THE BLOG
12/15/2014 01:45 pm ET Updated Dec 06, 2017

Turning Everyday Buyers Into Customer Evangelists Through Referral Programs

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My interview with Tony Mariotti (center) and Manish Goyal (right) of Friendbuy

If you want to grow your e-commerce business, you must always be encouraging people to do these three things:

  1. Join your mailing list.
  2. Buy something.
  3. Tell their friends to buy something.

Most e-commerce sites have nailed the first two -- the last one, not so much. That's why I carved some time out of a recent trip to southern California to interview CEO Manish Goyal and COO Tony Mariotti of Friendbuy, an online platform for running customer referral programs.

If you're a customer of Birchbox (subscription service that delivers a monthly sampling of cosmetics), Dun & Bradstreet (provider of business products & services) or Warby Parker (American brand of eyeglasses and sunglasses sold online and through a limited number of showrooms), you may have participated in a referral program powered by Friendbuy.

Friendbuy and its competitors like Extol, Ambassador and Talkable allow you to implement a robust referral program in minutes with features for A/B testing, share buttons, referral widgets, and a dashboard for monitoring conversions and performance.

Turn your Customers and Site Visitors into Sales Reps

Word of mouth advertising is nothing new; it's just become easier and more virulent thanks to the internet. With a few keystrokes, people can share business experiences and recommendations across the globe, including the good, bad and ugly.

I will stay with the good, as Friendbuy is about encouraging people to share what they like. And people are quite willing to share a bad experience with no further prompting!

Yet many e-businesses continue to view word-of-mouth advertising with a hope and a prayer, believing that their great products and outstanding service will be enough motivation. I'm all for hope and prayer, but if you really want to get people sharing some love for your business, it helps to encourage them, and incentives sweeten the motivation pot.

Is Your Business Right for a Customer Referral Program?

Friendbuy has seen referral programs work across a range of demographics, though the company has identified some profiles that work particularly well:
  • Companies that market to women and millennials - it seems that women (especially moms) and young people love telling friends about products and services they like. Essentially the demographic of women and millennials is a homerun for referral programs, as they tend to go ballistic over buying and talking about their purchases.
  • Companies that compete with large brands and large advertising budgets also can benefit from customer referral programs, which are something of a guerilla tactic for combating Goliath competitors. Dollar Shave Club, a company that competes with providers like Gillette, is an example of a challenger brand that has had success using Friendbuy.

It might also be beneficial to share the kinds of businesses that aren't always a good match. First, you are not a candidate if your sales are completely offline. Friendbuy is an online service for online businesses. If your business is in decline, a referral program is not going to save it. A trickier category is companies that sell any kind of product or service that could be embarrassing to recommend - I'll leave it to your judgment and imagination to figure this one out!

Manish also described situations where marketers can get in the way of their own success. For example, some marketers are afraid to use incentives. Others will use flowery language in their program with too many soft benefits, rather than focus on the customer and the 'what's in it for them' benefits. It appears simplicity is a virtue when it comes to all marketing, including referrals.

According to Manish, the most important indicators of potential for success are your online traffic and your conversion rate. "If you have a healthy conversion rate and you're acquiring traffic through good sources, then I am very confident that referrals will work for you. If you can get people to come and buy from you, you can definitely get them to refer their friends to you."

Customer Referral Program Myths and Misconceptions

I went into my discussion with Manish and Tony believing I held valid assumptions about the types of products and services that would benefit most from a customer referral program. They proceeded to do a little myth-busting for me:

Myth 1: The product or company must have a 'cool' factor.

It's true that many Friendbuy customers are in trendy, high growth categories. Besides Birchbox, there's Friendbuy customer NatureBox, which also offers monthly deliveries of products-in-a-box (natural snacks and treats). And yet another popular customer is MeUndies - yes, you can now subscribe to underwear delivery! Imagine that.

But Manish and Tony assured me that referral programs have worked enormously well for mundane products, like legal documents and computer/audio cables. Products that solve common everyday problems are great candidates for customer referrals, because problem-solving is a great motivator for sharing.

