How To Build a Successful Customer Referral Program (2024)

A referral program is a system that incentivizes previous customers to recommend your products to their family and friends.

Retail stores create their own customer referral programs as a way to reach more people and grow revenue. Compared to other types of marketing strategies (such as traditional television ads), referral marketing can be more cost-effective because you are tapping one of your most valuable resources: existing loyal customers. Incentivizing these customers to become brand advocates can benefit your business long-term. 

Considering starting your own referral program? Here is a deep dive into how these programs work, the benefits of having one, and a six-step guide to creating your own.

What is a customer referral program? 

A customer referral program embraces a word-of-mouth marketing strategy, which incentivizes existing customers to recommend your products to others in their network. Referrals can be to family, friends, or anyone on popular social media platforms looking for a product like yours.

Since you are leveraging your existing customer relationships, you can save money compared to other types of marketing. The referrals themselves are free (although there can be costs related to referral software or any incentives you provide). Examples of perks to subscribers include your brand’s products or exclusive access to email newsletters or special events.

Ultimately, encouraging existing customers to refer your company to their network increases their lifetime value and aids customer retention. These loyal customers are worth up to 10 times the value of their first purchase. Word-of-mouth marketing can drive growth and revenue, generating five times the sales of paid advertising. 

A referral program should not be confused with an affiliate marketing program, as the former relies on your existing customers or subscribers.

Why are referrals important?

Referral marketing is effective in optimizing conversions, with data indicating conversion rates for this type of marketing is three to five times higher than other channels, including social media marketing and traditional marketing like television and radio ads. Why? Because new customers earned via referral have pre-established trust in your brand. According to one Nielsen study, 88% of respondents globally are more trusting of recommendations from those they know when compared to recommendations from other channels.

How does a referral program work?

A referral program works by inviting your current customers to become brand ambassadors. When they join your referral marketing program, they receive a unique code or link to share with their personal network. Your referral program software tracks the activity of a customers’ code or link. If someone uses the shared code, for example, the referrer earns a reward.

What are the different types of referral programs?

• Incentivized referrals
• Direct referrals
• Reputation referrals

There are multiple types of referral programs, including:

Incentivized referrals

The most popular type of referral is incentivized, a model in which a customer has a reason to refer your products to their personal network. In return for the referral, the existing customer may receive a discount on their next purchase, a complimentary product or service, or a cash incentive. 

Lifestyle brand Erin Condren offers a double-sided referral program: giving a $10 coupon code for referred customers to use on their first purchase, and a $10 equivalent in 1,000 EC Insider points to the person making the referral.

Direct referrals

Direct referrals are when your existing customer base actively refers your company to people looking for a product or service you provide. It’s the most traditional form of referral. There’s not necessarily an incentive for the referrer to act; typically they are just genuinely happy with the product and are willing to share it with others. 

Reputation referrals

Reputation-based referrals are when you have built a brand with such a strong reputation that people are confident in mentioning you to someone looking for the products or services you offer—even if they haven’t bought from you themselves. While it’s a good target to aim for, it’s not necessarily easy to get these types of referrals. They happen as an indirect result of having great products and a strong brand reputation. 

How to create a customer referral program in 6 steps

1. Start with a great product
2. Understand your customers
3. Determine incentives
4. Choose a referral marketing tool
5. Invite previous customers to join the program
6. Make it easy for people to refer you

So how do you create your own successful referral program? Here are six simple steps to get started:

1. Start with a great product

Develop a referral program with a great product by going through the product development process. This includes conducting market research, sourcing quality materials and finding reputable suppliers, and testing your product from prototype to soft launch before its full release to your target audience. These steps are key to creating a product that is high-quality, reputable and valued by your customers—the entry point to building a solid reputation.

2. Understand your customers

What does your target customer value? Why do they purchase your product over a competitor’s? What incentives drive the most referrals? Knowing your ideal customers and what influences their behaviors can help you educate those joining your referral program—and give them the insights necessary to effectively connect with their networks. You can collect this information by leveraging ecommerce analytics tools such as Shopify’s analytics and reporting and others available through the Shopify App Store.

3. Determine incentives

Incentivizing customers to make a referral can be an effective tactic to get more people using your program. Make a plan to determine which customers receive rewards and have it clearly stated on your website. Some companies give both the referrer and the new customer an incentive for joining. This is a win-win: New customers are incentivized to purchase through a referral link. When they do, the person who referred them is also rewarded. 

