• Ivaylo Yorgov

Referral-led growth: how to unlock and accelerate it


There is a major untapped business growth opportunity. It is called customer referral.

Few of us can confidently say we are doing enough to nudge our customers to recommend us. And with all honesty, there is still a lot we don't know about activating customer referrals. 


In what follows I offer you a glimpse at what I believe can incite a paradigm-shift for many businesses: referral-led growth. 



How my local restaurant got it all wrong and still made me a promoter


A quiet Thursday evening in October 2012. Me and my (then) girlfriend ordered a take-away dinner from a place we occasionally visited. When we got home we realized they got our order completely wrong. Well, we ordered fish and we got fish, so probably not completely completely wrong. But the fish was of a distinctly different kind and was cooked in a radically different way. Plus they missed a couple of the things we ordered. 


After an initial bout of anger we figured it might be best to approach the situation assertively and just go back to the place and tell them. So prepared to go ballistic if need be, I go back to the restaurant and explain the situation. 


I'll tell you what, not only there was no need for me to go in wartime mode, the guys reacted in such a way, that to this day I keep telling this story any time I talk about good service recovery. They recognized their mistake and immediately set off to correct it. Not only did they give us what we ordered - they also threw in a dessert. And perhaps most surprisingly for me, they even gave us our money back. 


How many people I've told so far? About 20. How much did it cost the place to recover from the mess up? About 20 euro. That's 1 euro for every potential customer. 

The numbers speak for themselves - referrals are good for your business


Do customer referrals work? Are they worth investing in?


The simple answer is a resounding "Yes"


The more complex answer is still a resounding "Yes". Referred customers equal higher margins and higher retention which leads to at least 16% higher customer lifetime value (1). A customer you gained from a referral will spend north of 16% more with you than a customer you acquired through a different channel.


Referrals work and they are an effective way to grow your customer base. 



Why are customer referrals so effective and efficient?


The non-exhaustive list of factors ranges from the low investment to implement to the ease of scaling them up. 

  • Referral programs have relatively low cost of implementation as they are easy to set up, administer, and maintain. Most of these programs, especially in the more and more digital times we are living in, require little more than a couple of web pages. Once in place, there is little you need to do other than update them.

  • Referral marketing can be very well targeted. (I hope) most companies maintain a good record of how customers evaluate their customer experience and that can serve as a good starting point.

  • Because the referrer knows well both your products and the person they are referring you to, they can ensure a good match between the two. This is the mechanism behind the higher margins and longer retention of referred customers. In essence, the referrer is doing the targeting and because they have a knowledge they do their job well. 

  • Related to the previous point, trust and social enrichment are vital in referrals. Being recommended helps to overcome the trust barrier, and that's one of the major benefits of referrals. The other one, perhaps less widely known, is that "...the relationship with the firm is enriched when a family member, friend, or acquaintance is a customer as well." (2)

  • Importantly, referral programs are easily scalable, if we apply the right data analytics techniques. More on this in a few minutes.

How to generate more referrals?


The reality is, you can only nudge people who are willing to talk positively about you to actually start doing it, but you cannot create a referrer per se. What you can do is something every business should be doing: keep the promises you make to your customer, thus creating a valued customer experience. The truth of the matter is, very few unhappy customers will tell their friends and family to start working with you or to buy your product. Unless you make customers happy, they are not going to be your promoters. 


So, good customer experience sows the seeds of a referral, yet it is oftentimes not sufficient. What you can do is further nurture the seeds by making smart interventions along the way.


Here are a couple of ideas. 

  • Offer incentives, of course. I trust that all of us know we need to offer something back.

  • Ask for referrals. This one is also a fairly common-sense one but it's worth including. Referrals are a great source of business but we can't expect customers to just spontaneously spread the word. I don't think anyone would mind being asked to do so, especially if we've made enough to provide good customer experience before that.

  • Chose the right moment. A client I work with in the telco domain is making the most of a brilliantly simple and effective solution. After their customers complete a satisfaction survey, the ones who claim they are very happy get redirected to my client's Refer-a-friend webpage. The customer is in the right mindset and has just said that they would recommend you - not giving them the tool to do it immediately is a lost opportunity.

