Referral Marketing - just hype, or a new sustainable trend in e-commerce?

Gaining new customers gives sleepless nights to people dealing with marketing in e-commerce. To activate existing customers one can introduce partnership programs, MLM (Multi-level Marketing), viral marketing, buzz marketing or referral marketing. Because the last one is a relatively new phenomenon, we are going to familiarise you as a reader with it.

Gaining new customers gives sleepless nights to people dealing with marketing in e-commerce. It can work in many different ways: through paid advertisements, SEO, up to referrals through loyal customers. To activate existing customers one can introduce partnership programs, MLM (Multi-level Marketing), viral marketing, buzz marketing or referral marketing. Because the last one is a relatively new phenomenon, we are going to familiarise you as a reader with it.

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There are plenty of definitions used in marketing. For the sake of this article, we will be using the definition given by Refericon: ‘Referral marketing is an organised method with the aim of promoting products or services through existing customers among their friends in an informal way. Its theoretical concept is based on Nielsen’s research, according to which 92% of clients trust their friends’ endorsements and 77% of them are prone to purchase a product because of it. Additionally, 83% of content clients declare willingness to further endorse products.

This definition may be too little to fully understand referral marketing, obviously. That is why we will show both differences and common denominators of referral marketing and other methods which are prevalent.

Buzz marketing and referral marketing

Both strategies of gaining new clients have the commonality of spontaneity and using informal communication channels in order to spread information about specific products. The aim of buzz marketing is to spark off a debate among, e.g. Internet forums users who do not know each other.

In the case of referral marketing, however, both sides remain in a close relationship; they know each other’s email addresses, phone numbers, or they are connected via FB Messenger. Thanks to that, such referrals have more credibility.

Viral marketing and referral marketing

In the case of viral marketing, the aim is to create an ad that evokes strong emotions among people. Thanks to that, it is appealing to potential customers and they share it with others. Usually, this is done via social media channels, such as Facebook, Twitter or YouTube.

The aim of viral marketing is to trigger a buzz about products or services and to draw the audience’s attention, among which there are potential clients. Usually, the effect is short-lived; it lasts until people get bored.

In the case of referral marketing, the content that circulates is the product or shop itself. Additionally, its aim is the exchange of information about a product or service among people whose relations are quite close. In this case, the effect is a long lasting one and it works as long as people have the possibility to gradually discover a product.

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Partner program and referral marketing

In partner programs, the compensation is in cash. Very often the programs are connected with a more advanced campaign that exceeds the purpose of solely sharing information about a shop or a product.

A referrer (a person who refers the shop/product) receives compensation as soon as the person who received the recommendation, purchases something.

Partner programs mainly accumulate clients who focus on profit. In fact, such an attitude qualifies them as business partners, rather than brand ambassadors. What also advocates such reasoning, is that on entering a partner program, a user usually has to sign a contract. In the case of referral programs, the only thing a user must do is to share the information about a product with their friends. Additionally, a prize is conjoined with services provided, or with a discount on a given product.

MLM and referral marketing

In multi-level marketing, we come across the building of structures by staff members of a company, who are simultaneously its clients. Employees receive compensation in a form of commission from orders and they also can encourage other people to join the organisation. In such a case, we talk about the second order commission, when one gets compensation based on the sales value generated by the people they recruited.

In order to join the circle of sales agents people have to sign a contract, register to a database and attend coachings with the aim of acquiring product-based knowledge.

For many people, MLM is a source of additional income or even a full-time job. There is no spontaneity that is typical for referral marketing. MLM also doesn’t generate additional profit. Forget that!

Referral marketing. For whom?

In theory, it should work for any company. There is, however, a fundamental condition:
It is crucial to have customers who are content with the offered services or products.

The most important thing to understand is that referral marketing is not better or worse from the above-mentioned strategies. It has both its advantages and disadvantages. Some may say that referral marketing is less effective for online shops which are just getting started because they only generate a very modest number of monthly visits and do not have loyal customers yet. In such a case it may be advantageous to set up a partner program and look for a partner who will advertise your e-shop on behalf of the company.

For online shops who have been operating already for a longer period of time, referral marketing may work as an efficient automated marketing channel in order to boost sales since it only requires limited resources. To automate the whole process webshops need proper tools which do not only motivate customers to recommend a shop but also enables them to do so easily and without any problems.

How can referral marketing look like?

Airbnb is a platform which allows renting a flat, room or bad by a private individual. In the case of Airbnb, referral marketing is simply a referral program with a win-win situation. Both parties, the one referring and the person receiving the recommendation profit, which increases the number of referrals and the effectiveness of the program.

A referral received $25 when a person who received a recommendation just went on a journey and $77 in the case in which the receiver of a recommendation decided to become a host as well. The person who received the recommendation (after creating an Airbnb account) got a $25 discount for the first trip.

Airbnb provided us with data considering the benefits of referral marketing. In comparison to the rest of the customers, Airbnb earned an additional profit of 13% through referral customers. Also, the likelihood of being recommended via the referral program increased up to 264%.

In the case of hosts, the effects were even better. The value of the user who had received a recommendation was higher by 146% compared to the average Airbnb host.

How to introduce referral marketing in a simple and quick way?

The example of Airbnb introducing referral marketing is just one out of many which were proven to be successful. The company operates on a global basis. However, this does not mean, that small and midsized companies cannot use this strategy as well. Referral marketing is a good solution for every shop which has gained content customers.

Just like in the case of other marketing techniques used in e-commerce, there is a variety of tools allowing to introduce referral marketing. They differ in effectiveness, the way they work and the level of personalisation.

Refericon aims at high effectiveness through the simplification of the whole process connected with sending referrals. After the implementation of the app, the Refericon widget appears on the webpage. A client, by clicking the widget, has the opportunity to recommend a shop to a friend, without leaving the page. Additionally, he or she may receive a discount for the next purchase.

Average CTR (Click-through-rate) for the icon is 5%. Around 10% of people who click the widget send a referral. Of course, the data is global and abbreviated. The conversion rate heavily depends on the product, category, the line of business and some other factors.

Summary

We have just shown what referral marketing is and what pointed out the differences to other popular strategies. In order to get a better overview, we have decided to use an illustration that summarizes the topics explained which makes it easier to remember them:

Table with pros and cons of e-commerce marketing activities

Explanation of categories:

  • Tools for referrals – a user (referrer) can use a tool which facilitates the measurability of the effectiveness of their actions. The tool is provided by the company which a user promotes.
  • A prize for the recommendation – a user receives a prize depending on the effectiveness of their actions. The prize may be either money or it may be connected to the product which is being promoted.
  • Relationship with a company – first, the user is a client of the company and after that he/she recommends it.
  • Relationship with a referral – a user knows a person to whom he/she recommends a product or a service.
  • Measurability of effectiveness – a company whose products are recommended tracks the effectiveness of its clients’ actions in order to calculate its profitability.
  • Formal character – in order to recommend products legally, the customer needs to enter into contact.

About the author

Author of the article

Adam Olejnik is a referral marketing expert working at Refericon. The company provides an app that helps you to increase your e-commerce sales through a referral program.

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