Fact Versus Fiction: Shedding Referral Marketing's Old Myths

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It's time for marketers to shed their misconceptions of referral marketing as a low-volume, low-impact awareness strategy.

Truth 3: Referral customers have high retention rates and strong loyalty.

If referral marketing conversions represented one-time-only transactions, marketers might dismiss the referral channel as a short-term, low-value play. But the opposite is true. A three-year study of a leading German bank, published by the American Marketing Association's Journal of Marketing, found that referred customers have higher margins and stay longer than do other customers. Referred customers were about 18% more likely to stay with the bank than other customers—and that gap did not fade over time.

Vonage, the high-quality VoIP home and international phone service, also finds a correlation between referrals and long-term loyalty. “Retention rates for referred customers well surpass our average,” notes Robert Szczepaniak, marketing manager at Vonage.

Truth 4: Referral marketing is cost effective.

Some marketers see the cost of referral marketing incentives for existing and new customers as a threat to the bottom line. Yet first-hand experience tells another story.

“In terms of cost-per-account, referral marketing is by far our most efficient channel,” says John Beck of OptionsHouse. “Display drives a ton of units, but it is our most inefficient channel. The efficiency of the referral channel helps balance our overall marketing spend.”

Hobson Brown, cofounder of Criquet, an Austin Texas-based maker of organic golf shirts and polo shirts, agrees.

“We knew referrals were going to be an important part of our business,” Brown says. “But we hadn't fully tapped the power of our own customers until now. Customer referrals are now our highest ‘paid' acquisition channel.”

Even the cost-per-lead of referrals can be surprisingly low. Online personal finance service Mint.com generated 8,500 new leads for 50 cents each by emailing existing subscribers with a referral offer that they could forward via email or share via Facebook or Twitter.

Truth 5: Referral marketing can be easy to implement.

Developing applications that enable referrals via email plus social media is complex and requires significant resources. Companies that develop and deploy homegrown versions in-house can get bogged down. But implementing such applications doesn't have to be difficult, because dedicated providers remove the cost and complexity by allowing customers to easily share across multiple channels, including email, Facebook, and Twitter. A third-party platform can give marketers total visibility into referral activity, which in turn allows them to optimize their entire referral funnel as they go, from increasing advocate clicks by changing rewards, to promoting more frequently across the channels that convert best, to tweaking the copy that greets would-be purchasers.

It's time for marketers to shed their misconceptions of referral marketing as a low-volume, low-impact awareness strategy. Not only is it a modern, scalable customer acquisition channel—it should an integral part of any digital marketing strategy.

Matt Roche is CEO of Extole.

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