Referral marketing, a tactic that relies on word of mouth and recommendations to gain new business, is one of the most effective forms of marketing out there, and especially so for local businesses.

Did you know that over 60% of marketers claim that referral programs generate high volumes of leads? By harnessing the experience and enthusiasm of your local community, you can quickly build your company into a beloved local brand. 

This increased brand recognition can also lead to some more direct benefits for your business. Leads generated via referrals are 36x more valuable than a lead generated by a cold call, 10x more valuable than a trade show lead, and 4x more valuable than a web lead.

In this article, we’ll look a little deeper into how leads from referral programs can benefit your business, and then show you how to use them effectively.

The benefits of referral marketing

There is a clear and obvious reason why so many successful businesses use referral marketing: it works. In fact, nearly 80% of marketers claim that referral marketing generates good to excellent quality leads, and represents the second-highest source of quality leads overall. 

For businesses looking to market within local communities, referral programs can be even more effective. The impact of referrals is increased when used for small businesses because a positive review from a trusted friend within a customers’ community is a far more effective way to establish trust than a cold call. 

Referral Marketing

Source: Campaign Monitor

Customers who are converted in this way are also far more likely to make repeat purchases and to refer their friends in turn, which results in them offering a 16% higher customer lifetime value.

How to build a successful referral program

Despite these benefits, many small business owners are hesitant to initiate referral programs, believing them to be complex and potentially costly. In reality, they are neither. There are essentially three steps to setting up a successful referral program:

1. Treat your customers well

The first step is not even directly related to referral systems but is fundamental to their success. You need to make your customers feel positive about their purchase, and about their relationship with you as a brand. 

There are many ways of doing this. Some concern the way that your business is organized. According to the Economist Intelligence Unit, 86% of marketers believe they will become responsible for the entire customer journey by 2020, and there is a good reason for that: marketers often have a better understanding of what drives customer behavior than sales teams.

Then there are techniques focused on customers themselves. You should seek to build trust with your customers by ensuring that you store their data responsibly, but also give shout-outs to customers who are using your products in creative ways. Stress that they may be using your product, but it’s their hard work that’s driving their success. Acknowledge these customers, and they’ll remember it when it comes time to ask for a referral.

2. Make it easy to refer you

Next, make sure that your customers know how to refer their friends or colleagues to you, and that they can do so easily. Research shows that over 80% of satisfied customers are more than willing to refer your company, but only a quarter actually do.

In most cases, this is simply because customers are unaware of how to do so. A customer may leave your store feeling that they want to tell their friends about you, so make sure they have a way of doing so.

This is particularly important for local marketing because word-of-mouth recommendations are extremely effective in driving community sales. You can even directly ask your satisfied customers to mention your store on social media or include an easy way to invite a friend or relative. Either way, make sure that you acknowledge the role of the community in allowing your business to grow and thank them frequently.

3. Reward Your Referrers

Rewards for referrals are the high mark of well-developed marketing programs and can take your referral marketing to the next level. However, they can be difficult to use, especially with local marketing campaigns.

Referral marketing

Source: Referral Candy

This is because offering a straight money reward for successful referrals can seem a little tacky: you are essentially bribing your customers to do your outreach marketing for you. You should therefore offer rewards that are non-monetary, and seek to reward organic referrals rather than paying people to construct them. These rewards can include gifts, an annual subscription to a relevant publication, or a cash donation to a charity.

Measuring the success of referral campaigns

Make sure you are tracking the success of your new referral program, so you can tweak it to make it more effective as necessary. Working with data can be a challenge for small businesses, but don’t be intimidated: there are plenty of courses out there that will give you the skills to work with data effectively and to use the in-built features of your website to track referrals and customer journeys.

There are several metrics that you can use to measure the success of your referral campaign as well. The first is the number of users who are sharing your invites. Another is the actual number of referral page hits that you get. 

Perhaps the most important metric to measure is the churn rate or the number of customers who break things off with your company. A higher churn rate clearly indicates that the products or services you are offering to customers are not what they were expecting. A lower churn rate, on the other hand, indicates that your referral marketing campaign is succeeding. 

Keeping things secure 

Remember that when in the marketing game you are always handling sensitive information, including personal and financial customer data, and protecting this data must be a priority.

You also need to make sure that you use a referral program that comes with a security system to help protect yourself against hackers. This means that you will not need to manually track each individual referral and can have peace in mind that your program has a solid layer of defense against cybercriminals, who have become an even bigger threat since the pandemic hit. 

The best security measures to protect your referral program include having strict terms and conditions in place to mitigate fraud, a transaction ID monitor, a duplicate blocking feature, and to always use a virtual private network (VPN) to encrypt all business and customer data sent over your company network from hackers. While many local businesses with smaller budgets skip utilizing a VPN believing it saves them money, the truth is you don’t have to spend more than $6 for a quality VPN provider, so there’s really no excuse not to be using one.

Successful examples of referral marketing

To provide some inspiration, here are three examples of businesses successfully using referral marketing to increase their leads and generate new customers:

Pupsik

Pupsik is an online parenting company that offers a point-based system. Each time a customer refers to a friend who purchases something from the store, the customer will receive 250 points plus a bonus discount on particular items. 

Referral marketing example

Dave’s Heating and Cooling

Dave’s Heating and Cooling is an HVAC business based out of Maryland. Both the referrer and the friend will receive a $50 credit to use on a future purchase when the friend becomes a new customer.

Referral marketing example 2

No Place Like Home Pet Sitting

No Place Like Home Pet Sitting is a pet sitting business based out of Lithia, Florida. They offer a unique referral reward system in the form of getting 10% of your friend’s invoice from your future invoice when you refer them. 

Referral marketing example 2

Conclusion

Local marketing can be difficult, and especially so when your business is new. Often, getting the first customer is the most difficult step of all. 

Referral marketing is so effective because it allows you to leverage the enthusiasm of your first few customers, and to quickly build a base of brand awareness and community trust.

Just remember:

  1. Treat your customers well so that they want to refer you
  2. Make it easy to refer you with step-by-step instructions and short URLs
  3. Provide a relevant incentive to encourage referrals
  4. Track the success of referrals and adapt accordingly
  5. Look after your referees’ data

Ultimately, this will result in more customers, higher revenues, and more referrals, so your marketing efforts build their own success.