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Fact Versus Fiction: Shedding Referral Marketing’s Old Myths

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. 

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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