Rethinking Referral Marketing

Published July 16-26, 2020

The past few months have given me a lot of time to think deeply about marketing. Starting with the ideas of Velvet Rope Marketing (VRM), I have had dozens of conversations with CMOs and digital heads of brands in India, SE Asia, Middle East and Africa. The basic problem statements are the same: how to get more from the existing customer base and how to optimise new customer acquisition.

In this context, the VRM pitch works well:

All customers are not equal; some have more customer lifetime value (CLV) than others
Identify your best customers – say, the top 20% — based on CLV
Create a differentiated experience for these customers to maximise revenue and retention
Among the rest, use individual customer genomes to identify who could be future best customers
Also use the characteristics of best customers to acquire new customers who look like them

On paper, this looks simple. But it is quite surprising how few companies actually do this in a disciplined manner.

I have identified eight problems that handicap the use of VRM:

Limited data: Brands are not collecting customer data at every touchpoint
No CRM / CDP: The collected data is not centralised into a single place to provide a unified customer view
Data not being analysed: If the data is there, then the analysis is either not being done or is very limited
No internal team / skillsets: The right talent is missing for doing the analytics and then acting on it
Incorrect CLV calculations: Too often, the CLV calculations are done in a very simplistic manner (for example, basing it on the average value of past transactions)
No tech platform: Even if all the above is done, there is no tech platform to help implement the use cases
Adtech-Martech silos: The acquisition process is not streamlined because there is no exchange of data between the acquisition and engagement teams
Cannot measure RoI: Finally, it is hard to get the green light for VRM because the CMO is unable to show the actual uplift in revenue

In my presentation, I address each of these challenges and show the solution to every identified problem. These series of essays discuss the VRM roadmap in depth:

And as it happens so often, one idea leads to another. While VRM does well in addressing the needs of the best customers, a question that came up repeatedly in my meetings was about how to optimise new customer acquisition.

As I started to think about the new customer acquisition problem, my first answers were:

Identify who your best customers are
Decode the genome of these best customers
Use the Best Customer Genome (BCG) to run lookalike campaigns for new customers

I should mention another point in passing. A brand’s best customers could also be persuaded to get others like them – given that each of us has a wide social network, and we do tend to advocate brands we like to our family and friends. Word-of-mouth has a big influence on what we buy.

I never thought of this seriously until the same question got asked in three successive meetings. In fact, one of the CMOs put it in straight-forward terms: “I don’t want to spend a lot running Google/Facebook ads for new customer acquisition. I have X million happy customers. How can I get them to get me more like them?”

What the CMO was alluding to was referral marketing. (It is also called word-of-mouth marketing, but I will stick to referral marketing in this series.) That got me thinking about the problem more deeply. One angle especially struck me – how to persuade the best customers to do referral marketing? The best customers are very likely to know and refer more like them – which means it can become a very powerful positive feedback loop for revenue growth for a brand.

The problem seemed very similar to the loyalty programs that brands run. Most brands have a loyalty program, but few have transitioned to making it into a VRM program which creates a differentiated experience for their best customers. Referral programs also seemed to be stuck in a similar time wrap – if they existed. A free ride here, a few points there, and that’s it.

Were brands missing out on a big opportunity by not combining the two ideas of best customers and referral marketing? If so, what could they do?

I started thinking about my own experience as a customer of many brands. I could not recollect a single instance of a brand pro-actively asking me to recommend others who could become customers. Yes, there would be some link in the app which would give me a referral code or link to send to others. But that didn’t really seem anything exciting. None of the referral programs seemed interesting enough for me to actually talk to others.

And yet I would talk to others about new products that I bought and liked. A case in point was this Yeti Blue microphone that I bought after being attracted by the lovely clickbait headline from a Wall Street Journal article, “How to Sound Your Best on Calls From Home?” I was so thrilled with how my voice quality improved (to others) that I would immediately show them the secret – my new microphone. Not surprisingly, at least five others bought the same microphone! I did all this on my own – unknown to Yeti, and with no financial incentive for myself.

