How Referral Programs Work

Word-of-mouth referrals are the one true corner-stone of marketing strategy over time.

In the early 2000s, PayPal achieved nearly 10% growth daily—without our social media platforms. PayPal spent 60-70 million dollars on offering tiered levels of money directly into PayPal accounts—you could earn $100 by referring five people. They had 100,000 users in their first month and by March had grown to one million. By the end of the year, they had five-million. The founder of Dropbox, Drew Houston, said the success of the program at PayPal inspired the referral program at Dropbox.

By giving people unique referral codes and offering rewards for hitting a set number of referrals, referral programs increase referrals, brand awareness, and revenue.

Referral programs often provide two types of rewards:

  1. Referral rewards such as points, cash, discounts, or free merch incentivize current customers.
  2. Customers who refer new customers benefit through increased visibility and recognition as specialists or special treatment, possibly becoming partners.

However, having a referral program does not immediately lead to more significant customer acquisition. The desire to share has to be there for any referral program to be effective. Referrals won’t happen if people feel that sharing the content will lower their status because it is subpar or not inline with them. It’s best to cultivate a desire to share.

With digital referral tools, it’s possible to have a system that tracks user traffic and behavior to offer referrals to other known online customers.

The goal is to create a viral effect and make the participants spread the word about the competition for you. Reward users who rank in the top x spots or reach a certain number of points.

Examples of rewards

The Viral Loop

Andrew Chen, investor and partner at Andreessen Horowitz defines viral loops as

the steps a user goes through between entering the site to inviting the next set of new users.

And in a 2007 interview with Lance Tokuda, chief executive of RockYou, Tokuda explains

The viral loop of people inviting each other to most social networks revolves around a user posting a widget to their page and having friends see their page. The viral loops for Facebook (there are multiple) revolve around the news feed, the mini-feed and the invite request. Not around people coming to your page and interacting with it

Viral loops are another way to talk about referral programs—optimizing the steps between one person adding another.

What you are offering should increase the familiarity and intimacy between you and your customers—ideally influencing your customers to do nothing but speak about you.

How do you build an effective referral program?

  1. Have a valuable product. Start a referral program when your product is good enough that people refer others without any other incentive.
  2. Build viral loops into the product. Optimize the steps between one person inviting the next.

Referral Program Example

Morning Brew

In 2015, While helping college classmates get ready for job interviews, Alex Lieberman noticed they were failed to connect with traditional business news, so he created a daily newsletter that later became Morning Brew.

Morning Brew is a free daily newsletter covering the latest news from “Wall St. to Silicon Valley” in an informative and witty manner that gives you everything you need to start your day.

On April 5, 2020, Morning Brew hit 2 million subscribers and reports it will turn profit on revenue of $20 million this year. Knowing a thing or two about viral loops, Morning Brew has an effective referral program within every newsletter.

On March 23, 2020, Cofounder of Morning Brew, Austin Rief, tweeted

When Tyler Denk joined Morning Brew in 2017, he aimed to create the most badass and effective referral tool in the world.

The referral machine at Morning Brew is home-brewed and enables

And Tyler describes their referrals program as responsible for

over 30% of our total subscribers and is the “secret sauce” that makes our growth flywheel spin. It’s helped turn readers into evangelists and evangelists into walking advertisements. It’s the ultimate 1 + 1 = 3 scenario that makes all of our acquisition channels X times more effective.

Every day Morning Brew reminds readers by constantly changing what referral rewards a reader sees based on their referral count and motivates through a real-time counter of how many referrals someone has, alongside “You’re only X referrals away from receiving Y!”

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