A common way of driving word-of-mouth recommendations is to provide an incentive to either the adopter, referrer, or both. This article explores some options available with a refer-a-friend program, as well as important limitations to be aware of.
Benefits for existing customers to share
One way of encouraging existing customers to share their products and experiences is to provide benefits to your existing customers to do so. Dropbox is a classic example of this – their referral scheme allowed you to gain additional storage by recommending it to others, with a bonus for your friend when they signed up – thus encouraging the referral process and adoption.
Different reward structures of refer-a-friend programs
Referrer and new-customer both get a reward
The quickest way of driving customer signups is to provide a benefit to both the referrer and the customer that signs up. This provides a direct benefit for the existing customer to share their referral link (encouraging the word of mouth discussions), and also benefit for the potential customer to take advantage of the promotion.
Only the referrer gets a reward
An approach that may drive referrals, but is less likely to encourage adoption, is to only provide a benefit for the referrer. The potential customer has the same offer as if they were signing up themselves.
One benefit of this is that it reduces the cost of the referral program while ensuring that only customers show genuinely are interested in your offerings sign up. The disadvantage is that it reduces adoption – and depending on hope much this is reduced, it may mean that refers do not share the offer – why share an offer if no one is actually likely to take advantage of it?
Only the new-customer gets a reward
The opposite to only providing an incentive to the referrer is only to reward the new customer. The limitation of this approach is actually getting the referrer to share the promotion – they are not incentivized to do so. The benefit though is that it may encourage genuinely positive word of mouth referrals – since there is nothing in it directly for the referrer, they can’t be seen as promoting the product solely for their own personal gain.
Neither the referrer nor the new customer gets a reward
A final approach is not to provide any form of rewards or discount – to instead encourage sharing, without actually rewarding it. Although actual signups from this approach are likely to be limited – there is no specific reason to encourage the existing customer to share, nor direct benefit for the potential customer to signup now, it may still be an effective tool to increase engagement. Indeed, as a completely free approach, this may work well for companies whose business model or capital availability does not allow for significant discounts to be given to drive customer acquisitions.
Disadvantages of providing benefits associated with referral programs
Appearance of being less organic in nature
One slight disadvantage of offering bonuses is that it can make the referral appear less organic in nature. If there is a direct reward for gaining signups, potential customers may see through this – reducing the authenticity of the recommendation.
May encourage un-natural sharing
Another disadvantage to be aware of with perks for signing up additional customers is that it can drive people to share their referral codes beyond their acquaintances via discount codes sharing sites. Rather than referring their friends and colleagues to sign up, the referral program may encourage individuals to seek-out individuals on the internet who likelihood would sign up anyway, and insert themselves as a referrer. This may in turn cost you the associated referral fees or sign-up discounts, without actually having driven the signup.
Sign-ups may not be genuine or likely customers
A final disadvantage of referral programs is that it may cause individuals to create duplicate accounts, or encourage friends and family to only signup for the initial trial. While a referral program may help drive adoption, if a large proportion of that adoption is only singing up to take advantage of the initial promotion, then it may result in high customer churn, without improving the long term customer base.
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