As I thought about my own buying and recommending behaviour, I realised that I do get influenced by what those close to me recommend. It could be books, movies, restaurants or even vacations. Word-of-mouth marketing is a key factor in many of our purchase decisions. And yet the world of referral marketing (like that of loyalty programs) has largely stayed the same through the years.

Few brands that have a relationship with me (and many don’t) actually have reached out to ask me whether I would recommend them to people I know. Perhaps, I would not – there is always a social awkwardness in doing so. And yet, we do it quite often. As a result, referral programs tend to have a one-size-fits-all approach for the lowest common denominator. That’s where I felt they were all making a big mistake – by not creating a program for their best customers, they were missing out on an amazing acquisition opportunity. So, how could it be done better?

Before we answer the question of what we can do better with referral marketing, we need to first understand the present state of the programs. I spent an afternoon reading dozens of articles that have been published over the past few years.

At a broader level, word-of-mouth marketing has many elements, as Amity Kapadia explains:

Referral Marketing: Exactly what it sounds like — a strategy for encouraging passionate customers and advocates to directly refer their network to your business.
Affiliate Marketing: A transaction between a company and an entity where the business receives customers (or leads) in exchange for a financial incentive.
Influencer Marketing: In many ways influencer marketing is a modern take on traditional affiliate marketing. Instead of a network of smaller affiliates driving traffic, however, influencer marketing targets specific people who have large, captive followings.
Partner Marketing: Very simply, partner marketing is a strategy that aims to connect two brands to share one or both brands with the other’s networks. Primarily used in B2B marketing plans, this strategy strives to raise and improve brand awareness amongst similar audiences.

We will focus on referral marketing in this series. There is a good overview of referral marketing from Wikipedia:

Referral marketing is a process to encourage and significantly increase referrals from word of mouth, perhaps the oldest and most trusted marketing strategy. This can be accomplished by encouraging and rewarding customers, and a wide variety of other contacts, to recommend products and services from consumer and B2B brands, both online and offline.

Online referral marketing is the internet-based, or Software as a Service (SaaS) approach, to traditional referral marketing. By tracking customer behavior online through the use of web browser cookies and similar technology, online referral marketing can potentially increase brand awareness, referrals and, ultimately, revenue. Many platforms allow organizations to see their referral marketing return on investment (ROI), and to optimize their campaigns to improve results. Many of the newest systems provide users with the same experience whether they are on a desktop or mobile device. Offline referral marketers sometimes use trackable business cards. Trackable business cards typically contain QR codes linking them to online content for sale while providing a way to track that sale back to the person whose card was scanned.

Online referral marketing focuses on interactions between customers. The Internet is a common channel for referral-based marketing. It delivers abundant outlets for customers to share their opinions, product favourites, and experiences, including the company’s website and through social media such as LinkedIn, Facebook, Twitter, and Google. The marketers can encourage the referring parties by providing pre-scripted messages. Advocates can provide their family members and friends with personalised links including unique referral codes and advertisement information through e-mails, blogs and instant messages. The company can give rewards to advocates when their family members and friends buy through the link.

An additional overview of referral marketing also comes from Amity Kapadia:

Referral marketing is a strategy to encourage passionate customers and advocates to directly refer their network to your business.

Studies have continuously shown that customers not only seek referrals, they act on them. Referral marketing takes the inherent organic and altruistic nature of referrals and gives brands the tools to incentivize and manage them at scale.

You’ve probably seen, most likely even participated in, a referral program. And while most companies are anecdotally excited and realize that referrals are a significant driver of new customers and value, there is still some confusion on how to scale this strategy.

We’ve seen companies build a referral program in-house and others who try to manage it manually through email and other basic systems. But the most successful companies automate the process by using one platform to enroll, track, manage and reward their ambassadors.

The goal of referral marketing is simple: To harness the power of authentic word-of-mouth to drive a steady stream of high-quality referrals to your business (and grow revenue as a result).

