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Referral Program: What is it and How does the Referral System Work

Referral programs are one of the most common and effective tools in the niche of affiliate marketing. They can be an extremely powerful way of promoting products and services, especially for start-ups, as referrals are capable of simultaneously generating leads and building customer trust even on a strained budget, relying above all on goodwill recommendations by satisfied clients.

In this article, we explore what a referral program is, how powerful it is for attracting new customers, and what types of referral programs are most effective in building up the trust and customer base of a brand. 

WHAT IS A REFERRAL PROGRAM 


In referral marketing, companies employ recommendations by satisfied customers or affiliates to attract new consumers. A person who already experienced the benefits of a product or service, known as an ambassador, recommends the product to a friend, a relative, or a follower in the case of influencers. 

Such personal recommendation coupled with stated positive experience acts as a strong motivator for the new consumer to trust and buy the product. Usually, the ambassador is provided with some incentive for issuing a referral such as a discount, a bonus, or other type of compensation.   


To recap, the referral program has three participants: 

  1. The business seeks to increase outreach and sales for its products and services, thus enacting a referral program to attract new customers.

  2. The ambassador is the business’s already existing, satisfied customer or influencer who agrees to recommend this business to other consumers.

  3. The lead or referral is the consumer who engages with the business following the recommendation of the ambassador. 

For multilayered referral programs, also known as pyramids, leads can become ambassadors themselves and attract new referrals, expanding the program’s structure further. 

HOW DOES A REFERRAL PROGRAM WORK 


What distinguishes referral programs from usual word-of-mouth advertising is the pursuit of an intentional marketing strategy by the business and special rewards granted to ambassadors (and, sometimes, referrals too) for every lead generated. 

Ambassadors are issued special affiliate links or promo codes, and their leads have to use these to interact with the business first for it to be considered a completed referral. For the business, it is incredibly easy to track the performance of ambassadors, since they can see every client who accessed the platform or bought a product or service using the affiliate link/promo. 

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For ambassadors, the rewards range depending on the type of offer and collaboration with a brand. Some affiliates can get a discount for a product or service they recommend, some might receive additional bonuses when purchasing anything related to the brand or the whole company, and some may even get direct payment for every lead or a certain percentage of the company’s revenue from this particular product. 


What does a referral program mean for business is a highly relatively low-effort marketing strategy. However, it does not necessarily mean the same for ambassadors. Sure, they get their special rewards, but first, they have to somehow convince prospects to follow their links or promo codes. 

To help ambassadors attract new leads, many businesses institute a double-benefit referral program that involves rewards not just to ambassadors, but to the leads as well, usually in the form of a discount if the purchase is done using an affiliate link/promo code.



WHY SHOULD YOU CONSIDER REFERRAL PROGRAMS 


Double Benefit: Reputation & Sales 

In most marketing niches, lead generation, customer trust, brand awareness, and reputation are considered separate focuses. However, referral marketing combines them all in a single program, since ambassadors generate leads employing their direct positive experience, which immediately establishes a positive association with the brand in the mind of potential customers and starts building trust even before interacting with its products or services. 


Income Streams

As a business, Referral programs can significantly augment your earnings in affiliate marketing. Beyond promoting products or services directly, you have the opportunity to earn commissions on your referrals' successful conversions. This can create a snowball effect, as your referrals may also refer others, further increasing your income.


Low Barrier to Entry

Referral programs are accessible to affiliate marketers of all levels, making them an ideal starting point for beginners. Unlike some advanced marketing techniques, you don't need extensive experience, technical knowledge, or even a very big audience to get started.


Budget Friendly

Most referral programs do not require huge budgets. Usually, the incentives for ambassadors and referrals alike are discounts to already existing products, risk-free commissions, or giveaways. More advanced programs may feature CPA payments, but companies with constrained finances will find their own viable options. 


Diverse Offerings

Most industries offer referral programs, providing a vast array of options to choose from. Additionally, the extent of referral marketing ensures a wide variety of conditions for deals and offers, so you can always choose the one that fits you as a business or ambassador. There are different types of rewards, different ways of attracting referrals, different links and different requirements for ambassadors from brands and vice versa. Almost every vision or need can be met. 