Myth 2: Customers must be truly vocal, enthusiastic fans.

Something that keeps businesses from rolling out a customer referral program is their uncertainty about how much their customers actually like them. It's that old, 'What if I throw a party and nobody comes?' fear.

According to Manish, "We've been at this for four years and here's what I've learned: If you can get people to buy from you, you can absolutely get them to refer their friends to you. If they're going to buy from you, they can think of someone else who would buy from you, and if you're going to give them credit for doing that, something they can apply toward a future purchase, why wouldn't they?"

Myth 3: Must be a subscription-based service

I was most convinced of this assumption, that the only companies that would consider adopting a customer referral program would be subscription-based. I thought the revenue stream and long-term experiences of subscription and membership services would have to be key triggers.

It turns out that subscription-based businesses ARE killing it with referral programs; however Manish and Tony assured me that the majority of their installed base is made up of ecommerce companies selling products and services that are discrete, one-time purchases.

It helps if your products have a frequent purchase tendency. They told me about Pura Vida Bracelets, a young online retailer which sells woven bracelets made in Costa Rica, a popular product with college and high school students. If repeat business is a marketing goal, a customer referral program can help encourage existing customers to buy more for themselves.

Why Pay for Word of Mouth Advertising?

I'll finish up with something I'm sure you're wondering, which is, "Why would I pay for word of mouth, which is something that's supposed to be free?"

I would change the question to more of a proposition: "If you are even remotely successful at getting word of mouth promotion, perhaps a customer referral program is a tactic with even greater potential for repeat business and adding new customers."

As for costs, you will have:
  • The expense of the platform itself. You must either pay somebody to develop and manage it for you, which can be both expensive and time-consuming, or you can choose an option like Friendbuy, which offers two levels of pricing: Do-it-Yourself for small businesses and Enterprise for larger sites. Enterprise customers get strategic guidance, training in best practices and access to advanced features.
  • The cost of the incentives themselves, which could be offered to both the person doing the referring and the person receiving the recommendation.

As for the incentives, since they are tied to an actual purchase, they are not an expense as much as a promotion - like discounts or special offers. You only pay incentives when you make a sale, and Friendbuy allows you to experiment with incentives to find what works best, so you don't have to leave any profit on the table.

Finally, it helps to remember that you are paying not only to grow revenue and add new customers, but to strengthen and grow one-on-one relationships with your customers.

According to Tony and Manish, the average CPA (Cost Per Acquisition) for an Enterprise customer is below $3.00. Friendbuy's client's experience a range in revenue lift - around 5% on the low end and some clients enjoying as much as a 20-25% increase in revenue on the high end. Viewing results through the lens of acquiring new customers, results range from 7% to as high as 15-20% of new customers being acquired through referrals. Tony says, "In the course of helping our clients, I've had the privilege of seeing thousands of referral campaigns. One thing is crystal clear: regardless of product or vertical or target demographics, marketers with a performance mindset always do well."

What makes a customer referral program so attractive is that it's one of the most direct of direct response tactics. It's giving a bit of profit margin or free product in exchange for new customers, better customer relationships and revenue growth.

Friendbuy recommends casting a wide net for customer referrals, promoting offers to everyone on your website, social media and email. Some companies limit their referral program exposure, promoting it only on post-purchase pages or membership account pages. Friendbuy has found that forcing a login creates undue friction and can result in 90% drop off from expected sharing performance.

The following are two examples of businesses that offer incentives to all site visitors:

Pura Vida Bracelets (the Costa Rican bracelet retailer) places a call-to-action navigation link at the top of every page, which clicks through to a standalone referral page with an immediate incentive.

NatureBox presents their referral offer above the company logo, which appears throughout the site. Clicking on the offer triggers an overlay widget.

Check out Friendbuy's customer referral platform to learn more, and I recommend a visit to this blog post for information they share on referral marketing benchmarks.

Photo credit: @Friendbuy

John Fox is the Founder and President of Venture Marketing. He writes about issues especially important to B2B businesses leaders.

© 2014 John Fox. All Rights Reserved.