How to Get More Customers with Referral Marketing Programs

November 19, 2015 Brandon Gains

How to Get More Customers with Referral Marketing Programs

Referral marketing programs are a structured way to incentivize natural word of mouth recommendations between friends and colleagues.

Customer referral programs, in one form or another, have been used by businesses for centuries. Accountants, lawyers, bankers, merchants, and tradesmen have all relied on their personal client network for introductions to new business opportunities.

 Brandon discusses #ReferralMarketing in more detail in our #smallbiz_expert Twitter interview w/ Referral Saasquatch

Origin of online customer referral programs

In 1998, PayPal’s founders were able to use a $10 double-sided referral program as their primary marketing channel to achieve 7-10% daily growth and scale up to 100 million customers. This referral program was created to solve PayPal’s biggest problem - acquiring new customers.

PayPal

They had tried many different marketing tactics to solve the problem, but so far they hadn’t worked – what with advertising being too expensive and bank partnerships being full of problematic bureaucracy.

This problem spurred an impromptu ice cream meeting between Elon Musk, Peter Thiel, and Luke Nosek. In this meeting, they kept coming back to the fact that their current customers were in love with the product.

So, it became clear that they needed a structured system that enabled their customers to recruit other customers to PayPal, in order to grow.

Spending $20 for each new customer ($10 each way) turned into an affordable customer acquisition cost and helped spur the growth of the company. This was a true social campaign that spread like wildfire through the channels at the time, for example, Email, Instant Messaging and blogs.

Their double-sided incentive of $10 was an incredibly successful marketing tactic because it played off a different type of consumer behavior.

Having a dual-sided reward gave their customers a sense of altruism – they were giving their friends a reward and not profiting off a one-sided transaction.

The referral program helped PayPal become one of the true success stories of the dot-com era where their 2002 IPO raised $70M and were quickly sold to eBay the same year for $1.5B.    

What should I consider when creating a referral program?