The two big drivers for the growth referral marketing in recent years have been the rise of digital and social. Customers (and brands) have become digital. And as social media has risen, every customer now has the ability to amplify messages to a large number of people. What needed to be done through physical coupons earlier now can be done via links and referral codes.

It is no wonder then that referral marketing has become one of the most valuable forms of marketing, as explained by Steli Efti (in the B2B context):

Which marketing or sales tactic do you think has the highest ROI? Inbound marketing? Email campaigns? PPC ads?

The truth is this: there’s a standout winner that can’t be touched by any other method. That winner is referrals. Referral sales require almost no financial investment, but they bring in very valuable warm leads.

Why the love for referrals?

Because there are two types of referrals, and both of them have significant advantages.

First, you can get a referral from a customer to one of their contacts in the same field.

That means your new prospect is highly qualified. They’re in the same industry, they probably have the same problems, and there’s a good chance that your product or service will be a good fit for them.

Second, you can get a referral from a customer to one of their friends.

Even if they’re in a different industry or situation, that referral comes with a lot of trust. That trust means is invaluable.

Most marketers and salespeople know—at least implicitly—that referrals are highly effective. They may not know that referrals drive some of the highest conversion rates among all marketing channels, but they know that getting them is important.

Bottomline: referral marketing can be very effective. And yet, it is not used properly by most brands. This has puzzled me.

Harvard Business Review had an article as far back as 2007 entitled “How Valuable Is Word of Mouth?” by V. Kumar, J. Andrew Petersen and Robert P. Leone. “The value of any one customer does not reside only in what that person buys. In these interconnected days, how your customers feel about you and what they are prepared to tell others about you can influence your revenues and profits just as much. Companies go to considerable lengths to motivate their customers to double up as salespeople.”

The authors outline a way to calculate Customer Referral Value (CRV), as a complement to Customer Lifetime Value (CLV). They do so thus: “The obvious way to do this is to break the sample down into the four cells of a two-by-two matrix, which we’ve done for our telecom company sample in the exhibit “The Customer Value Matrix.” The customers who scored high on both measures we’ve called Champions. Those with high lifetime values but low referral values we call Affluents. Those with low lifetime values and high referral values we’ve termed Advocates. And those who score low on both measures we’ve labeled Misers. We found that the distribution of customers across the four cells was fairly even.”

Another HBR article in 2011 by Philipp Schmitt, Bernd Skiera and Christophe Van den Bultehad entitled “Why Customer Referrals Can Drive Stunning Profits” showed the benefits: “We studied 10,000 accounts in a large German bank over a period of three years, and found that customers obtained through referrals are both more loyal and more valuable than other customers. After controlling for such factors as age and gender, we calculated that referred customers are, on average, about 18% more likely than others to stay with the bank. We also projected that they generate 16% more in profits (amounting to €40 each). Thus, the bank earns a return of about 60% on its €25 referral reward.”

There are also many books on the idea of referral / word-of-mouth marketing. Some of the titles from a list on Amazon by John Jantsch:

The Anatomy of Buzz Revisited
The Referral Engine
Purple Cow
Never Eat Alone
The Secrets of Word-of-Mouth Marketing
Endless Referrals
The 29% Solution
Get More Referrals Now
Word of Mouth Marketing
The Go-Giver

Another list by Jay Baer recommends some more:

Brains on Fire
Contagious
Creating Customer Evangelists
The Face-to-Face Book
Fizz
Made-to-Stick
Talk Triggers
The Tipping Count

In other words, there is a huge array of work that already exists. And yet, referral marketing did not seem mainstream in the marketer’s arsenal. As a customer, I was not asked for referrals by most of the brands. Why?

For me, the parallels with loyalty programs were uncanny. The ideas had been around for a long time. There were many companies offering software solutions. And yet, something was missing in the adoption and ability to drive profits.

Let us next understand the types of referral marketing programs that exist. We will then discuss the problems – and possible solutions to make referral marketing more effective.

