Fact Versus Fiction: Shedding Referral Marketing's Old Myths
It's time for marketers to shed their misconceptions of referral marketing as a low-volume, low-impact awareness strategy.
The Internet has changed marketing—and the social Internet has changed marketing's relationship with the customer. Social media programs have joined display advertising, email marketing, natural search (SEO), and paid search (SEM) to give companies more targeted and human engagement tactics. Like SEO and SEM, referral marketing engages prospective customers where they live online—through their daily interactions on the Web. It also engages them how they live online—through personal connections and by recruiting existing customers to help drive new customer acquisition.
But referral marketing takes it a step further. It allows marketers not just to converse with customers, but to gain from conversations that they're not even directly involved in. Referrals are actually as old as business itself, but the technology to track and manage them is new. Now referral conversations no longer slip away on the wind, causing marketers to view them simply as awareness-builders. Today referrals create a scalable, cost-effective customer acquisition channel—which is why the old myths about how and why referrals work no longer apply. The sooner marketers understand the truth of today's referral marketing, the sooner they can generate meaningful revenue with it.
Truth 1: Referral marketing drives high-impact acquisition.
Referrals aren't a low-impact awareness tool. In fact, referrals are for acquisition. Referral marketing conversion rates range between five and 40%. Here are some examples:
- When Advance Auto Parts launched its referral marketing program, it hit a 25% conversion rate on program emails.
- CLEAR, a travel technology company that allows travelers to speed through airport security lines by using a separate CLEAR kiosk and lane, has doubled member enrollments through online referrals with a conversion rate of 9%, and now consistently acquires 20% of all full-paying members through existing customers.
- The online brokerage company OptionsHouse launched a referral marketing program that rewards referrers with $150 cash or 30 commission-free trades. In six months, some 3,000 existing customers shared the program with an average of five traders each, generating 13,000 shares, a 13% conversion rate, and the acquisition of more than 3,200 new customers.
What's behind these double-digit rates? One word: Trust. Consumers trust recommendations above all other forms of advertising, which means they're more willing to buy based on a friend's endorsement of a brand—even one they've never heard of before.
According to the 2013 Nielson Global Trust in Advertising Survey, earned advertising channels like referral marketing are now the third-ranked format for the delivery of marketing messages worldwide. Eighty-four percent of respondents across 58 countries pointed to recommendations from friends and family as the most trustworthy source of advertising.
Truth 2: Referral marketing reaches audiences SEO and SEM don't.
Far from having limited reach, referral marketing reaches prospects that aren't searching for you. This audience is much bigger than the audience of people searching for you at any given time. Beyond the benefit of accessing a huge audience, forward-thinking marketers are also finding that people reached through referrals are also more likely to become customers.
“We have a very specific target, and referral marketing allows us to extend our reach to others within that target,” says John Beck, marketing director at OptionsHouse. “There is nothing like a customer telling a friend about the brand they use. That extra little juice circumvents a lot of tire kicking and leads to faster, more immediate action.”
Customers acquired through referrals often have no previous experience with the company's products and services. “More than 50% of the customers we acquire through referrals are new to our brand,” says Heath Bradbury, eBusiness marketing manager at Advance Auto Parts.
The acquisition process is quick. Across all customers at Extole, 33% of acquisitions in the first quarter of 2014 happened within one hour of a friend receiving a referral message from an existing customer.