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When friends or founders reach out to me for growth ideas, usually I begin by asking what all growth channels they have already tried. What is startling, is that frequently Referral Marketing does not even exist in many startups’ growth agendas. This simple yet effective channel getting overlooked in so many companies is so bizarre, that it called for a post on “the value of referral for growing your users”. In parallel, I have also addressed some issues which frequently cause referral programs to fail.

As marketers when we are faced with the question of which growth channel to focus on early on in a company’s journey, usually our attention runs to what we see most often — Performance Marketing, Social Media, BD Sales expansion, and like. In my experience frequently founders running growth or marketing leaders, overlook referrals for any of the following reasons

1. You have seen 10 times more paid Ads vs Referral programs, as a user
2. You think there is nothing new here since everyone else has also been doing it
3. You think you are already getting enough from word of mouth, what value will the referral product add
4. You think it requires huge Product and Tech bandwidth, unlike traditional marketing, which requires almost none
5. Lack of product market fit. This is perhaps the only valid reason why the absence of a referral program is justified.

So, Why is Referral Important, again?

There are many reasons but here’s my list of Top 3.

• It is cost-effective. In my experience, Referral Program CAC is usually 1/3rd to 1/2 of paid ads. It can even be significantly lesser for a [great program, riding on a great product]. Also, you generally pay for performance that too as an in-app currency / closed wallet. Many good programs ensure payouts are linked to product usage milestones. As a result, payout incentivizes right behavior i.e higher product engagement.
• You are paying your User Base and not the Big Ad Companies. This is perhaps a very big difference, which is hidden in plain sight. Typical startup teams spend 75–90% of the budget on Digital Marketing, which is more or less split 50:25:25 into the G:F: Others bucket. Referral offers a completely new way of growth that is more focused on a product’s power user networks and not “strangers bought on an auction”.
• Scale can be very very high. Referral programs usually scale exponentially unlike Ad platforms where scale is linear (usually proportional to budget). For more on this point, you can check out this Blog — Viral growth Loops

Let us understand the basic Anatomy of a Referral Program before we understand where it fails

First things First, Treat A and B as 2 separate buckets with separate product journeys, motivations, incentives, flows etc etc. Hence if you have a program addressing only either A or B, it will not reach full potential.

Let’s break A and B further to understand their journeys and interactions

Critical failure points to watch out for in bucket A

• If x<10%, work on program visibility, communication, incentives, or all of them
• If y<10%, then increase program incentive and/or revisit Referral UX

Critical failure points to watch out for in bucket B

• If p<10%, then improve the program incentive or the program appeal
• If q<10%, then revisit Referral UX

For both A & B user segments, the referral incentives need to be simple to understand, quickly settled (preferably real-time), and reward both A & B user segments.

While what we laid out so far is very basic, it still qualifies to be checked before we deep dive into the more subtle aspects. Remember that this is foundation-level stuff and if not done right, everything else won’t work anyways.

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The 3 Hidden Metrics which can tell, why most referral programs fail in reality, in spite of checking on all the Basics

1. Most Programs don’t actually lead to user win [Metric — %of users winning / users initiating Referral]

The Metric to track here is how many users who participate in your program actually win something. A startling number of products relish in the fact that their CAC is low when in reality a large number of users who participate in referrals don’t ever win. If you have a Win Ratio of less than 10%, the program will fail to get traction as 90%+ users would have not got any incentive for their work.

2. Time to win is Dead Long [Metric — Time between users initiating Referral invite and users receiving the promised reward]

Users today seek instant gratification, therefore it is mission-critical to understand how to make the user win fast. Another factor is that the majority of users typically go through the same emotions when either they are waiting vs when they are not winning. The wait develops distrust of the program. Hence winning fast is as crucial as winning itself. In my experience,

• a significant portion of incentive-winning users, never claim the rewards if the delay is more than a week.
• a large number of the above users never participate in the same program ever again

3. User Base is exhausted [Metric — %of the overall user base that has already been exposed to / participated in Referral Program]

This is a late-stage problem and typically every company faces it sooner or later, when the existing base has already been exposed to the referral program long enough and is not able to generate new referrals. This means the program either stays at the same level or declines to a reduced stable state. Herein lies the key question which can unlock the growth

How can you unlock the referral program for users who were earlier referred as guests on your platform?

We can consider the following options when facing the above problem

• Continuously strive for creating excitement within the user cohort, with relevant and new offerings. Limited time offers are usually more interesting than the same old stuff.
• Unlock the program early for the new users. Monitor the early days’ experience and try to fit in a referral earlier vs later.

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Summary

In conclusion, remember these 5 Points for designing a great referral program

Point Zero — Launch a referral program if you haven’t done it yet

1. Get basics right — The program should treat A (users on Platform) and B (guests on Platform) well enough, don’t ignore any one of them
2. Optimize the funnels basis what is the bottleneck for your Program i.e. basic flows in 1.
3. Get a large number of participants to win
4. Get participants to win faster
5. Constantly Focus on converting B (guests on Platform) to A (users on Platform) who can become sources of future referral

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