When Is The Right Time To Launch A Customer Referral Program?

When Is The Right Time To Launch A Customer Referral Program?

It could be argued that starting a business is easy. In most countries, the process of registering a business with the relevant authorities can be done in a couple of minutes at a minimal cost. Moreover, there are over 100000 domains registered online every day as more and more people purchase digital real estate as a signal that their business idea is coming to life. It depends on what you consider the requirements for a business to have started to be.

Most business owners will tell you that the difficult part is actually marketing and growing your business. In our digital world, there are countless channels available to market your business from SEO to PPC. For an entrepreneur without marketing experience, the jargon can be overwhelming with the abundance of choices leaving some not making a choice at all.

One of those channels available to market your business is referral marketing. It isn’t as widely discussed as paid social or paid search marketing, but that also means you probably haven’t heard that consumers find word-of-mouth to be 2 to 10 times more reliable than paid advertisements. That’s why is easier to convert a lead from a referral than it is for any other marketing channel. That’s also why companies like Tesla, Uber, Dropbox, and Airbnb have integrated referral programs into their marketing mix to grow their businesses.

Referral Factory allows you to build your own referral program in less than 15 minutes at a minimal cost. But when is the right time to actually start a referral program?

We compiled this list of considerations to help you make a choice as to whether your business is ready for a referral program. But it’s important to start with the fact that every business starts with an organic referral program from inception. As a business owner, you start as the first customer for your product or service. You then start referring others to use your product or service in order to get customers. As a matter of fact, your business already has a referral program. It just hasn’t been automated or optimized and you probably aren’t tracking its performance. 

Any company regardless of size, industry, or life-cycle stage can have a successful referral program. We’ve just compiled these criteria for those wondering when may be the best time to start a referral program.

Do you have a great product or service?

It always starts with what you are trying to sell. Does it do what it says it should do on the box? You need to make sure that the product or service efficiently solves the customer’s problem. Bonus points if the process leaves the customer feeling delighted.

69% of customers who had a positive experience with a company would recommend the brand to other people. SOURCE

Think of it this way, how likely are you to recommend something to someone if your experience of that thing wasn’t great? Having a great product or service means happy customers. Happy customers are more likely to refer your product to others.

Do you have existing customers?

While you were likely to be the first customer and referrer for your business if you own the business, you need more than yourself as a customer for it to be a viable business. The same applies to starting a referral program. The more customers you have the better you are able to take advantage of network effects where the value of your referral program increases the more existing customers you have.

While it depends on market factors and your price point, we suggest having at least 20 – 100 existing customers to fully take advantage of a referral program. The cheaper the price the higher the number of existing customers you should have.

Let’s compare the potential results of this spectrum.

If you have 100 customers.
You can expect 30 of those to refer customers.
You can expect 60 referred leads from those who choose to refer.
You can expect 18 of those referred leads to turn into existing customers.

If you have 20 customers.
You can expect 6 of those to refer customers.
You can expect 2 referred leads from those who choose to refer.
You can expect 1 of those referred leads to turn into existing customers.

As you can see having more customers results in better returns. But it’s important to highlight that you can still use the few customers you have to get more customers. A referral program creates a flywheel referral loop that grows your customer base while also compounding returns as your customer base grows.

Are your existing customers engaged?

It’s not just about the number of customers but also the quality of the customers and how engaged they are with your business. You can have thousands of social media followers and hundreds on your email list but if those people aren’t engaged with your brand then they won’t refer customers. Rewards aside, it takes more effort and time for a customer to refer other customers, and if they not opening your emails or commenting on your social content then they are less likely to refer other customers. That makes engagement a great metric to consider before starting a referral program.

Below are some of the key engagement benchmarks to consider for primary digital marketing channels. They calculate the number of people that take a particular action (like sharing, opening, commenting or liking) as a percentage of the people that saw your content.

If you refer to your analytics for the platforms above and are in the range or above the benchmarks, that suggests you have an engaged audience which sets your referral program up for success.

Are you spending money on paid advertisements?

Platforms like Google, Facebook, and TikTok make their money primarily by offering advertising to reach potential customers. If you’re reading this article, it’s safe to assume that you’ve tried paid digital advertising to market your business and sell products or services.

The benefit of having used paid advertising is that if it’s done right it provides a benchmark for how much it costs to turn a potential customer into a paying customer. This is what we call Customer-Acquisition-Cost (CAC). When starting a referral program having this figure can assist in designing rewards or incentives. The general rule is that the monetary value of your rewards and incentives should be less than the cost to convert a customer when using paid ads.

For example: Let’s say it costs you $50 to convert a single customer through paid social advertising. Based on this you can reward someone who refers a new paying customer to you with $40. Better yet, you should have a double-sided referral that rewards the person who referred $20 and the new referred customer $20.

Knowing what it costs to convert someone gives you a great foundation on which to base your rewards and incentives. It’s also important to remember that your rewards don’t have to be monetary. Experiences and exclusivity are also great for rewards or incentives and can lower the cost of converting a customer through referrals even lower.

Do you use a CRM platform?

CRM stands for Customer Relationship Management and there are various software platforms available that help you business owners manage relations with customers. An investment in a CRM platform suggests that you know the ability build and nurture customer relationships has a positive effect on revenue and profitability. It also suggests that you have existing customers who are engaged and know what your CAC is.

Customer engagement is not a cost centre. It’s an invesment in customer relationships.

Brian solis

The next logical step after ensuring you deliver a great customer experience with a CRM platform would be using those happy customers to get a new happy customer. This is where a referral program comes in. The great thing about Referral Factory is that we have integrations with HubSpot, Salesforce, Intercom, and Pipedrive which make it easy to integrate a referral program into your existing workflows. And if you’re not using one of these CRM platforms, our Zapier integration and API allow you to do the same in less time and with less hassle. 

Launching a referral program if you’re using a CRM platform is a no-brainer. We’re preaching to the converted.

If you answer yes to any 3 of these 5 questions, then your business stands to gain a ton of value from launching a referral program. Whether you’re a business owner or a marketer trying to convince the board to start a referral program, these questions are great motivations for starting a referral program.

If you’re just starting your business, remember that you’re the first customer and the first person who should be referring others. Reach out once you’re ready to automate word-of-mouth with a referral program powered by Referral Factory.