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Why Referral Marketing Works: 8 Benefits for Business Growth

Businesses today are still looking for the most effective marketing strategy that yields solid and consistent results. Affiliate and referral marketing are powerful tools that support growth by leveraging word-of-mouth marketing, peer recommendations, and incentivizing evangelists.

Referral marketing is a cost-effective growth strategy that leverages existing customers to market a company’s products. For every successful referral, the customer gets a reward.

As a staple in B2C and B2B marketing, referrals are used by companies in retail, financial services, and many other industries.

In this article, we’ll cover the key benefits of referral marketing that will help you build a loyal customer base while preserving your marketing budget.

1. Increases Customer Lifetime Value (LTV)

A key benefit of referral marketing is improving customer lifetime value (LTV). This metric measures the amount of money a customer has or is expected to spend with your business.

Referral programs tend to attract highly valuable customers, i.e. loyal, customers who spend more. 

According to a clothing retailer that implemented referrals using Extole, the first purchase of referred customers was almost twice that of non-referred customers. A furniture retailer found that advocates and referral recipients made up between 30% and 50% of their repeat purchasers.

There are a couple of reasons for this behavior. Referred customers come with a level of built-in trust, so they are likely to spend more than someone encountering your brand for the first time. In addition, these customers are a great fit for your product because they were referred by someone who knows their needs well.

2. Lowers Customer Acquisition Costs (CAC)

Acquiring customers at all costs eats into your profits and leads to a poor LTV:CAC ratio. Referrals help lower CAC by reducing your reliance on more expensive acquisition channels such as pay-per-click or print advertising.

Referral marketing is also more cost-effective because consumers trust their friends and family for product recommendations, so they’re more likely to convert. When you combine this with a great reward, you can acquire more customers at a significantly lower cost.

For example, mattress retailer Lull saw a 9% conversion rate with its referral marketing program, which rewarded advocates with an Amazon gift card.

3. Nurtures Customer Loyalty

When brand advocates receive a reward for referring a friend, it strengthens the emotional connection to your brand. The advocate feels valued, and the positive experience reduces the likelihood they’ll switch to a competitor.

In addition, referral rewards encourage repeat purchases. For example, a free shipping offer or a 20% discount increases the chances that the advocate will remain loyal to you for their next purchase and beyond.

With Extole’s customer engagement platform, you can even detect super advocates in your referral program and reward them with special offers to show your appreciation.

4. Provides Additional Customer Insights

With referral tracking, your marketing team can glean a wealth of customer insights powered by first-party data (i.e., data that is collected directly from your audience). 

The data allows you to answer questions such as:

  • What kind of rewards do advocates and friends respond to best?
  • How do different sharing experiences impact participation?
  • How much revenue do referred customers generate over time?

And much more. These answers enable you to enrich and optimize your marketing strategy to get even better results.

In addition, referral tracking helps you measure the ROI of the entire program, tying your efforts to tangible business results.

5. Drives Brand Advocacy

Over time, referral marketing builds brand advocacy by encouraging customers to talk about and recommend your products. 

Brand advocates are crucial for every business because they aren’t just going to keep their support private. They will also publicly endorse your brand on social media, review sites, and other platforms.

Grow your pool of brand advocates by personalizing referral rewards. Instead of taking a one-size-fits-all approach, segment your audience by age, interests, or other attributes and offer incentives that speak to their needs.

6. Elevates Engagement

An important benefit of referral marketing is improving engagement by allowing the customer to be an active brand advocate.

With a referral program, customers interact with your brand more often, not just when they want to make a purchase. As they refer more of their friends and family, your brand might come up in conversations more often, creating a sense of community around a shared interest.

For example, Bestseller, a global apparel retailer, implemented a referral program to acquire new customers and re-engage existing ones. The impact on engagement was significant, resulting in 16x more advocate sharing.

7. Unlocks Customer-Led Marketing

Customer-led marketing uses your existing customer base to advertise your products instead of relying almost exclusively on expensive digital ads. 

A referral marketing program is essential for this type of marketing since it allows customers to grow your business by inviting their friends. And because there is a reward involved, they are motivated to keep sharing their referral invites.

This marketing strategy is a part of customer-led growth (CLG), which Extole CEO Matt Roche defines as turning existing customers into the primary channel for improving awareness, acquisition, and activation.

CLG also prioritizes customer feedback when developing new products, optimizing existing ones, and improving the overall customer experience.

According to Mary Pilecki, Forrester VP and Principal Analyst, CLG can be among the least expensive acquisition methods — especially considering the rising media costs and the issue of data deprecation which is driven by broader privacy laws and ad-blocking software.

8. Improves Personalization

Personalization leads to repeat purchases and more loyalty. With the right referral marketing software, you can segment your audiences and tailor your communication based on their level of engagement, interests, or other unique attributes.

Using Extole’s platform, for example, you can group customers based on how much revenue their referrals generated for your business. 

Then, you can tailor your communications to each segment. For example, recognize Super Advocates with a special email highlighting their status. 

Keys to a Winning Referral Program

From increasing LTV to improving engagement, referral marketing has many advantages for your business. But how do you build this customer acquisition engine so it runs efficiently and sparks advocate sharing?

In Extole’s latest guide to referral marketing, we’ve compiled the best practices to help you answer these questions. Download it here.

Benefits of Referral Marketing FAQs

What are referral benefits?

With a referral marketing program, businesses lower customer acquisition costs because they can easily find highly qualified leads without spending a lot on more expensive marketing channels. These leads become loyal customers with a higher lifetime value than non-referred ones.

How effective is refer-a-friend marketing?

Refer-a-friend marketing is highly effective because consumers trust friends and family when it comes to product recommendations. On average, referred customers are at least 16% more valuable than non-referred ones.

What is the purpose of referral marketing?

Referral marketing motivates customers to market a brand’s products to people they know. In return, they get rewards such as points, discounts, or special offers. 

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