The Value and Benefits of Customer Referrals

Referral marketing and customer referrals are nothing new in the world of business, but sometimes they’re overlooked due to an ever-increasing focus on online and digital marketing. However, if you’re interested in generating new business and greater profitability, customer referrals should never be forgotten or overlooked, and they can also be an important part of your online marketing strategy.

Just consider the amazing success enjoyed by Dropbox when it launched a referral marketing program to increase sign-ups. Dropbox determined that its search, keyword, display ad, and affiliate marketing programs were costing too much and not producing enough. So it incentivized referrals, and signups increased by a remarkable 60%. Dropbox grew from 100,000 registered users to 4 million in just 15 months, and 35% of its daily signups were coming directly from the referral program.

Research underscores the experience of Dropbox and shows that referral programs generate tremendous value for businesses, consistently outperforming other forms of lead acquisition in terms of lifetime value, profitability, conversion rates, and return on investment (ROI).

According to the Nielsen’s 2013 Global Trust in Advertising Report, 83% of people worldwide trust in recommendations from people they know, and all of these individuals take product-related actions, such as reading a review, evaluating the product or service offering, or making a purchase. Not surprisingly, given this level of trust, referred prospects are more easily converted.

Nielsen points out that people are four times as likely to buy when referred by a friend, and renowned sales trainer Tom Hopkins completed a study several years ago that found that referred leads are closed at a ratio of 60% compared to just 10% for non-qualified leads.

At around the same time, the Wharton School of Business at the University of Pennsylvania teamed up with researchers at Goethe University in Frankfurt, Germany to conduct a customer referral study that went on to make huge waves in business media and continues to be a source of inspiration for capitalizing on the value of referrals.

In the study, researchers analyzed a customer referral program at a major German bank, which was offering 25 Euros to its members for each referral. Naturally, with any referral program offering cash incentives, there is always worry that customers might provide unprofitable or undesirable referrals in the interest of simply collecting a financial reward.

However, the study found that the value of customer referrals far exceeded any worries about referral integrity. Referred customers were more loyal and were 18% more likely to stay with the bank, while they were also more profitable, generating 16% more in profits. The researchers also concluded that the combination of margin and retention amounted to an increase in customer lifetime value of 16 to 25%. And it also amounted to an ROI of 60% over six years.

And referral programs can also be integrated into online and digital marketing efforts to leverage these benefits. According to MCM Capital, when Cole Information Services a lead generation and direct marketing company, launched a new referral marketing program through its online marketplace, the company was able to convert 50% of the referred leads to high-margin business within just 30 days, capitalizing on referred customers’ 270% increase in contribution margin at a much lower cost compared to traditional acquisition methods.

MCM Capital has also summarized a number of important benefits of customer referrals, as outlined by business expert and author, Darrell Zahorsky.

People feel more comfortable when a product or service is recommended by someone they know and that they can trust. And this trust can be immediately transferred to your company through a word-of-mouth referral.
Referred customers are usually less price sensitive. Since they usually come to your business with a sense of trust and credibility, they can be sold at full price.
A good referral marketing program can quickly expand and provide a good flow of qualified and interested prospects. So you can focus on quality customers who are highly profitable for your business and not necessarily focus on anything that comes your way.
Referral marketing is less expensive than other forms of acquisition and can help shorten your sales cycle due to better conversion rates.
Customer referrals can be self-perpetuating and beget more customer referrals. As you convert more customers who have greater loyalty and satisfaction with your brand, they can potentially refer more potentially loyal and profitable customers to you.

Clearly, with these examples and other quantitative and qualitative analysis that increasingly shows the value of customer referrals, businesses need to make sure that they keep referral marketing top of mind and take action to put it to use. But what’s the best way to get started?

To get you on your way, check out one of our other blog articles for a quick overview of How to Get Referrals from Existing Customers, and consider using planning and CRM software to organize and help execute your referral program. However you decide to go about it, make sure to learn about all of your referral marketing options, set clear goals, develop a plan for success, and use efficient tools to execute your plan and keep you on track.