The State of Referral Marketing in 2017: A Webprofits Analysis

 |  Sujan Patel - Get more articles like this sent to your email here

2015 was the year of content marketing.

In 2016, all anybody could talk about was influencer marketing.

So what’s 2017 going to be about? While effective web marketing tactics abound, we’re putting our money on referral marketing as this year’s hottest trend.

That’s not to say that referral marketing is new. In fact, it’s been around since retailers realized it was more effective to leverage their satisfied customers to drive new sales than to drum up purchases from a cold audience.

Referral marketing made its mark on the web thanks to high-profile growth hacking successes. Dropbox’s $10 billion empire was built almost entirely on its “give us a customer, get free space” promotion, while Airbnb used personalized referral messages (among other tactics) to drive its current $20-$25 billion valuation.

Yet, despite these clear successes, referral marketing hasn’t yet achieved the same level of excitement as other growth strategies. According to 2010 data from the Wharton School of Business, only 30% of companies surveyed had a formalized referral program, despite the fact that those that did experienced 86% more revenue growth over a two-year period.

Besides the obvious opportunity this creates for motivated retailers, referral marketing represents an ideal strategy for cutting through today’s noisy digital environment. A National Harris Poll survey of 2,000 consumers found that:

82% of Americans say they seek recommendations from friends and family when considering a purchase, while 67% say they’re at least a little more likely to purchase a product after a friend or family member shared it via social media or email.”

Essentially, referral marketing programs, when executed appropriately, have the potential to bypass the thousands of branded advertising messages consumers are exposed to each day by leveraging our natural tendency towards person-to-person sharing. As Richard Lazazzera writes:

With a simple Facebook post, Twitter tweet or Instagram selfie, the average consumer can now reach hundreds, if not thousands or friends (who again trust their opinions) in a matter of seconds.” 
But, despite these clear benefits, has anything changed since 2010’s dismal adoption statistics? Are more retailers using referral marketing, or are those who have implemented these programs seeing measurable success? To answer these and other questions, we reached out to thousands of companies as part of our “2017 State of Referral Marketing” report.

Executive Summary

Looking at the data gathered (broken down in more detail at the end of this report), only one-third of respondents (33%) say they have a referral program of any kind in place. In smaller companies (those under $1 million in annual revenue), 29% say they have an active referral program; however, among companies sized $1-$10 million in revenue, that number jumps to 44%.

Of those with existing referral programs, only 30% are satisfied with the specific referral marketing program they’re using; however, almost two-thirds (64%) of these respondents built their current systems themselves.

Of those with referral programs, 75% say referrals are their lowest-cost method of acquiring new customers. That number jumps to 82% among those who are using a SaaS-based referral marketing system. 78% of respondents with an established referral program say that customers acquired through the program are more loyal than other customers.

Satisfaction with the chosen referral program tends to improve based upon the size of the company surveyed. Of those with referral programs:

  • 20% of respondents in businesses under $1 million are satisfied with their program.
  • 50% of respondents in businesses with $1-$10 million in annual revenue are satisfied.

Overall, respondents are split as to whether or not referral marketing programs are effective at acquiring new customers. Roughly 44% say referrals are the best way to acquire new customers; however, among those respondents using a SaaS-based referral marketing system, that percentage jumps to 64%.

There is, however, some dissatisfaction with SaaS-based referral programs. Of those planning to implement a referral program, 30% intend to build it themselves, while 50% have no idea how they’ll do it. The rest have indicated a willingness to implement with SaaS-based players, but none of the existing options stand out to respondents as market leaders.


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Key Takeaways and Recommendations

Taken in the abstract, it can be difficult to see how these findings apply to your business’s referral program (existing or planned). To that end, we’ve broken down our key takeaways and recommendations into the two sections below:

1. If you have a current referral marketing program in place

Given that only 20% of small business owners are happy with their current referral program, the first question you should ask yourself is whether or not you’re satisfied with the results you’re getting.

Answering this question, however, isn’t a simple yes or no. To determine whether or not your referral marketing program is working for you, you need to have metrics in place to gauge its success. This is especially critical if you’re offering a financial incentive as a referral bonus; you need hard data about your program’s results to determine whether the cost of offering your incentives exceeds the average lifetime value (LTV) of the customers you’re acquiring.

