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
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.