Referral systems can promote engagement, gather insight, and result in a large loyal customer base. But, the work that goes into these programs can be arduous, and even expensive. Offering referral rewards such as store credit or cash payments isn’t something that every company or startup can justify. So are referral systems worth it?

Subscription and eCommerce Companies

Companies such as Hulu, Netflix, StitchFix, Loot Crate, and other similar ecommerce subscription companies have a unique position. They likely built their customer base from social media marketing that was relatively low cost. Now, they have room in their marketing budgets to offer bigger rewards to their current customers that bring in new customers.

For example, a new company that attracted those initially interested in the niche, say high-quality tea leaves, will have trouble acquiring customers after a certain point. Their operations are so niche driven, but they can rely on their current customers to spread the word about the love of freshly brewed tea, and it’s benefits. Using their customers for word-of-mouth marketing, you can rely on someone who’s interested, passionate, and paying into your brand. That’s more than you can get out of any top-notch marketing team.

Many companies are diverting their funds away from traditional marketing teams and into using their customers as marketers. It engages the customers, makes them feel involved in the brand, and it creates a cohesive customer-driven brand voice.

What Do The Numbers Say?

Ultimately, acquiring news customers through any avenue can cost five times as much as keeping your old customers. You’re going to spend a substantial amount either through marketing, customer service hours, or customer engagement systems.

So, if you’re going to invest in acquiring new customers, it’s important that you make an informed decision. When it comes to customer referral systems, you’re relying on your already loyal customers. About 92% of consumers report that they trust referrals they receive from people they know. Additionally, if someone learns about a product from a friend or close family member, they’re 77% more likely to buy or try that product.

For many companies, a referral system is a safe bet for acquiring new customers. Major brands such as StitchFix, Digit, and more have built almost an entire customer base off of customer referral systems. It’s how Airbnb reached its level of popularity, and it’s proving to be a necessary aspect of any startups marketing plan.

Is A Customer Referral System Best for Your Company?

If you’re a new startup business, have had trouble building upon your loyal customer base, or operate primarily through ecommerce, then a customer referral system is likely worth the investment. When you compare this method of customer engagement to alternatives such as polls, surveys, purchasing incentives, or reward programs, it’s the only way that benefits your current loyal customers and works toward acquiring new customers as well.

However, if you’re a storefront that will require a substantial monetary and time investment to establish this system, you might want to consider alternatives. If your current POS or other business software can’t perform simple referral tasks such as awarding bonus points or cash rewards upon signing up with a referral code, then it may be best to stick with what’s working for you now.

Always give careful consideration into investments in technology, which customer referral systems often require. It’s far too easy for companies to have more than ten technology “solutions” for different aspects of customer interactions, engagement, and other areas of operation. Be sure to check in with your current technology providers before diving into a new option to initiate your customer referral system.

Sales Driving Machines

Customer referral systems are well-known as sales-driving machines. People generally expect high-levels of success from these systems, but it doesn’t always work out that way. When you bring in something that can generate not only leads but sales directly, you must ensure that all other areas of your supply chain are ready for a boom in growth.

Many startups have met their demise from not being able to keep up with a sudden growth from a marketing effort gone too well. Death Wish Coffee caught a bit of attention on a morning news show, and in the weeks that followed, ended up losing money because of its inability to meet orders on time and rushed the process of manufacturing.

Sales driving machines, such as a customer referral system are always a risk. Work with those within your company to meter growth and manage the boost from a referral system so that the effects are only positive.