Here is an excerpt from 2015 research paper by Barry Berman entitled “Referral marketing: Harnessing the power of your customers”:

There are two types of referral programs: one in which existing customers are paid an incentive, and another in which current customers work without pay on presentations, case histories, and user forums. The second program benefits the referrer by increasing visibility, heightening his or her recognition as a specialist, and/or gaining special treatment from a supplier/vendor. Both program types share common characteristics. They are initiated, managed, and at least partially controlled by the marketer. They use the social connections of existing customers with their friends, family, and business associates. They focus a firm’s marketing efforts on existing customers as opposed to new customers. And, finally, the referring customer receives an incentive in each program type, either via direct or indirect payments. Direct payments can come in several forms, such as cash, points in a loyalty program, miles, free goods and services, or donations to a nonprofit organization in the name of the recommending party. In the indirect payment type, the referrer may receive recognition as an expert or may be given the opportunity to serve on a company advisory board.

The paper also covers the advantages and disadvantages of referral programmes:

There are many other articles on how to structure referral programs. Here are a few:

The 5 Best Practices for a Successful Referral Program by Joseph Nies
Do’s and Don’ts of Referral Marketing by Amity Kapadia
11 Ways To Build An Effective Referral Marketing System (Forbes)
Top 10 Referral Marketing Insights by Kirsty Sharman
Referral Marketing Software – Everything you want to know (Invite Referrals)
The Do’s and Don’ts of an Effective Referral-Marketing Program by Jeffrey Epstein
17 Surprising Referral Marketing Statistics (CustomerThink)
The 5 Factors That Make Customer-Referral Programs Fail by Sujan Patel

As I see it, there were three primary problems with the existing state-of-the-art in referral marketing:

There is no focus on best customers; it is the same program for all
The rewards do not factor in the referred customer’s lifetime value
The programs do not create a multi-level referral network

The common thread is that the referral programs as they stand today are not exciting for the referrer. Let us consider each of these – and how they can be addressed. Taken together, the solutions can open up a new world of opportunities in the world of referral marketing.

Let’s begin with the point about best customers. The referral programs that we see today do not factor in the differences between their customers. As such, there is a lowest common denominator element across these programs. Thus, they are limited to offering small incentives.

Just as brands should use CLV to segment their customers and create a differentiated experience for their best customers (what I have termed as Velvet Rope Marketing), they need to do similar for their referral programs – use the same segmentation and create a different program for their best customers.

The key reason for this is that while all customers may not have an affinity towards the brand, the best customers do! They are the most loyal, highest spenders and have the greatest lifetime value. As such, they are willing to overlook all deficiencies with the brand or products (if any) and ignore competitors. They will thus be also willing to champion the brand to others – if asked and if given an incentive. Some may do so on their own – but recognition of their contribution can give a fillip to the referral activity.

And yet, no brand that I have come across has a referral program that is focused on just their best customers. In fact, most brands do not know who their best customers are. Solving both of these problems can be a big booster tor revenues. This is because not only will the best customers appreciate the special experiences, they will also help get more like them – more future best customers. This will be many times more cost-effective for the brand than running ad campaigns to a wider audience.

All we have to do is to think about ourselves as customers. We know people like us. And if we are the best customers of a brand, it is very likely that the people we know could also become best customers of that brand. This is the growth flywheel brands need to create.

The second issue with current referral programs is that they do not offer rewards based on the lifetime value of the referred customer. So, all that one gets as a referrer is some small one-time incentive – either a cashback or a free ride or some additional points. None of this is exciting to make referral marketing a key plank in new customer acquisition. It thus ends up just becoming another checkbox in the marketing toolkit.

Customers have different lifetime values. When a new customer comes in through a referral, the brand is not incurring marketing costs in acquisition. It can thus afford to reward the person the referring customer.

Let us take an example. Suppose the lifetime value of a customer just acquired is Rs 20,000. A brand may have spent Rs 2,000 or so in acquisition costs as part of a marketing campaign. Instead, it now no longer has to spend all of that money. It could take some part of the money saved and split it in three ways: give both the existing referring customer and the newly acquired referred customer the same initial incentive of say Rs 300 (for a total spend of Rs 600). It could then allocate 5% of the future spend by the new customer as an incentive to the referring customer, who would thus earn Rs 1,000 in the coming months and years. This creates a substantial incentive and encourages the best customers to make sure they get more future best customers. [A point to note in the example above: the payment need not necessarily be in cash. It could be through an alternate currency (virtual coins, points, etc.) also.]