Begin by setting your target metrics and key performance indicators (KPIs). Can your program be considered a success based on any of these metrics?

  • The number of new customers it drives
  • The LTV of referral customers
  • The number of new referrals each referred customer drives
  • The average length of a referred customer’s lifespan
  • The net promoter score (NPS) of each referred customer
  • The number of repeat purchases each referred customer makes
  • The total amount of revenue generated by referred customers
  • The average cost to acquire a referral customer

As Jonathan Fields, writing for DuctTape Marketing, notes on the challenge of driving people to a business and the importance of metrics:

“The real challenge is driving new customers who will spend many times what it cost you to acquire them. Getting 100 new customers who spend $100 each is a recipe for ruin when it costs you $110 to bring those customers through your doors or to your website.”

The specific metrics that are appropriate for your company will depend on your industry, average order size and company size, among other variables. A new startup with less than $1 million in annual revenue, for instance, may be more interested in viral referral growth than an established tech company bringing in $50 million a year, which may be more concerned about lowering churn (and, therefore, care more about the average lifespan of referral customers).

If you aren’t sure where to start, stick with core metrics, as well as those that referral programs seem to support well. Number of successful referrals and total revenue generated by referred customers can help you gauge the overall success of your program.

In addition, remember that 66% of respondents believe that referred customers are more likely to go on to make their own referrals. Use this assumption to test the general health of your program by monitoring the number of referred customers within your program who make new referrals to your business. If you find that referred customers aren’t more likely to make new referrals, this could suggest the need to make your referral program or bonus more appealing.

Similarly, 78% of survey respondents with existing referral programs suggested that referred customers are more loyal than customers acquired through other channels. Test this assumption with your own referral program results. Measure average lifespan or total number of repeat purchases made by referred customers relative to other channels.

Seeing referred customers perform worse relative to customers from other channels doesn’t necessarily mean something is wrong with your referral program (any number of different factors can influence loyalty). However, it is an indication that you aren’t getting the same results as the majority of referral program users – and that’s worth investigating.

2. If you have a referral marketing program, but aren’t happy with it

Now, let’s say you complete the analysis described above and find that your referral program isn’t performing at the level you’d hoped. Or, let’s say that, for reasons as wide-ranging as clunky management or poor performance, you know you aren’t happy with your referral program – analysis be damned!

If you aren’t happy with your current referral marketing program, don’t worry – you aren’t alone. As our survey discovered, only 20% of small businesses are satisfied with their systems, while just half of companies reporting $1-$10 million in annual revenue can say the same. If you fall into this camp, you have several important choices to make, depending on where you believe the fault lies.

First, look at your program itself. Across all survey respondents with established referral programs, 64% built their programs themselves. Unless you have substantial internal resources, trying to “reinvent the wheel” can result in systems that are difficult to understand and use (perhaps unsurprisingly, satisfaction rates with newly-acquired customers jump nearly 20% when respondents use a SaaS-based referral marketing system).

You’ll also want to look at the specific incentives you’re offering to drive your viral loop. Building referral programs is part art, part science and part testing. We can’t make universal recommendations on what you should offer because every industry is unique. An incentive that seems grandiose may be standard in another industry, so it’s up to you to find the balance point between incentives you can affordably offer and the number of referrals you’ll attract.

Keep in mind, also, that your referral scheme may not even include a financial or product-based incentive. It may be as simple as a handwritten thank you note or a “just because” gift sent after the transaction in response to a word-of-mouth referral. According to John Ruhlin, writing for Entrepreneur:

“Your customers are real people, and sabotaging your own brand equity will only make them think less of you. Instead, focus on the little things; this will actually help you build more meaningful, long-term relationships — no $20 gift cards required.”

Anemic performance can be the result of poor program structure or improper incentives, and distinguishing between the two requires both data and gut feel. If your numbers are inconclusive, try to look at your program with a set of impartial eyes (better yet, ask trusted colleagues to help you with this). Ask yourself, if you were a customer of your company, would you take advantage of the referral program? If not, what specifically would hold you back?

