What is a Customer Referral Program? A 6-Step Guide to Creating Your Own

Giving money

A referral program is a system that incentivizes previous customers to recommend your products to their family and friends.

Retail stores create their own referral programs as a way to reach more people. It’s a marketing strategy that asks previous happy, loyal customers to become brand advocates. They’re incentivized to do so—in return for gift cards to redeem for discounts on future purchases, free products, and more.

Wondering whether you need your own referral program? We’ll walk you through how they work, the benefits of having one, and a seven-step guide to creating your own. 

What is referral marketing? 

Referral marketing is a strategy that incentivizes existing customers to recommend you to their own network. This can include their family and friends through to anyone they see on social media looking for a product like yours.

Also known as word-of-mouth marketing, it’s a growth tactic that leans on happy customers. Referral marketing convinces them to become independent promoters of your product—and get rewarded for doing so. 

Why are referrals important?

Referral marketing was rated the most effective tactic used by marketers at all stages of the sales funnel. Why? Because new customers earned via referral have pre-established trust in your brand. 

An old (but still relevant) Nielsen study shows that recommendations from friends and family are one of the most credible forms of advertising.

Some 92% of consumers trust recommendations over traditional forms of advertising.

For more recent data: 18% of Gen X consumers say they use word of mouth as their main source of brand discovery. It beats newspapers, blogs, and magazines.

We can see this in action using website referral traffic. The conversion rate of referrals from other websites saw a lift from 2.4% in 2018 to 3% in 2019, making it the highest-converting traffic acquisition channel.

What is a referral program?

Chances are you have a group of happy customers who’re already referring your products to their network. A referral program puts power in that referral machine and convinces more people to refer you (and to do it more often.)

With a referral program, you don’t have to plough money into getting in front of new customers then providing content that wins their trust. The person giving the recommendation already has that—which, in turn, gives your product more credibility. This is why word-of-mouth marketing generates twice the sales of paid advertising. 

The best part? Encouraging existing customers to refer you to their network increases their lifetime value and aids retention. These loyal customers are worth up to 10x of the value of their first purchase. 

One of my retail ecommerce clients connects their Shopify store to ReferralCandy to provide in-shop rewards for referrals in the food and drink industry. Over a period of two years, their referral programs resulted in 6% of sales, generating over $100,000 in [referral] sales, with a 9X return on investment. “What’s also exciting is that referrals helped drive brand awareness through word-of-mouth in communities and on social media, so a lot of these sales generated new customers who had otherwise not heard of their brand.

How does a referral program work?

A referral program works by inviting your current customers to become brand ambassadors. They join your referral marketing program and get a unique code or link to share with their network. Here’s an example from Gousto:

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Your referral program software tracks the activity of a customers’ code or link. If someone purchases using it, the referrer will earn a reward.

What are the different types of referral programs?

There are three main types of referral programs: direct referrals, reputation referrals, and incentivized referrals.

Direct referrals 

Direct referrals happen when your existing customer base actively refers you to people looking for a product like yours. 

It’s the most traditional form of referral—and the most natural. There’s not necessarily an incentive for the referrer to do so; they’re just genuinely happy with the product and are willing to share it with their friends. 

Reputation referrals 

Reputation-based referrals happen when your brand has such a strong reputation that people are confident in mentioning you to someone looking for the products you offer—even if they haven’t bought it themselves.

While it’s a good target to aim for, it’s not necessarily easy to get these types of referrals. They happen as an indirect result of having great products and a strong brand reputation. 

Incentivized referrals

The most popular type of referral is incentivized. With this model, a person has a reason to refer your products to their network—be it to receive a discount on their next purchase or a cash kickback. 

Incentives are twofold for some referral programs. Retailers can choose to give both the referrer and the new customer an incentive for using the program. Erin Condren’s referral program, for example, gives a $10 coupon code for referred customers to use on their first purchase. The person who made the referral gets 1,000 EC Insider points.

How do I create a referral program?

So how do you create your own successful referral program? Here are six simple steps to get started!

1. Start with a great product/service

While it might not sound like an actionable step, the first stage of creating a referral program is to have a great product or service. 

