A Comprehensive Guide to Starting a Paid Referral Program

by Greg DePersio

4 min read

Word-of-mouth marketing is an effective lead generation method to grow your small business and bring in new customers. Prospects who come from referrals close at higher rates than leads generated from traditional marketing strategies. They also tend to be more loyal and profitable customers. There are several ways to increase your referral business. The simplest one is to provide excellent products and services at competitive prices and treat your customers like gold. Many will spread the word organically because they’re such happy customers. Another option is to offer tangible incentives for referring business through a paid referral program. Your customers receive receive cash, prizes, or product discounts for sending business your way.

Why Paid Referrals?

Paid referrals can grow your business and strengthen your relationships with existing customers. They’re more cost-efficient than most marketing strategies. With paid referrals, you only pay for actual customers, as opposed to methods such as TV, radio, and social media, which require you to spend big money up front and hope for a strong response. Because referral leads close at such a high rate, it takes stress off your sales team. Whereas a radio spot might produce 500 calls out of which fewer than 20 are legitimate prospects, referral leads often come ready to buy. Implementing a paid referral program can improve your existing customer relationships. It encourages customers to work on your behalf, which makes them more invested in your company’s success and more likely to remain loyal when competitors come calling.

Setting Up Your Program

Setting up your paid referral program involves choosing the incentives to offer, setting a budget, tracking program logistics, and developing a strategy to reach out to existing customers and other potential referral sources. It might be helpful to remember times when you’ve been offered incentives to refer new customers to companies. Mobile phone providers and fitness centers are both known for utilizing paid referrals to great success. If you’ve ever received a text message from your mobile provider for $50 off your next bill if you refer a customer, or seen a flyer at the front desk of the health club offering a free month of membership for referring a friend, these are paid referral programs. Think about how you, as a customer, have responded to such tactics, and what the companies might have done to motivate you to participate.

Choosing Incentives

One of the biggest decisions when starting a new paid referral program is figuring out what specific incentives to offer. You have a few choices: cash, discounts on products and services, non-cash prizes, and so forth. You’ll probably want to conduct market research beforehand to determine what your likely referral sources find most attractive. It’s hard to go wrong with cash, but it needs to be enough to motivate people to take action. Discounts and cash prizes can also be effective, but again, they need to be robust enough to be worth people’s time. Ultimately, your incentives should strike the right balance between being attractive enough to motivate people and inexpensive enough to not stretch your marketing budget.

Tracking Logistics

You have a few options when it comes to the logistics of your paid referral program. For the program to succeed in the long term, you must credit referral customers to the right sources. If you prefer to do this manually, you can ask new customers how they were referred. Alternatively, you can put the onus on the referrers to let you know when they’re sending new customers your way. These methods aren’t foolproof, and at some point, a referral is likely to fall through the cracks or not get credited correctly. For these reasons, you might want to consider installing software or an app, such as Ambassador or Referral Key, that helps you track referrals automatically.

Leveraging Existing Customers

Your existing customers represent your best source to gain referrals. Since you’re already doing business with them, they’re accessible and easy to approach about the program. Their words also carry more weight with new prospects. The easiest time to ask customers for referrals is right after you make a sale. Let the customers know you appreciate their business and that they can receive, for example, a $50 prepaid debit card simply for sending friends or relatives your way. For a more hands-off approach, send a follow-up email a few days after the sale. Tell them you hope they’re happy with the product or service, and by the way, you’ve implemented a great rewards program for spreading the word to friends and family. Aside from existing customers, you can also call on non-competing businesses to participate in your paid referral program. If you’re a chiropractor, for example, you could approach health clubs or massage therapists and work out a deal to pay them to send you customers. Because word-of-mouth prospects can turn into some of your best customers, a paid referral program can do wonders for your company’s marketing efforts.

References & Resources

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