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Are Referral Programs Good For Your Business?by@adetola
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Are Referral Programs Good For Your Business?

by Adetola Rachael November 29th, 2022
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Many businesses rely on referrals to market their products. 83% of consumers consult their friends and families before purchasing a product or service. Many prospective customers would trust their friends' opinions on your products and services more than an online ad. The effectiveness of referral programs is heavily dependent on human relationships. Referral programs offer a lot of benefits for businesses, especially if it's not the right marketing strategy for your business. This article shed light on its disadvantages, the types of businesses it suits, and the ones that shouldn't consider it.

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Many businesses rely on referrals to market their products, and of course, you'll most likely trust a product or service that your friend/family has tried and enjoyed more than a random ad on Instagram. A recent study by Chatter Matters discovered that 83% of consumers consult their friends and families before purchasing a product or service.


The effectiveness of referral programs is heavily dependent on human relationships. Many prospective customers would trust their friends' opinions on your products and services more than an online ad. Now, while few of your current consumers might recommend you highly to their friends, imagine a marketing strategy where you pay your customers for that recommendation. That's a referral program.


The benefits of referral programs are vast. This article will also shed light on its disadvantages, the types of businesses it suits, and the ones that shouldn't consider it.

Why Do Companies Venture Into Referral Programs?

Market me, and I'll offer you rewards in return.

That's the deal with referral programs. Like companies pay for online ads, you can create a marketing system that incentivizes your current consumers to recommend your business to their friends and family.


You might wonder if it's necessary to pay people to recommend your company when they can do it for free. A survey by Texas Tech discovered that while 83% of satisfied clients won't mind referring your enterprise to other people, only 29% actually do it. Giving a reward for referring your business to other people is a great way to get that 83% recommending your brand in no time. These rewards can be discounts, promotional merchandise, gift rewards, and product upgrades.

Benefits Of Referral Programs For Businesses

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Referral programs offer a lot of benefits. One of the reasons many companies opt for this marketing strategy is that it doesn't require stressful audience targeting. Want to learn more?  These are some of the benefits of referral programs for businesses:

Direct Lead Generation

It automatically generates direct leads and sales through referrals. For instance, if your customer recommends your furniture company to her friend who admires her pink recliner, there's a higher chance that the friend will get the couch from your company than a company she has no connection to. This marketing option gives you precise customers who actually need what you're selling.

Loyal Customer Base

Mouth-to-mouth marketing is one of the best marketing strategies. It allows prospects to understand the legitimacy of your products or services before buying. After all, someone that uses your products referred them to you. This creates a loyal customer base. It doesn't end there; customers that get paid for putting in good words will continue to buy and refer that brand to others. It's simple arithmetic.

It Also Boosts Your Brand Awareness

Customer referrals, partnerships, and content creation are solid ways to make your company known to the world. It's also one of the benefits of referral programs that don't need you to do the extra work. Through this method, you can use referral marketing software to tap into new markets with new or existing product launches. The sweet part is you don't even have to pay your referral partners until the customer converts and pays up.


However, several cons attached to this marketing method begs the question, "Are referral programs good for your business? The truth is, there are a lot of disadvantages associated with referral programs for businesses, especially if it's not the right marketing strategy for your brand.


Luciano Viterale, a content marketer, says, "a successful referral program mostly depends on how big the incentives are; otherwise, your customers might lose interest, calling an impending doom for your campaign."


Viterale's Newsletter, Ticker Nerd, had experimented with referral programs and realized that it doesn't work when your competitors have more money and back-end products that allow them to utilize their customer base to the full capacity. A low marketing budget puts you in a futile race against big competitors. In the end, you might lose a lot of money without gaining many clients. This is one of the drawbacks.


Helen Walker, a creative and content marketing executive at White Label Loyalty, says, "a company must have the right technology in place for them to work seamlessly, and referral programs for business work best when they're automated. The issue with many companies that use this system is that it doesn't talk about them as much as it should.


Companies should initiate the internet, social media platforms, and marketing software to reach potential customers online. Your brand should focus on its technological advances; words spread faster on social media, and you should take advantage of that.


Also, many businesses don't include timing in their planning. For instance, new customers are not an excellent target for referral programs. The benefits of referral programs are effectively earned when your customers are loyal to you. You should only engage your customers in a referral program when they've shown a consistent pattern of interest in your company. This consistency can be a subscription, a membership renewal, or anything that shows they constantly buy from you.


Another downside of referral programs for business is that your company's growth heavily depends on your referral partners (customers or partnering companies), which determines your success rate. This literally puts your customer acquisition in the hands of your referees, and you might risk losing more if they don't bring enough customers in.


Most importantly, this marketing strategy won't work if it isn't the right approach for your company. You should understand its effect on your company before opting for it.

Which Businesses Should Try Referral Programs, and Which Shouldn't?

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The logic is simple. While the benefits of referral programs are valid, some businesses shouldn't try them. On the other hand, it's the perfect marketing strategy for some. The point is knowing your goals before settling into them. Try referral bonuses if you're:


  • Trying to increase your social media presence since these programs work faster online.
  • You have a clear selling intent; your products and services are direct-use, like food, spa treatment, and insurance agency. A better example is retail companies, hotels, and resorts.
  • You have a significant marketing budget: most referees focus on the benefits of referral programs, and that's the rewards. The rewards you offer mostly determine the success of the program.


The uncommon reality about referral programs is that it gets you the customer, but it doesn't make them stay. Vaishali Dialani, a customer experience analyst at Konabus Consulting, says that "businesses can use referral programs as a marketing strategy but more in terms of acquisition of the customer then customer retention. Complete retention and loyalty depend on the service and the product, the offering to continue to provide the customer service, the experience, and a lot more."


You shouldn't consider referral programs if:

  • Your business offers little or no reward. Referrals work best when there's a nice reward at hand for referees.
  • Your business is a small-scale establishment. You should focus your money and energy on growing your business first. You can enjoy the benefits of referral programs when you have a significant customer base. Only a great business is worth referring to people, anyway.
  • If your company sells high and expensive products and services like real estate, purchasing from you requires big money. It's a great choice if your products and services aren't so expensive, and people can buy them on impulse. You should avoid the program if it's not.

The Bottom Line

A successful referral program depends on many factors, from customer acquisition rate to your marketing budget. There's also the clause about what kind of products and services you offer. These are the influencing factors on the success of your referral program. You might luck out if your company ticks all the boxes, but it's best to avoid unnecessary budget spending if it isn't the right marketing strategy for your company. I hope this article helps you decide on the benefits of referral programs for your business and if you should even venture into it in the first place.