Your answers to these questions will give you a starting point for the changes you’ll need to make to improve the performance of your referral marketing program, whether you need to rework your incentives or move to a different provider entirely.

If you don’t yet have an active referral marketing program

Now, let’s say you either don’t have a referral marketing program (67% of our survey respondents didn’t) or you’re in the market for a new one, based on the assessment described above. Choosing between the many options that are available to you can be daunting, though our survey results offer some insight.

Consider the following statistics from both the Executive Summary above and the Raw Data below.

Of all survey participants:

  • 67% of respondents have no referral program
  • 22% of respondents use a home-built solution
  • 9% of respondents use a software/web-based referral marketing provider
  • 3% of respondents use a program managed by an outside company

Of those planning to implement a referral marketing program:

  • 36% plan to launch one within one year
  • 25% say they have no time
  • 20% say they have no marketing resources to manage one
  • 30% intend to build it themselves
  • 50% have no idea how they’ll do it
  • 20% have indicated a willingness to implement with SaaS-based players

Added to the statistic given earlier that those with existing SaaS-based referral programs tend to be marginally happier than those with home-built systems, we can make a few suggestions based on this data:

  • If you have no time or marketing resources to manage a program, partnering with a SaaS-based provider can minimize the effort required to build a program in-house.
  • Similarly, if you intend to implement a referral marketing program, but, like 50% of our survey respondents, don’t know how to do so on your own, a SaaS-based provider can assist with account managers, customer support, onboarding features and education resources (the extent of these offerings varying from provider to provider).
  • If you intend to build a referral marketing program yourself, it’s worth considering what resources you have to allocate to the project in terms of time, money and expertise. Creating your own program, administering it and developing a working customer interface can all be resource-intensive endeavors.

Further, as you assess the referral program type that’s right for you, keep our earlier discussion of goals in mind as you make your selection. How do you envision using the program within your existing marketing and customer acquisition efforts? If you’ll be hand-selecting customers to act as brand advocates, for example, your priorities may be different from a company hoping to funnel as many people – existing customers or not – through an incentivized customer referral program.

What Makes a Referral Program Effective?

Choosing a referral program for your business is a serious undertaking. Not only can many of these systems be difficult to implement (especially if you’re building one in-house), changing between programs creates unnecessary confusion for participants. Imagine that you’re a customer of your business. How active will you be if, one month, you need to take an entirely different action to qualify for a referral bonus than you will the next month?

That isn’t to say you shouldn’t tweak and test your referral program – you absolutely should. However, as completely rebuilding your program from the ground up has the potential to waste your resources and frustrate your customers, it’s best to make as educated a decision as possible from the start.

To that end, we’ve gathered the following suggestions from industry influencers on the factors that make a referral program effective. Consider their advice carefully as you attempt to either rework your existing program or choose an entirely new one.

Neil Parker, VP of Product Management and Marketing at RewardStream, shares the five elements that the most successful referral marketing programs all have:

  • Easy-to-understand rules
  • Appropriate benefits and rewards for both the referrer and the referee
  • Simple sign-up methods
  • Simple eligibility criteria
  • Fast reward payout

Whether you choose a SaaS-based program or build your own, some of these factors will be up to you, and others will be dictated by the program you’re using. Setting appropriate two-way benefits, for example, is your call. Simple sign-up methods and fast reward payouts, on the other hand, are two elements that will be more heavily influenced by the program you choose.

Yaniv Masjedi, writing for Salesforce, offers another important suggestion: consider the importance of referral tracking.

“Asking a customer for a referral is one thing; delivering on your promise once they’ve successfully referred is another thing entirely. This process can sometimes take weeks, months or years for a client to come through. Make it a practice to ask each new client how he or she learned about your company and then follow up with the referrer (and your new client) to administer your referral gift in a timely manner.”

Admittedly, referral tracking is less of an issue if you’re using a SaaS-based provider that handles the transfer of bonuses automatically. However, if you’re building an in-house system – or if you’re offering referrals for big-ticket items (for instance, $2,000 off a first contract) – the way you track completed referrals and issue bonuses should be of primary importance.