Dollar credit is among the most popular referral rewards. Percentage discounts are also commonly offered as rewards. Other reward options include free products, free month subscriptions, and points to redeem on future purchases.

Regardless of which incentive you chose, a solid understanding of your customer lifetime value (CLV) is key. You want the cost of acquiring each referred customer (i.e., the cost of the incentive) to be less than the total revenue brought in by the customer. 

4. Choose a referral marketing tool

Select a referral marketing platform that handles referral invitations, generates unique codes or links, and tracks conversions. Some options that integrate with Shopify stores include:

• Referral Candy & Affiliate
• Retainful: Email Marketing
• Rivo: Loyalty & Referrals

Next, design and create a landing page to explain how the new referral program works (plus, any incentives you’re giving). On this page, include a form for people to join. That person will then receive their unique referral link by email. The best referral marketing platforms enable you to monitor the progress of your referral campaigns, and your referrers get access to a dashboard to track how many referrals they’ve made.

5. Invite previous customers to join the program

Loyal customers make the best referrers because they are already familiar with your brand and its reputation. Invite them to join your referral program using email marketing.

Start by sending a broadcast to announce your new program and any incentives. Most referral marketing tools have an email feature to send a customer’s unique referral code or link without having to participate in a signup process.

A best practice is to continue promoting your referral program by mentioning it in your purchase confirmation emails—when customer excitement is fresh. This type of email has an open rate of nearly 60%. 

Also, consider using the footer area of your purchase confirmation emails to invite new customers to join your referral program. 

6. Make it easy for people to refer you

In addition to designing incentives, you need to make the referral process seamless and engaging. There are a couple ways you can do this.

First, make it easy to refer friends and family with templates customized to your brand voice. Templates could be for emails, social media posts, or direct messages—simply formatted and supported by software allowing referrals to be sent with a click of a button. Include key information such as brand name, type of reward (with reward value), and discount code or link.

You can also collect online reviews that can help improve your overall reputation and grow your community of brand advocates. Ask happy customers to share their experiences on Trustpilot, Yelp, or other credible review sites that your target customers are likely to visit before purchasing. 

5 successful referral program examples 

1. Tesla
2. QALI Hair Extension Studio
3. Good AirX
4. PayPal
5. LIVELY

For more inspiration, check out these real-world referral programs:

1. Tesla

Car manufacturer Tesla has its own multi-tiered referral program. The program centers on first-time buyers, and it posts referral credits when family or friends buy qualifying products (including certain car models) through referral links. 

A previous version of Tesla’s referral program offered two-sided rewards: The referred customer received at least 1,000 miles of supercharging; the referrer received the same, and for a limited time they were also entered into a sweepstakes to win a new Tesla. In 2015, the winner referred 188 new customers to Tesla, generating sales worth an estimated $16 million in just two months. 

2. QALI Hair Extension Studio

QALI Hair Extension Studio is a full-service salon in Vancouver, Canada, with an ecommerce site that sells hair products. To incentivize its loyal customers to refer their family and friends, the brand created a points-based referral marketing program called TreatPoints. Customers earn points for every purchase—be that services in the salon or products.

3. Good AirX

Good AirX built its own referral program to capture customers already buying through its ecommerce store. Both the referrer and the new customer are incentivized through discount codes: referrers get 10% off future products; new customers get 7% off.

4. PayPal

PayPal’s referral marketing program is a points-based program that rewards the referrer cash back up to $100. When a referred customer signs up and spends a set minimum within a certain time period, they get a $10 cash back as well. Customers who refer their friends can earn this reward up to 10 times per year.

5. LIVELY

Fashion retailer LIVELY offers referrals as part of its reward program, in which subscribers get one point for every $1 spent (and can sign up on the brand’s web page). Referrers are incentivized to share 15% off and get 15% off in return if the referred customer shops with LIVELY. Within 48 hours of launching its initial rewards program, LIVELY received 133,000 emails. Its ecommerce store saw 300,000 online sessions. 

Choose the right referral program for you

Now that you know the value a referral program holds, it’s time to move forward and create your own. Understand what your target customer looks like (and explain that to referrers), choose an incentive, and make it easy for happy customers to recommend you.

The best part? With Shopify POS integrations, you can create an omnichannel loyalty program that rewards customers shopping both in-store and online.