Referral marketing is a method of promoting products or services to new customers through referrals, usually word of mouth

Word of mouth

Word of mouth, or viva voce, is the passing of information from person to person by oral communication. Storytelling is the oldest form of word-of-mouth communication where one person tells others of something, whether a real event or something made up. Oral tradition is cultural material and...

. Such referrals often happen spontaneously but businesses can influence this through appropriate strategies.

Overview

Referral marketing is a structured and systematic process to maximize word of mouth potential. Referral marketing does this by encouraging, informing, promoting and rewarding customers and contacts to think and talk as much as possible about their supplier, their company, product and service and the value and benefit the supplier brings to them and people they know.

Referral marketing takes word of mouth from the spontaneous situation to one where maximum referrals are generated.

Online referral marketing, using digital marketing

Digital marketing

Digital Marketing is the promoting of brands using all forms of digital advertising channels to reach consumers. Digital marketing extends beyond Internet Marketing to include channels that do not require the use of the Internet...

 as a platform, is the internet based approach to traditional referral marketing. Given the advances in tracking customer behavior online through the use of web browser cookies, online referral marketing provides a high degree of tracking and accountability.

Benefits of Referral Programs

A study conducted by the Goethe University Frankfurt and the University of Pennslyvannia, on referral programs and customer value which followed the customer referral program of a German bank that paid customers 25 euro for bringing in a new customer, was released in July 2010 . According to Professor Van den Bulte, this is the first ever study published on the financial evaluation of customer referral programs. The study found that referred customers were both more profitable and loyal than normal customers. Referred customers had a higher contribution margin, a higher retention rate and were more valuable in both the short and long run.

On whether customer referral programs are worth the cost, the study mentioned - "Our findings are important news for practitioners considering deploying customer referral programs in their own firm. Assuaging prior skepticism, we document a positive value differential, both in the short term and long term, between customers acquired through a referral program and other customers. Importantly, this value differential is larger than the referral fee. Hence, referral programs can indeed pay off."

Examples of Successful Referral Marketing Programs

Dropbox referral program - In 2009, Dropbox implemented a referral program to encourage their users to tell their friends about Dropbox. Their referral program had a two-sided incentive for sharing: the person who signs up for Dropbox through your referral link gets more space than through a normal sign up, and you get more space yourself too. According to Drew Houston, the Co-founder and CEO of Dropbox, at the Startup Lessons Learnt Conference on 23 April 2010, the referral program was inspired by the Paypal Sign up Bonus program. The referral program was wildly successful and it permanently increased their signups by 60%. Referrals account for roughly 35% of their daily signups (as of April 2010). In the 30 days before the conference presentation, Dropbox estimated that their users had sent 2.8 million direct referral invites to their friends.

Okabashi referral program - In March 2011, Okabashi, the largest US manufacturer of sandals and flip-flops, implemented their own customer referral program through ReferralCandy, a customer referral web app by Anafore

Anafore

Anafore is the company that makes the customer referral program web application , a referral marketing service that plugs into existing e-commerce platforms...

. According to a case study released, the referral program became one of their top ten drivers of external traffic, boosting sales within a week of implementation. Referred customers also spent 13.2% more on average compared to regular non-referred customers.