Referral Marketing – The Science Behind Generating High Quality Leads

With the invention of sophisticated marketing automation tools, capturing “more leads” seems attractive. But “more leads” is rarely the best answer.

Generating a large amount of low-quality leads would do more damage than good. You need to focus on generating high-quality leads that are easy to convert into customers because they already have an affinity with your brand.

That is where referral marketing can help you. We may be a referral software company…. but it all starts with marketing!

The concept of referral marketing is not new. Satisfied customers have been referring solutions to their friends for a long time. And today, it is an excellent way to leverage word of mouth to build a lead engine that runs itself.

Happy customers telling their friends and family about your business is a great way to raise awareness in the right target market. People with similar interests flock together, and for difficult industries like finance (tax, investment, insurance, etc) people trust their friend’s recommendations far more than advertised solutions.

Referral marketing can help you grow brand awareness and fill your sales funnel with a solid amount of high-quality leads. But, how do you effectively implement a referral marketing strategy?

It starts with understanding how it works.

This is the science behind referred leads

This showcases four reasons why the leads generated through your referral program are likely to be high quality.

People are more likely to buy through referrals

Have you recently bought something because your friend recommended it?

Given that 83% of people trust others’ recommendations, it’s the least surprising. Humans are social beings who seek the cooperation needed to survive. The most common “help or invite a friend…” referral message addresses this need for humans to be social.

Interestingly, your customers buy from you based on three main factors:

The logical side: Your solution addresses a pain point. There is a rational justification.

The emotional side: They feel special. Your solution adds value to their life.

The social side: Your solution impresses their friends. You add value to their social circle.

Referral marketing campaigns help your leverage all three factors.

Let’s take a look at a simple example. The “Love With Food” referral campaign offers a free box of healthy snacks to the value of $10 for using a referral link. They let you help a friend by promoting healthy eating while you earn $10 on top. If you carefully notice, this is a campaign crafted to trigger all three factors – the logical side by giving your friend advice on something that is useful, the emotional side, by showing you care about them, and the social side, by impressing them with your inside information. Even though this is quite a standard campaign, it is effective because it works across these three levels.

Referrals let you laser-target the right audience

Unlike PPC campaigns on channels like Google and LinkedIn, referral marketing comes with a “done for you” advantage. Your paying customers recommend your offerings to those who need them the most. You don’t have to worry about wasting your entire ad budget (or throw everything and pray that some will stick.)

This means referral marketing automatically makes you a “trusted and recommended” option. With the built-in amplification, social media channels would help you further your cause. You can reach hundreds of people, generating high-quality leads in seconds.

Consider Fashion Nova, an example of referral marketing done right. It’s a fast-growing women’s apparel company with 20 million followers on Instagram alone. Their Instagram feed has customers’ selfies placed right next to Cardi B and Kylie Jenner. It’s like fans can wear identical clothes and walk with the big celebrities.

There’s also an incentive (40% off for referring two friends) to join their referral program. The company is using Instagram to reach the kind of customers they want. Fashion Nova is leveraging the laser-targeting attributes of social media through referral marketing.

When a customer connects you with their friends and network, it means you’re highly likely to be in the right circles. Even if their friends aren’t ready to buy now, they are more likely to remember you in the future.

Referrals deliver a lower user acquisition cost

The traditional means of advertising are becoming expensive as we speak. The average cost per action for Facebook ads across industries is 18.68 USD.

A new prospect needs to be targeted (and retargeted) with complex ad campaigns. Businesses get stuck competing with top brands on costly pay-per-click ads. Referral marketing is the better way.

Referrals allow a prospect to become a recipient of an invite from someone they already know. The referrer also offers a giant vote of confidence, which is a powerful social proof. Compared to paid ads, this is an inexpensive method of getting new customers on board.

By leveraging current customers to refer others, you could drive down acquisition costs. Second, you get to maintain autonomy from more expensive advertising platforms.

Plus, your current customers are also filtering your leads. They only send invites to those who are more likely to see value in your product or service. That’s the key to generating high quality leads who are already motivated to become long-term clients.

A perfect way to leverage proven laws of commerce

The law of reciprocity: You could be doing your customers a favor by giving them a monetary reward or a discount. At the most basic level, it’s an attempt to help another human being. A favor they feel bound to reciprocate by giving you referrals. It feels good to them that a solution they introduced makes anyone’s life better.

On a more superficial level, they’d put in a good word and sing your praises. This is an absolute win-win as you gain happy leads along with great testimonials. This is the law of reciprocity in action.

The law of compounding

Compounding is one of the most powerful forces in the universe. In a business context, a company can grow by making small changes to interrelated parts of the overall business.

