You’ve spent a lot of time building up a loyal customer base. Now you might wonder if you should tap into the potential for word-of-mouth marketing by starting a referral program. As with many additions to your business, there are both pros and cons to asking for referrals.

In the State of Business Customer Referral Programs, researchers polled both business-to-business (B2B) and business-to-consumer (B2C) respondents. They discovered about 80% of people make buying decisions based on peer influence or direct experience with a company. With so many choosing where to spend money based on recommendations, a referral program seems like a no-brainer.

Benefits of Starting a Referral Program

Those who already enjoy your products know who else might be interested in them. A referral program becomes a powerful targeted form of advertisement, allowing you to reach a specific audience segment. There are several reasons to start one.

1. Reach New Leads

Not everyone is on social media or will see an ad you place. One way to reach new leads who may otherwise never hear about you is through your current customers. No matter what you sell, they likely have contacts who are interested in what you offer. Ask them to share information about your business and get the word out.

Southern Maryland Oil offers a way to make money. You submit your friend or family member’s name to the company and can earn up to $100 in referral fees. It requests you and your friend’s contact info so you can get the information in the other person’s hands and get the relationship on record for your future payout.

2. Earn Trust Easily

Since consumers have more trust in information from those they know, you’ll earn their confidence. You can tell someone all day long how great your company is, but until it comes from someone they know personally, they have no reason to believe you.

A referral program is like placing a testimonial directly in the hands of the lead and encouraging them to take a chance on you. There is a psychology to personal referrals that make word-of-mouth one of the most effective forms of advertising.

3. Reward Everyone

Referral programs aren’t always solely for the person sharing the information. You can encourage new clients by offering them a discount and providing one to whoever shares you with them as well. This type of model is one where everyone wins. Back in the early days of PayPal, it offered a similar deal. You shared with a friend, and both got $10. It was a win/win for all involved.

Boost Mobile offers a simple refer-a-friend program where you both get $25 in credits. By providing the new person and the current customer a gift, the chances that both will participate increase.

4. Know Your Customers

Refine your reward program over time. Talk to your customers and find out what they like and don’t like about the system. Make adjustments and create easier opportunities to share and earn rewards.

One example would be allowing fans to share your social media posts and drawing a winner from the people who did so with their own followers. Not every referral has to be a direct one that earns cash. Sometimes people are just happy to spread the word about what you do.

5. Tap Into a Cause

What does your company stand for? If you find a cause your target audience also cares about, you can serve a great good while also bringing in new leads. Offer a donation for every new client that comes on board. Let people donate their reward to a charity. Look for ways to tap into your mission as a brand.

Greats offers customers a chance to get 25% off their order and also help them donate to City Harvest. The customer does have to follow through by completing an order, but when they do, the company sends $15 to City Harvest in New York City. Another option is to get $30 off and give $30 off to a friend. Either of you can choose to donate the amount to City Harvest.

6. Give Points

Some companies offer points every time a customer does something. If you place an order, you earn points. If you refer a new customer and they order, you get a few more. Over time, the loyal fan recieves enough for a free item or a discount toward something they want to buy. This personalizes the gift and makes it more likely they’ll participate for a long time.

Think about the program Kohl’s has in place. It offers Kohl’s Cash, which the customer must use in their store. This brings the customers back in. It could improve this system by allowing people to refer friends to sign up as well.

Why You Might Want to Wait to Start a Referral Program

Just as there are some excellent reasons for offering rewards for recommendations, there are also a few reasons you might want to put this type of program on the backburner for now.

1. Increase Profit Margin

If your profit margin doesn’t allow for discounts or rewards, then it might be better to wait a bit to start a referral program. You don’t want to promise price breaks only to find they are costing you money.

2. Hire More Staff

If you are a solopreneur or only have an employee or two, then now probably isn’t the time to start one. You’ll need someone dedicated to ensure the program runs correctly. You don’t want to offer something that isn’t functional.

3. Improve Reviews

If your reviews are mostly negative, you may need to do some customer service work and improve your image before adding new clients. People aren’t likely to recommend you if they dislike you in the first place. Improve your brand’s position and then add the referral offering.

How Effective Are Referral Programs?

How well the approach works for you depends on your business type and the way your customers respond. Think about what is of most value to your audience and go from there. Tweak your procedure as you go until you find the perfect combination.