Referral marketing

Type of marketing

Referral marketing is a word of mouth initiative designed by a company to incentivize existing customers to introduce their family, friends, and contacts to become new customers. It differs from pure word of mouth strategies, which are primarily customer directed with the company unable to track, influence and measure message content, referral marketing encourages and rewards the referrer for allowing a company to do so. The process is distinct from multi level marketing, in that there is no incentive for the original existing customer to drive or influence the subsequent referrals of the new customer – only the conversion of the initial, primary customer is rewarded.

Referral marketing is a tool used by various businesses and corporations across a wide variety of different industries to grow and build customer bases. In the past, referral marketing was purely focused on spreading information through verbal interaction with a close network. Modern day referral marketing now heavily relies on social media and the internet, allowing the scope of referrals to increase dramatically by reaching a far broader audience. Most recently, referral marketing has allowed companies such as PayPal, Dropbox and Airbnb to grow exponentially with their personalized referral programs. There are three fundamental elements that help define and differentiate referral programs from organic WOM (word of mouth). They are company driven in that they are actively managed by the parent company, which is different from organic WOM which involves the unprompted recommendation for a company's products or services through external interaction, free from company influence. Secondly, an overarching aim is to convert existing customer's networks to join as new customers. Lastly, is a reward or incentive given to the existing customer by the company for the successful conversion of their network to their products and/or services. There are typically two types of referral programs: incentive payment and non incentive payment. The former is much more common and includes rewards such as cash, prizes, discounts, shopping vouchers or the service itself for a limited time. The latter referral marketing program benefits the existing customer through increasing reputation and gaining special treatment from the parent company through working
without economic payment on presentations and online forums for example
Referral marketing was questioned by managers for the effectiveness and material benefit it could bring to a company in comparison to organic WOM and other means. Concerns over operating costs of implementing a referral program, unsustainable economic benefits, suspicion on the trustworthiness of the referee given the monetary incentive to recommend, as well as abuse from opportunistic referrers all questioned the value of referral marketing brings to a company. The Internet is a common channel for referral based marketing. It delivers abundant outlets for customers to share their opinions, product favourites, and experiences, including the company's website and through social media. The marketers can encourage the referring parties by providing pre scripted messages. Advocates can provide their family members and friends with personalised links including unique referral codes and advertisement information through e mails, blogs and instant messages. The company can give rewards to advocates when their family members and friends buy through the link. This way, referral programs can also be regarded as a tool for retaining existing customers.

The referrer may not be impartial if compensation is based on the prospect joining the customer, not just for the referral. Incentives can place an ulterior motive on the referrer's end, which can introduce a drive to 'sell' referrals in order to receive compensation. This can result in uncertainty from the referred customer, and reduce trust in both the existing customer and company regardless of the product or service sold. This does not happen with pure WOM given that there are no incentives given to referrers by a company to recommend. Referrers can spread referrals to a wide audience, either offline or online, and introduce low quality customers to the business with no consequence. The study found that recipient benefiting incentive structures convert 1.41 1.79 times more than sender benefiting structures. Additionally shared incentive structures converted at similar rates of recipient benefiting structures. No incentive and donation structures converted at substantially lower levels than all other options.