Referrals lead to high-quality leads. More leads mean a higher number of opportunities to convert. Better conversion means more revenue, and so on.

When everything adds to the company’s bottom line, it is the law of compounding in action.

What’s the average conversion rate of referred leads?

The Referral Factory combined average conversion rate varies between industries, but data from thousands of campaigns run in 22 shows the averages by industry below.

These conversion rates are specifically higher than the average conversion rates of non-referred leads, which tend a conversion rate around 2% – 5%. This means that referred leads are not only more likely to become customers, but they are also more likely to remain loyal customers in the long run.

Is referral marketing a replacement for traditional lead-generation campaigns?

No, but its benefits are almost always understated. A successful referral program can attract quality leads for years to follow. These are prospects who want to buy what you’re selling. They have already heard about your solution and are likely to be a perfect fit. They are referred, so they haven’t looked at your competitors. This means you have a better chance of converting them. A win-win all around.

But this doesn’t mean that you’r other marketing channels are replaced – your referral program act as a booster for your marketing funnel, but it’s best when combines with other marketing efforts so you continue increasing your brand awareness around large audience bases. We advise combining referral marketing with PPC, SEO, influencer marketing, email marketing and other digital advertising efforts.

Referral marketing statistics

Referral marketing statistics demonstrate the effectiveness of referral marketing, proving its an effective way to generate high quality leads. These statistics typically indicate that referral marketing has a high rate of conversion, can generate more leads and customers, and can result in higher customer lifetime value and retention rates.

Furthermore, referral marketing statistics often reveal that customers acquired through referrals are more loyal and valuable. Overall, the data highlights that referral marketing can be a potent strategy for businesses seeking to increase their pipeline of incoming leads.

Three brands generating high-quality leads using referrals

Elysium Referral Program

Promoting supplements requires trusting voices. It’s a competitive space. That’s why Elysium decided their current customers could refer new leads.

The marketing team decided to create a simple two-phase referral system. They offered $50 for someone who subscribes to their dietary program. An extra $100 was provided for every ten referrals. Referrals instilled trust, which could’ve been difficult through advertising and educational content.

MVSN Referral Program

MVSN TV is a streaming platform for professional fighting events. They used Referral Factory’s easy-to-use platform to build a referral program where fans could refer their friends to get the streaming link to watch an upcoming fight.

MVSN TV also invited 200 fight influencers to join their program and this gave it the boost they were looking for – generating over 9000 referrals in the first week! The best part is, that they were able to track which influencers referred the most people using our platform – no tracking scripts, no complicated analytics setup.

Generating high quality leads for Evernote

Evernote rewards its existing customers for every new user they successfully refer. This way, users can win a chance to earn their service for free.

It’s a successful natural referral program that maximizes platform growth. Even better, the referral program was not a significant investment for Evernote. Although Evernote is far from perfect, it’s a great referral story. Evernote’s 75 million users and $1+ billion valuations prove things are on track.

High Quality leads – Harry’s Referral Program

Harry’s is a shaving products company that adopted a referral program even before its launch. It was a straightforward approach. An incremental rewards system incentivizes people to refer more people to get rewards. Refer five friends, and get free shaving cream. Refer 50 friends and get free shaving for a year.

The referrals added to the hype, and Harry’s garnered 100,000 email subscribers. It was a profitable program to help spread the word and gain a customer base.

Referral program templates you can copy

There is a library of pre-designed referral program templates that you can use as inspiration, or for actual use with a fee. These templates, created by global marketing experts, are aimed at ensuring that your initial referral program includes the most effective referral marketing strategies and tactics.

Search for a referral program template by business type or keyword, find one that suits your strategy or industry, then edit the template to include your own brand logo, colours, messaging and more. All templates can be fully personalized to match you brand tone, visuals, and goals.

Can AI create my referral program?

Artificial intelligence (AI) can provide marketers with superpowers by automating mundane tasks, analyzing large amounts of data quickly, and providing insights that can help improve marketing strategies. This allows marketers to focus on more creative tasks, and make data-driven decisions that can lead to better results. Essentially, AI works as a superhero’s cape, providing marketers with an edge to achieve more efficient outcomes.

If you’d like to test this notion, there is an AI referral program generator out in beta. It’s not widely available yet, but it’s the playground for whats to come at Referral Factory. For now the tool can use AI to auto generate a referral program for any brand with a website on the internet.

In conclusion, referral marketing is a powerful tool for generating high quality leads. It allows you to leverage the power of word of mouth to attract customers who are more likely to convert into long-term customers. By understanding the science behind it and implementing an effective referral marketing strategy, you can grow your brand awareness and fill your sales funnel with high quality leads.