In marketing, there’s always the latest buzzword that gets marketers in a tizzy. Whereas “word of mouth” was hot a few years ago, we’re now hearing a lot about “referral marketing.” I talked to Matt Roche, CEO of Extole, a company that powers referral marketing programs for some well-known brands, to get the scoop.
The Difference Between Word of Mouth and Referral Marketing
If you think that the two are similar, you’re right, but they’re not the same, Roche says.
“They both involve customers talking about a brand or product, but referral marketing is measurable and repeatable. It can be controlled by a marketer. It’s focused on acquisition.”
Word of mouth, he says, is more about serendipity and spontaneity. You can’t control it. As marketers, we’re all about what we can control; am I right?
Referral Marketing as an End-to-End Solution
Where companies might have just dabbled in referral marketing in the past, they’re now starting to use it in a more involved and in-depth manner, Roche told me. Companies are including promotion, tracking, analysis, and optimization in their referral marketing programs, and are leveraging the vast data they’re able to access.
And they’re using referrals in innovative ways. He points to these examples:
- AAA of Northern California, Nevada, and Utah: each agent gets his referral link printed on the back of his card so customers can easily pass it to friends.
- Trinity Solar (the Northeast’s largest solar energy installer): customers refer friends, who speak with a live customer agent, and the tracking is just as robust as a completely digital referral.
- A large financial services client: customer support agents tweet referral links to customers after resolving their issues on Twitter.
- Vonage: prints its referral links right on its packaging.
“There’s a growing understanding that to be fully effective, the referral opportunity can’t just sit in a call to action at the bottom of a website. It has to be visible everywhere a customer interacts with a brand,” Roche says.
The Long-Term Value of a Referred Customer
All the bells and whistles of referral marketing are nice, but does it actually work? Roche responds with a resounding yes.
He cites a study from a Wharton School professor that found that referred customers are about 25% more profitable per year for businesses than their non-referred counterparts. They’re 18% less likely to churn, and they have about a 25% higher lifetime value than non-referred customers, even after factoring in the cost of the referral.
And What About that Pesky ROI?
If there’s one buzzword we’re all sick of hearing, it’s “ROI.” Marketers will argue tactics for measuring things like social media into the ground. But still, I was curious how one tracked the ROI of referral marketing.
“Treating referral marketing like a program means you know exactly what you spend on each campaign, including the rewards you give to advocates and new customers in each of them. So you know your costs,” Roche told me, “You already know (hopefully!) the lifetime value of a customer to your brand, so when you know the exact number of new customers your program earns you, the total lifetime value you’ve added is an easy calculation.”
Using Referral Marketing to Gain Repeat Customers
While certainly referral marketing serves to attract new customers, a well-developed strategy can also bring them back again and again.
Offering incentives, says Roche, can drive repeat purchases.
“For example, if you offer customers a discount off their next purchase for referring a friend who makes a purchase as a new customer, it not only drives new customers (the referred friends) but repeat purchases among existing customers, who will subsequently use the reward you’ve given them for referring someone.”
Having the Right Tools Helps
Because there’s a lot to track when it comes to referral marketing, having software that measures, tracks, analyzes, and optimizes your program is extremely handy. Extole’s platform does all that, as well as allows you to create multiple campaigns aimed at segmented audiences, track inbound referrals that come when people visit a brand’s website, as well as to use outbound promotions in any location to raise awareness about a referral program.