Acing Referral Programmes

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My recent conversations with product companies have been around improving top lines, through innovative techniques in product design. And this is what got me to write on this topic. If there’s one thing that’s severely underrated across consumer products, is their referral program. And while it’s a straight arrow, I’m gonna try and give a spin to this one.

So let's dive right in.

WHAT actually is a referral program?

A referral program incentivizes existing users (usually with cash or credit) to refer new users. It’s essential that the program is built into the product experience.

What is the impact of referrals?

1. New User Acquisition: Fairly easy to comprehend, but an average of 12% to 50% of your new user acquisition could be driven via referrals. The idea is: if you’ve already spent on ads to acquire new users (largely your HXC), it’s best to utilise them fully, by asking for referrals within their network
2. Expense Optimisation: Beyond a point, novelty wears out across social channels. If at such times, instead of bidding higher on keywords & SEO, if you could divert part of these spends to building referrals, the returns would compound over time.
3. Scale: The effort on building strong referrals is minimal. (PM, design, engineer + marketer (for offline referrals)). And when done right, these programs pay for themselves many times over, and you can easily test and tune the incentives to make them increasingly more efficient.
4. Attribution: Referral programs are the most attribution friendly when it comes to revenue. You exactly know where or why a new user has come on board.

1. New Market or New Product: When you are a new product in an existing market or a new product in a new market, the spend on educating the customer on what and how you do, is exorbitant. Referrals help exponentially reduce these spends in user acquisition. Let your current users educate the new ones.
2. Sectoral Advantage: If you are a product that sits well into showcasing an affluent lifestyle, building a routine, part of a community or cult and such similar sectors, referrals would be hugely advantageous for you.
3. Word of Mouth Amplification: Referrals amplify the downforce brought in by word of mouth. If even part of your new user acquisition happens via word of mouth, it’s best to build strong referral incentives to rake the rest of their peers in.
4. High Trust Products: if you are selling a product that requires trust to be instilled in the user before use, this is an ideal way to push boundaries.

Side Note: Referral programs should be designed keeping your HXC in mind. While there could be peripheral users who would join the bandwagon via referrals, it’s best to design these programmes keeping an HXC in mind.

Referral Hubs: If you’ve been able to identify potential hubs or communities which fit directly into your product’s demographic, it’s best to build a super-referral network from there on.

Now, onto:

How to build referral programs?

Incentives: As easy as it sounds, building referral incentives can be tricky. I have a simple formula: start with 50% of your CAC as a discount. And then play your way up to see what price-point incentivises more users. 

Say you’re spending INR 600 on CAC your first flat fee discount for a new referral should be INR 300. Or INR 150 for referral and INR 150 as coins to start transacting for the new user.

Designing Referral Experience: It’s important to note that referral programs must follow very specific experience funnels, rather than the usual user acquisition flow. The micro-copy must have an impact on anyone reading a referral. The whole experience of referring and being referred must outdo most other flows for a customer.

Users must not just be incentivised to refer peers, but also feel motivated about it beyond discounts.

Placing the referral: Most products place referral at the far end of their menu bar. This showcases the priority order of a referral in your product journey. There’s no right or wrong order, but prioritising referral out of the menu bar or higher up in there, is an ideal way to test if referrals would work effectively. While it’s easier to give examples of poorly designed referrals, I’ll share one that’s effectively designed:

1. The menu bar, relatively clean, has referrals clearly identifiable for almost everyone. If there’s a test that I had to run, I’d place this referral on the home page to test its efficacy.
2. The 2nd image is an articulate mention of rewards that I stand to get as a user, when I refer my friends on to it.

Communication: Most customers might not be familiar with the existence of your referral program. So constantly being able to talk about it makes a difference. While the priority of a referral button may not always be as high, for it to appear on your homescreen, is why you must talk about it across different social channels.

Placement: There are several areas where you could build in referrals. If your product / site analytics have the ability to identify a satisfied transaction from a dissatisfied one, it’s best to place a referral right after a satisfied transaction.

The propensity of a user to refer after a satisfying experience is far higher than without one.

1. Increase discoverability: Add more touch points throughout the customer experience, across both web & mobile.
2. Optimise messaging: Test and optimise the pitch for a referral. You may not hit it off in the first go

Tiered Programs: Referrals work similar to loyalties. If you could incentivise a user (and communicate that well) to bring in newer customers, through a tier-based incentive program, it works similar to loyalty benefits or community building.

For a compounding effect on referrals, ideally give direct cash benefits as opposed to in-app coins or purchases. In my example above, Fi quite literally credits an amount into your account, for a referral.

Tracking Referrals:

The metrics you use to track referrals may differ depending on the sector / product you have. But aiming for strong parameters starts to show impact, as it can be effectively measured.

Broad Level Metrics: 

1. New User Acquisition (demand) / existing user: to track how many referrals come in from existing users
2. Broad level metric:New Supply Acquisition (supply) / existing user: works best for marketplaces trying to onboard new locations, sellers, merchants on the product

1. Narrower / Specific Metrics:
2. Invitees per Inviter
3. Conversion Rate to New User based on independent categories
4. Revenue Impact Potential

Pro Tip: Referrals may differ for different offerings within a single product. Try and not look at a blended referral program. Go specific to each offering.

Well, that’s it for me today. If you find these newsletters useful, just drop in a hi. It’s always encouraging to hear from you and I’ll be sure to reply.

Until next time,

Sak.