How incentivizing referral programs improves customer and partner engagement

Should you incentivize a referral program?

As referral programs have grown in adoption and become a more widely implemented B2B marketing strategy there has been much discussion over the best practices of getting advocates to refer. More specifically, whether it is a best practice to incentivize referrals.

The argument against incentivizing referral programs stems from conjecture that a brand is essentially buying a customers’ or partners’ opinion by incentivizing a B2B referral program because it isn’t a natural extension of a B2B relationship. The rationale behind this being that B2B customers or partners should feel strongly enough to want to refer without a referral incentive. And while I agree that B2Bs and the subscription service industry needs to build an authentic relationship with their customers and partners, I believe that critics of referral rewards are missing the point.

Notions of referral incentive naysayers disproved

To try and understand why referral incentive naysayers disagree with rewarding advocates lets breakdown some of the most common arguments against incentivizing referrals.

1. Motivating referrals with a monetary reward may make the referral appear less trustworthy.

Referrals are the most trustworthy form of lead generation available. But like most people, advocates are busy and referring takes time out of their day. No matter how loyal advocates are to a brand an advocate expects to be rewarded for their loyalty. If a business is under the impression that a customer or partner is obligated to be loyal to their brand then they need to re-evaluate their understanding of customer and partner expectations. Incentivizing referrals doesn’t take away from the relationship an advocate has with their referral but it does give them more reason to nurture that referral to make a purchase. And the fact that a brand rewards the loyalty of their customers can often times make them more appealing to a referral because they know they will be well taken care of when they become a customer. The brand Software Advice conducted an online survey with B2B companies and found that, “39% of respondents say monetary or material incentives such as discounts, free swag or gift cards greatly increase their chances of referring a brand.”

2. Programs providing incentives tend not to be sustainable.

While this once might have been true, with the development of referral incentive programs the hassle of reward management has been removed. By implementing an automated and scalable incentive referral program, referrals are automatically tracked and attributed to the advocate and the reward fulfilled. But as a referral naysayer might point out, “What about the grueling task of staying tax compliant?” With quality referral software now enabling automated tax compliance and W-8/W-9 collection, businesses don’t have to worry about keeping their program tax compliant. Instead they can re-direct their focus to growing the referral program.

3. Unlike organic referrals, incentivized referrals aren’t free, causing many to question the cost-effectiveness.

I partially agree with is statement, organic referrals are unlike incentivized referral in the sense that a referral incentive program can create a consistent channel for personalized lead generation while organic referrals are ad hoc. Gartner Research has even found that referral marketing is a channel that offers a high volume of excellent, low-cost leads. And unlike other lead generation channels, a quality referral program is hardly cost prohibitive. Comparing two WordSteam studies, one from 2012 and one from 2016, the average conversion rate of paid search ads has decreased by almost 50% in the last four years while display has fallen by 68%. In that same time period the average conversion rate of referrals has shot up to 35% (Amplifinity). And when taking the reward into consideration the amount of a reward will always be less than the cost to acquire a customer using any other marketing method.

4. Many times the reward is given no matter how long the new referred customers stay with the company. This incentive structure creates the potential for fraud in which advocates get rewarded for referring low-quality customers.

It is true that homegrown referral programs have had trouble dealing with fraud, but quality referral software eliminated the possibility of reward fraud and abuse. Through the use of referral software, rewards are typically never triggered until a referral has become a customer. Another anti-fraud mechanism is retention periods; which can be built into the reward fulfillment process.

Maximize referral results with special incentive structures

Escalating rewards – Escalating rewards create a structure that communicates the increasing value of referring multiple times. As an advocate’s number of successful referrals increases so does the value of the incentive offered. For instance, ADP’s customer referral program gives customer advocates $100 off their bill for each for the first three successful referral and on the fourth they receive free payroll for a year. This increases the number of referrals made and the referral program ROI.

Multi-stage rewards –For brands that have subscription products, they may want to have a retention period before they pay out a reward to ensure the new customer stays. If so, advocates can get frustrated waiting for their referral incentive to be fulfilled. And with retention periods comes the danger of advocates becoming disengaged while they wait for their reward. To combat this, multi-stage rewards spreads out the fulfillment of an incentive to keep advocates engaged.

For instance, if a referral program offers a $100 referral incentive but has a three month retention period, multi-stage rewarding can have the advocates receive $25 upon their referral signing up for the subscription and $75 after three months. And since the advocate feels appreciated for their referral they will be much more inclined to refer again within those three months which increases referral ROI.

Double-sided rewards – Double-sided rewards incentivize both the advocate and the person they are referring. Sometimes advocates feel hesitant to impose an ask on their network. Double-sided rewards show that a business understands the hesitation advocates are feeling by giving them a discount or incentive to pass on. This way the advocate doesn’t feel like they might be annoying or burdening a referral by reaching out to them. Instead they are excited to share a great deal.

Revenue sharing – Revenue sharing is common in partner programs. Revenue sharing ensures that partners are incentivized by the size of the deal by giving them a percentage of the revenue from the successful referral. This way a business can directly acknowledge the contribution a partner made and instill greater loyalty. Revenue sharing also gives the partner a stake in the success of the referral and motivates them to take an active role in the sales process.

Reward choice – Even when an enticing referral incentive is created, it doesn’t mean that it excites or motivates all customers or partners. Reward choice gives advocates the opportunity to choose the reward they receive. With this reward structure, once a referral becomes successful an advocate is directed to a page where they can choose the referral incentive that aligns with their sense of value and their lifestyle. This way a business can remove speculation about the value their referral incentive delivers and instead know that they’re providing a valuable referral motivator.

Incentivizing referrals improves your ROI

When developing a referral incentive a company can show customers and partners that they appreciate their loyalty and by doing so improve their experience. A referral incentive has multiple benefits in driving growth via referrals, but also strengthening the relationship and loyalty from these important customers and partners. Harvard Business Review published a study sharing that referred customers spend more (16% higher LTV) and stay longer (18% less likely to churn). And according to Fred Reichheld, author of the Loyalty Effect, a 5% increase in customer retention can lead to a 25-100% increase in profit for your company.

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