TYPES OF REFERRAL PROGRAMS

Many criteria help break down referral programs into several types. We are going to list the most commonly used: by ambassadors, by reference, by rewards. 


BY AMBASSADORS

There are two main types of ambassadors in referral programs.


Influencers

Those are professional content creators who promote the business’s products and services in their respective media. They are essentially affiliates that advertise products to their audience using affiliate links. Their primary advantage is the sheer number of people that get exposed to affiliate advertising. However, the downside is that most influencers who gathered a large enough following will rarely collaborate on barter terms. 


Satisfied customers

This referral program is oriented towards customers who completed and are happy with their purchase. The platform may offer them to recommend this or other products to friends, family members, or other individuals for an incentive. The market reach of this group is much more limited than that of content creators, however, they are much more willing to agree to business’s terms, and, unlike with influencers, business does not need to seek them out, instead being able to convert every buyer to the potential ambassador on spot. 


BY REFERENCE

The type of referral plays a big role in determining the program and may vary depending on the business model.


Affiliate links

The most common way of referring leads to the needed brand. By clicking the affiliate link, the lead becomes immediately known to the company running the referral program, and now it can track the lead’s behavior and activity, evaluating how effective the referral was in the first place. A big downside to referral links is that leads will often try to access the company on their own, without using the link, but still inspired by the affiliate advertising or referral program’s offering. 


Promo

Promocodes are a great way to circumvent the affiliate link’s deficiencies. Promos are specialized codes given by ambassadors to leads, usually offering a discount upon activation. They provide immediate financial incentives for the customer to access the brand’s platform and buy, using a promo from a referral program. Promos achieve two goals simultaneously: attract leads by promising an incentive of their own and ensure they play by the rules of the referral programs. A downside of promos is inability to trace the lead before they make a purchase using the code. It means the company has no way of knowing how many leads accessed them via the ambassador’s referral but decided not to buy/use the promo.


Hybrid

Most experienced marketers employ some kind of combination of affiliate links and promo codes to compensate for the downsides of both individual methods. Ambassadors in this situation might provide prospects with both the referral link and the promo code to use upon landing on a page following the link. By accessing the link, the leads become immediately known to the company, while the promo code provides an additional incentive for them to be converted to customers. 


BY REWARDS

Referral and ambassador compensations are diverse, but we are going to focus on the most commonly offered by businesses. 


Discounts & Bonuses

This category of rewards includes all special bonuses related to either accessing a business’s services or purchasing its products. Whether the referral program rewards only the ambassador or the new customer, they will receive price discounts, gift card bonuses, and other types of bonuses related specifically to their connection to the company running the referral program. This category is more commonly used for customer-based referral programs, where satisfied customers are expected to attract their relatives and friends. 


Payments & Commissions 

A classic affiliate partnership deal. The business offers the ambassador either a one-time payment per new customer or a commission from sales generated by the affiliate link/promo. Real money is considered a more advanced type of affiliate reward, however, it is most often used when working with influencers and almost never with multilayered referral programs or customer-based programs. 


Gifts & Giveaways

Another common reward that finds itself somewhere between casual discounts and high-profile commissions. Giveaways are considered more generous than simple bonuses, but they are still not as helpful – especially for savvy influencers – as paychecks. That’s why ambassadors who promote giveaways are usually the most dedicated clients of a business or micro-influencers thrilled to collaborate with brands. 


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Referral programs are indeed a gemstone of affiliate marketing, offering an excellent way for beginners and seasoned marketers alike to boost their traffic and sales without dedicating huge budgets. 

We hope that, after reading this article, you have a good understanding of what a referral program is and how a referral program works. Whether you are an advocate eager to promote your favorite brand, a content creator aiming to capitalize on your audience, or a business seeking to reach new consumers, referral programs can be a perfect opportunity for your expansion.

Remember, that referral programs are not just about earning checks or free products; they help build a network of trust and mutual benefit between businesses and their clients. 

2023-12-25