  • Incentivize the receiver. This is slightly counter intuitive at a first glance. Yet researchers have found (3) that programs offering benefits for the receiver are more effective in driving uptake as they minimize the action cost. You can read more here: https://www.linkedin.com/pulse/science-says-more-effective-referral-program-receiver-ivaylo-yorgov/

  • Nudge potential referrers. Reminders are a good starting point here. Often times it's not that people don't want to recommend you - they just don't keep this in their minds all the time (don't know why). What my telco client is doing is also a great example of a nudge. You can also make use of peer pressure (X people like you spread the joy already). 

  • Be specific. Don't go wide asking your customers to recommend the brand. Ask them to recommend specific products. Check out how Vodafone is doing it: https://www.buyapowa.com/blog/referral-marketing-but-not-as-you-know-it/

  • Pre-fill messages to make it easy for people to recommend you. Two examples that work: "Option A) Information that the friend bought it (e.g. “Just bought this, check it out”), to boost conversion rates by 11%. Option B) Information about a referral incentive (e.g. “Buy this, then invite friends to get it for free”), to encourage 53% more referrals." (4)


The final point I'd like to make requires more elaboration: work with what motivates people to talk. Jonah Berger is perhaps the most prominent researcher in the field of word of mouth. He offers the following six principles of contagiousness, or why things catch on: "products or ideas that contain Social Currency and are Triggered, Emotional, Public, Practically Valuable, and wrapped into Stories." (5)


In other words, for people to (spontaneously) talk about your product, you would have to:

  • Give them something that will make them look cool if they share it (however you define cool)

  • Remind people about the product. Offer cues! If you are a telco for example, can you send an email once a month reminding people that it's because of your uninterrupted service that the customer was able to chat with their loved ones?

  • Spark an emotion. "When we care, we share." (6)

  • Make it public. The easier it is for a person to see the product, the more they are going to talk about it. I suspect this is one of the reasons people often times talk about cars.. Oh, and the weather!

  • Provide something of practical value. Cat videos don't have a practical value, I admit. Still, things that are useful get shared because, well, they help.

  • Stories. It's worth repeating this - stories! You talk about movies right? And about your vacation? Why? Because these are all stories, and stories are easy to remember and share.

The future: personalized and targeted referral nudges at scale. Or how to reach hundreds of times more customers. 


As the saying goes, it is hard to make predictions especially about the future. What we can be fairly certain about is that companies will continue to explore ways to activate potential promoters. Two things are going to happen in this process I believe, as we are observing these trends in many other customer experience domains: personalization of the referral nudges and going big on them.


We are already cracking the conundrum of providing personalization at scale. With the amounts of data we collect and the advancements in data analytics it is becoming a fairly standard practice to predict customer behavior. And if we predict customer behavior well, we can also suggest the appropriate actions and how to time them right to generate maximum impact. 


A telco client of mine for example is using the transactional and usage data they have to predict which customers are detractors and which promoters. Predicting detractors allows them to reduce their churn, while predicting promoters allows them to scale up their refer-a-friend program. So now instead of relying on a limited-coverage survey to identify potential referrers they work with their full customer base. Think of it this way - if they do a survey with 10.000 customers but have 1.000.000 in their customer base, the predictive algorithm they use delivers a 100 times increase in the amount of people they can work with. 


Now, imagine an algorithm working on top of the 'scale-up' one - let's call it 'action-generator'. This latter algorithm can mine all previous actions you have done to activate promoters, can calculate the impact depending on hundreds of customer variables at the same time, and can suggest the actions that will have the highest impact on customers you haven't reached out to yet. 


Does this sound far-fetched? I hope not. The future, as William Gibson says, is already here - it's just not evenly distributed. Step into it now. 


My best wished for a great day ahead!


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Sources:

(1) https://faculty.wharton.upenn.edu/wp-content/uploads/2012/04/Schmitt-Skiera-vandenBulte-2011-Referral-Programs-Customer-Value.pdf

(2) How Customer Referral Programs Turn Social Capital into Economic Capital

(3) Why Prosocial Referral Incentives Work: The Interplay of Reputational Benefits and Action Costs

(4) https://ariyh.substack.com/p/the-hidden-opportunity-in-referral

(5) Berger, Jonah. Contagious: Why Things Catch On (p. 25)

(6) Berger, Jonah. Contagious: Why Things Catch On (p. 23)

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