Customers’ personal reputations and relationships are on the line. If they’re recommending bad products that don’t work as intended (or someone can find a better quality product at a lower price), they’re weakening the trust they already have from whoever they’re passing it on to. 

The bottom line: you can have a great referral campaign, but if the quality of your product or service is below par, you’ll have a hard job convincing existing customers to refer you. 

2. Understand your customers

What does your target customer look like? Why do they purchase your product over a competitor? How do they find you? By knowing what your ideal customer looks like, you can educate those joining your program—and give them the best shot at generating referrals. 

(This is key if you’re running an incentive program. You don’t want people spamming their referral links anywhere and everywhere with the sole purpose of claiming a reward.)

Let’s use Bebemoss as an example. Its ideal customer is likely a parent or close relative of a young child. They choose to buy toys from the company because of its social mission. 

Knowing that type of information in advance sets your future referrers up for success. They’ll know exactly what type of customer usually buys from the brand—and therefore, where they should best-focus their referral marketing efforts.

3. Determine incentives

Incentivizing customers to make a referral is a superb way to get more people using the program. Choose what type of reward you’ll give to those who refer family and friends.

But before deciding on your incentives, figure out who you’ll give the reward to. Some companies, including Rothy’s, give both the referrer and the new customer an incentive for joining. This is a win-win: new customers are incentivized to purchase through a referral link. When they do, the person who referred them gets rewarded. 

Rothy's referral program
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A report by SaaSquatch found dollar credit is the most common referral reward. It’s used in more than half of all customer referral programs—both for the person referring their friends and the new customer. Most set the reward at $10.

 Other reward options include:

  • Free products
  • Free month subscriptions
  • Points to redeem on future purchases

Evernote, for example, gives existing customers 10 points for making their first three referrals and five points thereafter. These points can be redeemed on its premium subscription, Evernote Premium. It’s a rewards system that incentivizes retention and increases customer lifetime value (CLV).

Free Download: Retention Audit Checklist

Struggling with customer retention? This free checklist will help you build a retention mindset throughout your company by auditing retention strategies at every level of your business.

Regardless of which incentive you chose, a solid understanding of your CLV is key. You want the cost of acquiring them (i.e., their reward) to be lower than the total revenue they’ll make. 

4. Choose a referral marketing tool

The next stage is to choose a referral marketing platform that handles referral invitations, generates unique codes or links, and tracks the activity made through them.

Here are some options that integrate with a Shopify store:

Once you’ve chosen yours, create a landing page to explain how the new referral program works (plus any incentives you’re giving). The page should have a form for people to join. That person will then receive their unique referral link by email and access to a dashboard to check how many referrals they’ve made.

5. Invite previous customers to join the program

Loyal customers make the perfect referrers. Invite them to join your referral program using email marketing.

Start by sending a broadcast to announce your new program and the incentives you’re offering (if any). Most referral marketing tools have an email feature that slots in a customer’s unique referral code or link without having to sign up themselves.

MeUndies, for example, sends an email to existing customers to promote its referral program. Each email contains a unique referral link for its customer to share and a clear explanation of what they (and their friends) will get in return:

MeUndies referral
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Continue promoting your referral program by mentioning it in your purchase confirmation emails. This type of email has an open rate of 60% (compared to 18% for standard promotional emails). It’s also where people are most excited about their new purchase. Some 20% are open to joining customer loyalty programs immediately after buying from a new retailer.

So use the footer area of your purchase confirmation emails to invite new customers to join your referral program. They’ll get rewarded for sharing the product(s) they’ve bought with family and friends while they wait for their own to arrive. 

6. Make it easy for people to refer you

One of the best things about referral marketing is that it can run on autopilot. You can automate the referral process from start to finish: beginning with software to generate unique links through to incentives being paid-out. 

But sometimes incentives aren’t enough. You need to reduce obstacles and make it easy for people to refer your products to their friends and family. Here’s how to do that. 

Create referral templates

Chances are you have a referral marketing program that generates unique referral links and tracks a customer’s referrals. 