Beyond the specifics of your referral marketing platform itself, you need to consider how you’ll weave your bonuses into your marketing mix. Jeffrey Epstein, writing for Entrepreneur, reminds marketers of the following:

“The best referral-marketing programs (see Airbnb and Dropbox) share a common thread: referrals are embedded into every aspect of the user experience. Referral calls to action are included in newsletters and blogs. Employee email signatures feature referral messaging. And the referral program is fully integrated with other critical systems (customer-relationship management, marketing automation, e-commerce technology, point-of-sale systems, optimization tools, etc.).”

If the results gathered by our survey have you thinking about whether or not your current referral marketing program is serving your needs, don’t look just at your system itself – look at the way you’re using it. If your referral bonuses are off, or if your customers simply aren’t aware of your program due to lackluster marketing efforts, start by remedying these weaknesses before beginning again from the ground up.

The Raw Data

For those of you who are number junkies, the following are the raw data results of Webprofits’ “2017 State of Referral Marketing” report, presented without analysis. All others – feel free to skip this section and head to the end of the article.

Who participated in the survey?

  • 67% of respondents were running small businesses ($0-$1 million in annual gross revenue)
  • 21% of respondents came from businesses generating $1 million to $10 million annually
  • 7% of respondents reported average revenue of between $10-$50 million
  • 4% of respondents self-reported over $100 million in annual revenue

How widely used are referral marketing programs?

  • 67% of respondents have no referral program
  • 22% of respondents use a home-built solution
  • 9% of respondents use a software/web-based referral marketing provider
  • 3% of respondents use a program managed by an outside company

How confident are you in your referral program?

  • 43% believe referrals are the best way to acquire customers
  • 29% are satisfied with their referral marketing program
  • 74% believe referrals are the lowest-cost acquisition method
  • 61% believe referral programs help retain customers
  • 65% believe customers acquired through a referral program are more loyal
  • 67% agree that customers acquired through a referral program tend to become referrers

Of those with referral programs:

  • 44% built it themselves
  • 26% have a SaaS-based system
  • 45% of respondents said they get between 10 and 30% of new customers through their referral program

Percentage of customers acquired through referral programs:

Most effective customer acquisition channels among those with referral marketing programs in place:

Of those without referral programs:

  • 36% plan to launch one within one year
  • 25% say they have no time to implement a referral marketing program
  • 20% say they have no marketing resources to manage one
  • 14% say they have an insufficient budget for a program
  • 47% have no idea what system they’ll consider

Among those using SaaS referral programs:

  • Almost 44% say referrals are the best way to acquire new customers
  • 74% believe referrals are lowest CPA
  • Almost 62% believe referral programs help with retention
  • Almost 70% believe customers acquired through referrals are more loyal
  • Almost 66% say that customers acquired through referrals go on to make their own referrals

Take an Educated Next Step on Referral Marketing

Ultimately, the statistics gathered by Webprofits’ survey give insight into the way businesses are using referral marketing programs and how satisfied they are with their results – but they don’t tell you exactly what your next step should be.

We’ve offered some suggestions above, but we also recognize that every company is different. The results that you experience – even using the same referral marketing system and bonuses – may be different than another company’s, especially if you’re serving vastly different audiences.

Our suggestion for moving forward in light of this new research is simple: take this as an opportunity to assess the current health of your referral marketing program or to better understand what you need from a system you’ll implement in the future.

Knowledge, especially in the case of referral marketing, is power. The better you understand what your customers want from you, relative to what you’re offering them currently, the better prepared you’ll be to take advantage of the brand-building, loyalty and retention benefits of referral marketing.

Do you currently have a referral marketing program in place? If so, we want to hear from you. Do your results line up with our survey data? Either way, share a note below discussing your experiences with referral marketing and what suggestions you can share from your results:

Sujan Patel

Sujan Patel

Co-Founder at Webprofits
Sujan Patel is the co-founder of Webprofits. He has over 13 years of internet marketing experience and has led the digital marketing strategy for companies like Sales Force, Mint, Intuit and many other Fortune 500 caliber companies.

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