting a sweatshirt that they have recently added in their catalog. This company is aiming to sell 20,000 of these sweatshirts, and so far, they have sold only 1,000.

This company also uses traditional advertising. This company then hears of referral marketing and referral programs. They take an interest in having a referral program, and they sit and decide what incentives to put in the program.

One incentive they decide to use is commonly used, ‘sign up with your email, and get X% off your first order.’ They also send an email to the 1,000 people who have purchased, stating, ‘Share this product on social media, and tag us, the company!

We enjoy seeing our product in the hands of you, the customer! We also encourage you to tell others about this product as well! We will give them an X% discount when they sign up to get emails from us!

 When this is implemented, the sales team of the company then starts to notice a slow rise in the sales of that sweatshirt. The more referrals that come in, the closer they are to that goal of 20,000. They also start to see the rise of sales in their other products, and then they decide to repeat the same process.

9. It Is More Likely to Draw Loyal Customers

While aforementioned throughout the article, this is an emphasis on the people that get recommendations from other people. Typically, when someone is recommended something, their brain thinks ‘I will have to note that for later and look into it!’.

For example, if someone is recommended to a clothing company, they will look into the said clothing company, to see if there is something worth buying. They end up finding something, and they find that they see why it was recommended to them.

Therefore, they will see if they find something else to buy from that company, and become a loyal customer, like the person that recommended it to them.

 They then start the chain reaction mentioned throughout the article.

10. It Builds Trust

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Image Source: https://www.kivodaily.com/leadership/efficient-methods-for-showing-employee-appreciation/

As discussed above, referral marketing helps prove that a customer is very loyal and is trusting in your service or business. They feel like you and what you are promoting is worth sharing with other people. And to most people, having that security is important. They don’t want to feel like their money is going to waste.

An example, mentioned earlier, is To Write Love on Her Arms. According to their website, they have responded to 210,000 messages in 100 countries, possibly more.

Mentioned earlier as well, the company believes in helping people with their struggles and showing that those people are not alone. They also sell merchandise. While this is the main purpose of the company, this also goes to show how many people put trust in a company.

Another example is the beauty company, Flower. They promote as being animal cruelty – free. When someone buys from them, they trust that the makeup they just bought was not tested on animals beforehand. They also believe that the product also has a better quality due to that fact. 

11. It’s More Direct

An emphasis on a point mentioned in number 7, referral marketing has also become more direct. An example of this is Facebook’s algorithm. One day you are scrolling through and see an ad for a website you were looking at just last week, with links to their products.

Another example is a site called Pinterest. You can receive notifications that pop up on your phone, stating, ‘Since you looked at this, now check out things related to this.’. It also correlates to the ‘tailoring of the individual/group’ point made in number 8. 

Relating to the ‘reaches an audience’ point mentioned throughout the article, an example is companies like Tentree and Flower.

Tentree is directing their mission and products to people who want to save the environment. The flower is leading their mission and products to people who want to wear makeup that was not tested on animals before going to the shelf. 

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Image Source: https://www.insperity.com/blog/employee-referral-program/

Conclusion

In conclusion, referral marketing helps in more ways than one. Businesses have grown, will grow, and will continue to grow because of referral marketing. It also helps with the direction of where you want the business to go, and what kind of audience you want to tailor to.

It can also help individuals who want to start a business (ex: someone looking to start providing creative services like graphic design, photography, woodworking, etc.), and help them get more people to notice their work.

People can also spend a little less time worrying if that ad is going to skyrocket their sales or not. People also don’t have to spend 1% of their budget on those very ads as well. They can spend more on making themselves an even better company.

Both the low cost in money and time is something that makes referral marketing an appealing strategy. With that being said, though, a business isn’t a business without having loyal customers first. It is the main key reason why referral marketing works. The customer trusts a business enough to inform other people about it, leading to the ‘chain reaction’ mentioned at the beginning of this article.

 Now you have a decent amount of knowledge about referral marketing, and why it works so well. If you want to read further information, you can read the articles referenced: Disruptive Advertising, DCR Strategies, Nielsen Research, Talkable, Oberlo, To Write Love on Her Arms.

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