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How to use referral marketing to strengthen your brand

Referral marketing

Key takeaways

  • Referral marketing uses current customers to promote your business on your behalf
  • Incentives such as discounts and giveaways encourage customers to recommend your business
  • Referral marketing is a low-risk strategy that builds strong brand loyalty and customer retention

What do Airbnb, PayPal, and Dropbox all have in common? They all experienced explosive growth using successful referral marketing campaigns—a marketer‘s dream.

Although those are digital-focused companies, you can use the same customer acquisition strategies to grow your small business and increase profits.

A customer referral program strengthens brand loyalty with current customers and funnels new customers to your small business without draining your marketing budget.

Learn how referral marketing works, why it’s so effective, and different referral strategies you can use to market your business.

What is referral marketing?

Referral marketing is a tactic that uses your existing customer base to promote your business through recommendations and word-of-mouth marketing.

Instead of trying to grow your business using methods that target a general audience—who may or may not be interested in your product—referral marketing harnesses your existing customers to promote your brand among their own network.

You give your current customers an incentive to refer new customers—like a discount or free services—and they send potential customers your way.

How does referral marketing work?

Referral marketing: Two women texting

In some cases, referral marketing happens naturally. You give customers an excellent experience and great customer service, then they tell their friends and family how much they love your business.

But it’s not enough to hope or assume happy customers will talk about your business. More than 80% of satisfied customers are willing to recommend your business to others, yet only about 30% actually provide referrals.

An effective referral marketing strategy can close this gap and increase your number of referrals by giving your current customers an incentive to promote your brand.

As an example, here’s what the referral process would look like for a cleaning company:

  1. Give clients something to remember you by. Clean the customer’s home, provide great customer support, and ensure they are 100% satisfied.
  2. Hand them a referral card with their name on it that says, “Refer a friend and you both get 20% off your next cleaning.”
  3. When the referred customer contacts you for a cleaning, give them 20% off and keep track of the referrer. Repeat this process.

In this scenario, it’s a win-win for all three parties. Satisfied customers become brand advocates and do the marketing for you, helping you acquire new customers with little marketing effort.

Existing customers come out on top in two ways: They get satisfaction from being an influencer and telling their friends about your business, and they get 20% off their next cleaning service. 

The new customer receives a personal recommendation from a friend and solves the need for finding a reliable business to clean their home—and at a 20% discount.

Why is referral marketing so effective?

More than 90% of consumers trust recommendations about brands and services from family and friends. Referral marketing capitalizes on this statistic and turns your satisfied customers into lead generators. Referral marketing has a number of other potential benefits.

Builds customer loyalty and retention

People who are referred to your business are more likely to become loyal customers. Because they were referred by a friend or family member,  they have a positive impression about your business from the start—enough to become a paying customer.

On top of that, they receive a reward for becoming a customer. These two positive experiences start your relationship off on the right foot. Referred customers are almost 20% more likely to become a loyal customer who makes purchases time and time again.

Pairs well with other marketing channels

Referrals aren’t a standalone marketing channel. They can be used in tandem with almost any type of marketing effort.

Think of referrals as a piece of content you use across all digital marketing channels, like social media, content marketing, and email marketing. You can promote and grow your referral program while also providing valuable content to other channels.

One marketing channel that goes hand-in-hand with referrals is email marketing. You can include information about your referral program in every email template you send to customers.

For example, a pest control business may send a digital receipt after every service they provide—something that you can easily automate with an email marketing platform. It can include a referral link with messaging like, “Refer a friend and you both receive 20% off your next mosquito spray!”

Focuses on your target audience

Your existing customers are like a marketing filter. Chances are, they’re not going to tell everyone about your business. Realistically, they’ll share the word-of-mouth recommendation with those who can benefit from your business.

Let’s use a real estate business as an example. Not everyone is in the market to purchase a new home. As such, real estate customers aren’t going to recommend a realtor if their friends or family members don’t need one.

However, if that customer knows someone who’s looking to buy a new home, they’ll likely refer them to the realtor who gave them an excellent experience. Existing customers are essentially identifying hot prospects and sending them your way.

Online reviews are another valued piece of information that influence people likely to make a purchase in the near future. Consumers use online review sites like Yelp to get recommendations and research local businesses. Claiming your Yelp Business Page as part of your marketing strategy can help you capture leads who are actively looking to make a purchase from your type of business in your area.

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It’s a low-risk marketing tool

Some marketing channels have associated risks. You could spend hundreds or thousands of marketing dollars and never be sure you’ll get a return on your investment (ROI).

For instance, you can expect to pay a minimum of $5 per one thousand viewers for a local TV ad. This can be much higher in major markets, like New York, which costs more than $27 per one thousand viewers. And this doesn’t take into account production costs for the ad.

Radio ads aren’t much different. These can run you $200 to $5,000 per week, plus production costs. Both of these traditional advertising channels are not only expensive, but they make it difficult to track your ROI.

With referral marketing, you only pay when you get new customers. This “payment” comes in the form of referral rewards, such as a discounted purchase, free product, or even a cash reward. And since referral marketing builds brand loyalty, your new customers will likely make multiple purchases. It pays for itself in the end.

4 referral marketing strategies for small businesses

Plant shop business owners with laptop

There are a few different ways to approach a referral marketing program. For some businesses, it might make sense to offer cash incentives. For a retailer or other startup, it might be better to give credit towards future purchases. Here are several strategies to explore along with specific examples.

1. Provide cash incentives

A simple way to incentivize customers is by giving them money or prepaid cards they can spend wherever they please. It’s straightforward and works well for certain types of businesses, like roofing companies.

Example: Roofing companies often struggle to get repeat residential customers, but it’s not for lack of providing excellent service. In fact, it’s the exact opposite. When you give high-quality service installing a new roof, customers won’t need a new one for many years to come. Instead of giving them a discount on future services, give them a home improvement store gift card or generic gift card they can spend on anything they like.

2. Offer credit or discounts for your business

Cash credits or a specified discount toward your business is one of the most common referral incentives. This works well with businesses that have repeat customers and can expect customers to frequent their business in the near future.

Example: An auto repair shop can give $20 for future services for every referral sent their way. They could also offer both referrers and referees 50% off their next oil change—a service that is required a few times per year.

3. Give away free services or products

Who doesn’t like free stuff? Free products or services will entice customers to refer family and friends. This is an effective option for businesses that provide routine services that aren’t too expensive and can occasionally be offered for free.

Example: A lawn care company can offer clients free lawn mowing whenever they refer a new client. Sure, the business owner isn’t making money when they give away free services. However, the new customer will likely become a steady customer that pays for services week in and week out.

4. Donate to a good cause

Attaching your business to a meaningful cause will show customers that you prioritize giving back to the community. Nearly 50% of consumers buy from companies that are socially responsible—it makes customers feel good that the business is not only about profits. For each new referral, donate a set amount of money to a charity or organization.

Example: A dental office donates $50 to an organization that provides dental care for underprivileged children with their refer-a-friend program.

Step up your referral marketing plan

A referral program can be an effective, low-cost way to grow your business. When your customers promote your brand, it makes much more of an impact.

To incentivize your clients, decide which referral strategy you’ll use—discounts, free services, or a charitable donation. From there, advertise your program to customers using various marketing channels, such as social media or email marketing. Before you know it, your business may begin to flourish as word-of-mouth spreads. For more ways to boost your bottom line without breaking your budget, try these referral program ideas.

The information above is provided for educational and informational purposes only. It is not intended to be a substitute for professional advice and may not be suitable for your circumstances. Unless stated otherwise, references to third-party links, services, or products do not constitute endorsement by Yelp.