Taken together, the first two solutions offer a big upgrade to existing referral programs. The focus on best customers ensures that the brand can get more higher value customers. The incentives offered by giving rewards linked to the lifetime spend of the new customer also ensure that quality is emphasised over quantity in the referral process. Our next upgrade to the referral marketing will, quite literally, take it to another level.

During the 2014 Lok Sabha election campaign, when I was assisting in the election campaign of Narendra Modi, my team at Niti Digital came up with an interesting twist on the Amway-type multi-level marketing program. Our goal was to get Modi supporters to identify other Modi supporters, and let us know. This way, we could ensure that all of them received the right nudges and reminders on the polling day to go out and vote.

So, we came up with an idea called “Namo Number”. An existing supporter needed to SMS their VoterID to enroll. They could then get others to also show their support by asking them to send their VoterID along with the mobile number of the referrer. This way, a tree could be built. We extended this to two levels and gave one point for every sign-up. (To keep it simple, we did not distinguish between the first and second levels.) The total count of the tree was the Namo Number.

We showed a leaderboard in real-time, and offered an incentive that those with the highest Namo Numbers would be invited to the BJP HQ in Delhi for an interaction with the party leadership.

The program worked very well – we ended up getting well over 10 lakh SMSes across states. The VoterID helped us identify the supporters at a booth level who could then be prioritised for the turnout operation on election day. It also helped identify the “super spreaders” – those with a large influence in specific areas.

Now imagine applying this same idea to the world of referral marketing. Allow the best customers to create a multi-level network of referrals for which they get credit based on the lifetime spends of the referred customers. This is how brands can build customer evangelists and measure their impact in a transparent manner.

The one big difference between what brands like Amway and others do is that there is no cost to joining. Each of the best customers can decide if they want to participate or not. There is no pressure and there is no payment; there are just good rewards as a recognition of the contribution made to the growth of the brand they love and are loyal to.

Taken together, the three ideas – focusing on best customers, rewarding them based on the lifetime value of their referrals, and extending the rewards program to the downstream of the referred customers – can transform referral marketing and make it a very powerful parallel track for new customer acquisition.

For me, thinking deeply about marketing is something that is quite new. It is only in the past few months that I have started probing into how the current marketing techniques can be improved in a world of digital customers, unlimited data and low barriers to customer churn. I have to the field as somewhat of an outsider, even though Netcore has been in the business of selling marketing solutions for many years. That has helped me bring a new perspective to the existing knowledge base of ideas.

Velvet Rope Marketing was the first big idea. While the core concept that a small number of customers can account for a disproportionate share of revenues and profits has been around for a long time, what I tried to do is to put together an end-to-end framework that covered concept to execution to measurement. It was during this process and through the conversations that I had with many CMOs and digital heads that the problem statement for thinking about referral marketing emerged.

As happens so often with new ideas, all that’s needed at times is for a newcomer to come in and combine existing building blocks differently to create something different. This is what I have tried to do in this series on referral marketing – by combining three elements that already existed:

Best customers, who can get others like them through their social networks
Lifetime value, which can create greater rewards and incentive for best customers for referring others like them
Multi-level network, that further enhances the value of referrals for the best customers

Some additional tech-led tweaks can also help in making referral marketing as core to marketing as adtech and martech are: ensuring that both referrer and the person referred get the same initial benefits (either both get it, or none get it), simplifying the process of referring (ask a new customer at sign-up about who provided the nudge), and creating a cross-brand rewards program and adding game-like elements to provide far greater incentives than what a single brand could do.

Hopefully, these ideas can serve as the foundation for transforming referral marketing. Perhaps, Velvet Rope Marketing has found its perfect companion – Velvet Circle Marketing?!

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