Make it easier for them to refer their friends and family by creating templates. This could be email, social media posts, or preformatted direct messages they can send to friends with the click of a button. It reduces one obstacle that could prevent them from actively referring you: thinking of a way to say it. 

Collect online reviews

People joining your referral program will have a hard job generating referrals if they’re promoting a company with a bad reputation.

So go out of your way to actively collect online reviews that improve your overall reputation.

Ask happy customers to share their experiences on TrustPilot, Yelp, or any other review sites your target customer is likely scanning before purchasing. It’ll make the sales process (and entire customer experience) easier if you’ve got a strong reputation to coincide with your referral program. 

6 successful referral program examples 

For more inspiration, check out these real-world referral programs that have driven more business for their respective brands.

Dropbox

Dropbox had one of the most prolific referral programs of its kind. It rewards existing customers with 500 MB of extra online storage space after referring a friend. 

As a direct result of the referral program, Dropbox grew by 3,900% in just 15 months—scaling from 100K registered users in September 2008 to over four million in December 2009. A few months later, Dropbox users were sending upward of 2.8 million invites every month.

Dropbox referral program
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Tesla

Car manufacturer Tesla has its own multi-tiered referral program. Both new and existing customers get 1,500 kilometres of free charging when they buy a car through a recommendation. 

People who’ve made a successful referral are also entered into a quarterly giveaway. One referral equals one entry, with the prize being a brand new Tesla car. 

A previous version of Tesla’s referral program also rewarded its top-referred with a brand new Tesla, a home charger, and a ticket to visit its new factory. Back in 2015, the winner referred 188 new customers to Tesla, generating sales worth an estimated $16 million in just two months. 

QALI Hair Extension Studio

QALI Hair Extension Studio is a full-service salon in Vancouver, Canada, with an ecommerce site that sells hair products. 

To incentivize its loyal customers to refer their family and friends, it created a points-based referral marketing program, called TreatPoints. Customers earn points for every purchase—be that services in the salon or products.

“Points can be redeemed for products they’ve never purchased, which is a great way to encourage them to try new products using their points and then purchase them again down the road.

“We’ve found our referral and TreatPoints program are great ways to encourage clients to tell their social circles about us and create a sense of loyalty for purchasing products from us instead of other salons/retailers.” —Alyssa Harrison, QALI Operations Manager

Good AirX

Good AirX built its own referral program to capture customers already buying through its ecommerce store. Both the referrer and the new customer are incentivized through discount codes: referrers get 10% off future products; new customers get 7% off. 

“By asking friends who would benefit from our product, they refer us to leads that may be a good fit.” —Gene Kursky, CEO, Good AirX

Through its referral marketing program, GoodAirX reduced its customer acquisition costs. It also increased orders by over 21% and boosted referral sales by more than 73%.

PayPal

PayPal is another tech company that saw much of its early growth in referral marketing. It gave new customers a $20 credit for creating an account via a referral link. The same reward was given to the person who introduced them. 

PayPal spent around $60–$70 million on its referral incentives—an investment that catapulted its user base to upward of 100 million members, at a daily growth rate of 7% to 10%.

Initially users just had to sign up, confirm their email address and add a unique, authorized credit card. The money was simply added to their account. This was real money. Users could send it to someone else or withdraw it. So it was a real cost to PayPal. We must have spent tens of millions in signup and referral bonuses the first year.

LIVELY

Fashion retailer LIVELY went full force on its referral program in its early days—so much so, it launched its referral program before its first store. 

Referrers are incentivized to promote products in return for 100 store credits. The person they’re introducing LIVELY to gets $10 off their first purchase. 

Within 48 hours of launching the new rewards program, LIVELY received 133,000 emails. Its ecommerce store saw 300,000 online sessions. Now, the program has more than 100,000 members, with more joining daily. 

Choose the right referral program for you

Now that you know the value a referral program holds, it’s time to move forward and create your own. Understand what your target customer looks like (and explain that to referrers), choose an incentive, and make it easy for happy customers to recommend you.

The best part? With Shopify POS integrations, you can create an omnichannel loyalty program that rewards customers shopping in-store and online.