Referral Programs – Who Should You Reward?

In a previous post, we found out that referral programs bring you better customers and also brings in the dough. Now that we know that a customer referral program is beneficial, the next order of business is to decide what kind of customer referral reward scheme to implement.

There’s been some recent research by the good people from the University of Pittsburgh and Korea University on this issue [pdf here]. They examined the how different referral reward schemes affected referral likelihood.

Some background to start with

The study examined the effect of brand strength on 2 common types of reward schemes, a “Reward Me” scheme in which the recommender (the existing customer) receives the reward, and a “Reward Both” scheme in which both parties (the existing customer and the new customer) are rewarded.

Two levels of brand strength were pitted against each other; stronger brands versus weaker brands. Stronger brands are brands that are well-established and have high brand awareness. Consumers of stronger brands feel more brand commitment to the brand than consumers of weaker brands.

298 mobile phone subscribers using different mobile services in Korea were examined. There are 3 major mobile services in Korea, the leading brand having 53% market share and the two follower brands having 31.5% and 15.5% share. The leading brand was used as the stronger brand, while the two follower brands were used as weaker brands.

The subscribers were told that their mobile phone provider was embarking on a referral reward program. The reward was 60,000 Korean won in free calls (about $50 at the time of the study) in the Reward Me condition or 30,000 won in free calls each in the Reward Both condition.

They were then tested for whether they would refer their phone service for the different reward schemes. Read the rest of this entry »

Do referral programs bring you better customers?

Are referred customers more valuable than non-referred customers? This is the question that researchers from Goethe University Frankfurt and University of Pennsylvania set out to answer in their paper “Referral Programs and Customer Value” (pdf here).

If you’ve some time to spare, you should take a look at the paper. Otherwise, I’ve summarized the main findings here.

Some background to start with

The researchers tracked around 5,000 customers that a leading German bank acquired through its referral program. The program carried out was simple. A 25 Euro reward to existing customers for each new customer brought in.

The profitability and loyalty of these new customers were tracked for 33 months and compared against a random sample of about 4,600 customers acquired through other methods in the same period.

What they found

The study revealed several interesting financial differences between referred and non-referred customers. It turned out that profit margins, retention rates and lifetime customer value were significantly higher for referred customers. Here are some of the key insights:

1. Referred customers have higher profit margins
Referred customers started out with profit margins that were more than 25% higher than non-referred customers. After 29 months, the higher margins of referred customers became equal to those of their non-referred counterparts.

The researchers think that the initial higher profit margins were due to the referred customers being a better fit for the bank. This was because the referrer would likely select friends that he or she thought would be a good match for the firm.

Another possible reason for the higher margins was that friends of the referring customer would be more like them and have similar needs and values. And the bank could use these similarities to better serve the new customer and get higher margins.

However, these advantages gradually vanished as the bank accumulated the same amount of information about both referred and non-referred customers. Also, non-referred customers who weren’t a good match for the bank were more likely to leave as time went by.

Even though profit margins became equal over time, the study still found that the average lifetime customer value of referred customers was 16% higher than that of non-referred customers.

2. Referred customers were less likely to leave
The research showed that the probability of remaining a customer by the end of the study was 82% for referred customers and 79.2% for their non-referred counterparts. Analyzing this data, researchers found that customers acquired through the referral program were 18% less likely to defect than non-referred customers.

In a nutshell, referred customers were more profitable and less likely to leave than non-referred customers.

How does this apply to me?

So what does this all mean? We now know why referral programs work and why it’s worth paying for them – because they help you attract more loyal and profitable customers. Applying the study to your own business, we can see that in addition to bringing you more customers, referral programs also help you get better customers.

So that’s the paper in brief. If you’re hungry for more details, you should definitely check the full paper here.

Referral and Affiliate Marketing – What’s the Difference?

“You guys do referral marketing? Isn’t that the one where affiliates do referrals for you?”

Turns out not too many people know the difference between referral and affiliate marketing. And if you think about it for a while, it is pretty easy to confuse one with the other. Affiliates do refer customers to your business… right? Although that’s true, referral and affiliate marketing are actually pretty different ways of finding new customers.

So it feels like it’s time for a stake in the ground. There’s tremendous value in reaching out to new customers through referrals. But that value can’t be unlocked without a clear and common understanding of what we’re trying to do. We hope this article serves as the place that helps us to align our conversations.

We’ll start with what’s the same between the two forms of marketing. Both drive new customers to your business through a group of people selling your product who don’t work for you directly (the advocates). This similarity is the reason that referral and affiliate marketing are often mistaken for one another. But there’s something very different between the two that sets them apart.

The answer lies in the relationship between the advocate and the prospective customer.

In affiliate marketing, the advocate doesn’t know the prospect personally. It’s unlikely that they would go out for a beer after work or know the names of each other’s kids. And this changes the motivation for the endorsement being made. The advocate helping you make the sale in affiliate marketing is doing it mainly for the financial reward involved.

Compare this with referral marketing which is carried out in a slightly different setting. Here, the advocate is recommending you to someone he or she knows quite well. This could be a college roommate or a co-worker during a coffee break.

But this relationship makes all the difference in the world.

The reason for the referral is now altruism and making referrals is a deeply satisfying way to connect with others. ”I’ve found a great product or service that I want to tell my friends about because I believe that it will make their lives better.” Sure there might be a discount or other incentive thrown in to make sharing the message more attractive. But this doesn’t change why it’s being done. “I’m not going to wreck my reputation unless I think the recommendation will really help my friend.”

So there you have it. The core difference between referral and affiliate marketing is in the relationship between the two people talking about you.

The relationships in referral marketing are personal while the ones in affiliate marketing are financially driven.

This distinction leads to certain practical nuances that need to be considered when implementing the two forms of marketing. It also results in each having its own pros and cons. But we’ll save that for a future post. For now, we’re content that there’s a stake in the ground to start from.

Not a Smooth Landing (Page)

A few days ago, we got an interesting email from one of the merchants we work with. She pointed us to a competitor whose referral marketing campaigns uses landing pages. So if someone wants to recommend the store, they’re directed to a webpage with a box that looks like this:

They would then type the email addresses of friends into the box or let the page access their email account to slurp in their contact list.

This turns out to be pretty different from the way we do it. Once Ignite is hooked up and running, it simply sends an email off to each customer after they make their first purchase. The customer then forwards the email to anyone they think would be interested, from inside the email client itself.

She liked the landing page idea and asked if we had something like that to offer.

Actually, we did previously consider adding a landing page to our campaigns. However, we ultimately decided against it for a bunch of reasons that have been confirmed by other merchants we’ve worked with.

We designed our referral flow to make it as effortless as possible to pass the recommendation message along. With a landing page, it’s no longer as easy for customers since they need to dig their friends’ email addresses out and enter them into the web form. Although this is only a little more effort, it causes conversion rates to take a hit.

So what about giving the website direct access to your contact list for it to pull in email addresses? That’s gotta be pretty easy right? Well… people are getting more wary of this practice since it’s what a spammer would do and could give you a bad reputation. In general, giving any website full access to your address book is a no-no.

We might offer a landing page option in the future, but it would only be after we figure out how to make it as simple and safe as possible for the merchant’s customer. Since ultimately that is what’s best for the merchant as well.