Referral programs still effective

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Referral programs still effective
Referral programs still effective

With all the excitement surrounding various ways to stimulate word-of-mouth marketing, I want to revisit a basic technique: the refer-a-friend (RAF) program. A successful RAF program leverages your ex­isting customer base, targeting evangelists to generate low-cost customer acquisition.

An especially powerful combination is layering an RAF program into other cus­tomer relationship initiatives, such as loy­alty programs. These programs typically offer an incentive to customers for referring an e-mail address, followed by a substan­tially higher value reward if the referred individual makes a purchase.

Consider the following high-level base­lines taken from real world examples: First is creating leads. A small percentage of your member base, your true evangelists, will ac­tively participate in your referral program. A common baseline is about 0.3%-1.0% participation. These evangelists will gener­ally refer up to 10 prospective customers a year. For example, in a program with one million members, 3,000 to 10,000 members will generate up to 300,000 referrals. Addi­tionally, when actively promoted via e-mail and special offers (such as double points), referral rates can increase tenfold.

Second, the real story is in the quality of the leads. Leads generated through refer­rals typically convert at a much higher rate than those from other channels, ranging from 5%-20%. More importantly, the life­time-value (LTV) of customers in an RAF acquisition cohort is generally significantly higher. LTV multiples of two to 25 are com­mon, even when compared to the highest cost acquisition channels.

In essence, your evangelists are bringing you customers just like themselves. Refer­rals come in with significantly greater affin­ity for the brand and the loyalty program — they are already on the fast track.

But having a RAF program is not suffi­cient for success. The program has to be actively and creatively promoted with the right combination of offers and awareness to achieve its potential.

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