Referrals are contagious

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📝 Intro

Customers coming from referrals are generally higher value and better quality (at least 16% more according to other studies, higher if referral programs are well targeted).

But this type of customer brings another benefit that’s easy to miss.

New research finds that referred customers don’t just join, they’re more likely to refer others, creating a domino flywheel effect that drives growth.

P.S.: You can even further increase your referrals by pre-filling referral messages for your customers. Including an incentive in the message for them to make more referrals can increase referral rates by up to 53%.

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Referred customers make more referrals, are more likely to convert and opt for higher tier plans 

Topics: Referrals
For: B2C 
Research date: May 2024
Universities: University of California - Berkeley, Wharton - University of Pennsylvania

📈 Recommendation

Maximize the impact of your referred customers by reminding them that they joined through a referral. Send them targeted messages via email or notifications asking them to pass on the referral (e.g. “A friend brought you here, how about passing the favor on and inviting a friend too?”).

Referred customers, who are already high-value, will be even more likely to refer more customers.

🎓 Findings

• When given a reward for a successful referral, people referred to a product by someone else are more likely to refer others (vs people who discover the brand by other means). Referred people are also more likely to convert from free trial to paying customers and pay more.

• As part of 8 experiments and analyses with 51.7 million customers, researchers found that:

  • Out of 41.2 million customers from a cashback app, referred customers (vs non-referred):

    • Were 36% more likely to make a referral (11.9% vs. 7.6%)

    • Made 27.65% more purchase trips (31.1 vs 22.5)

    • Were 20 to 36% more valuable

  • When over 10 million referred customers were reminded they joined through a referral and both they and the person referred would receive a reward, their referrals to others increased by 21% 

  • In 19 out of 20 companies across industries in a field experiment, referred customers had higher referral rates than non-referred customers when both the referring and new customer received a reward for the referral.

  • Data from 54,349 customers on My Yoga, found that referred customers:

    • Were 71% more likely to send referral invitations than non-referred customers (8.72% vs. 2.51%).

    • Were 19% more likely to convert to account sign-ups (23.8% vs. 19.3%)

    • Were 2.5x more likely to convert to full memberships (7.5% vs. 3%)

• Sharing a reminder message with referred customers can further boost their referral rates by an average of 20% to 27%.

🧠 Why it works

• When we receive a reward for giving a referral, it adds an incentive and increases the likelihood that we’ll refer someone.

• If we’ve been referred for a product, we consider it more socially appropriate to refer someone else than if we found the product on our own. 

• Since we were referred to the product, it shows us at least one other friend also vouches for the brand’s quality. This lowers the psychological cost barrier we feel when recommending a product to someone.

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✋ Limitations

• Differences in the incentives given for referrals could impact how strong this effect is. The study looked at referrals where rewards were given either to both parties or the referring party - it didn’t differentiate by the type of reward given, who it was given to, or whether a reward was given at all. Other research indicates altruistic rewards - those given to the new customer - are the most effective at driving referrals.

• The research looked at purchases, but not revenue or profitability. Other research indicates that offering very high rewards for referrals increases the quantity of referrals, but lowers the profitability and quality of the referred customers. 

• On average, 3.8% of the referrals were fraudulent, most likely due to the incentive given. While these were removed from the dataset, it’s likely these fraudulent referrals would occur in real-life too when an incentive is given.

🏢 Companies using this

• Data from Referral Saasquatch shows that across industries, the difference in referral rates between referred and non-referred customers ranged from 0.5% to 11%. The software industry had the highest difference (12.14% referral rate vs. 0.52% for non-referred customers) while the Finance industry had the least difference in referral rates (3.64% for referred customers vs. 2.07% for non-referred customers).

• Companies don’t seem to specifically target referred customers for their referral campaigns but generally seek referrals and offer rewards to all customers.

  • Robinhood gives free stocks when you refer a friend

  • Uber gives a bonus if you refer someone to drive for Uber

  • Airbnb gives you a reward if you refer a friend to join

• On the SaaS side:

  • Dropbox and Coda both give an incentive - to both parties - 500MB of free storage on Dropbox and $10 credit for both parties on Coda

  • Jobber gives one month free to the referred customer when they sign up

  • Project management tool Clubhouse takes it a step further - your company receives $500 in credit, the referred company receives two months free and the individual making the referral receives a gift or gift card for their personal use

Portfolio management tool CoinTracker offers both the person making and receiving the referral $10 in credit. They use referral best practices including providing pre-filled referral messages and offering an altruistic reward.

⚡ Steps to implement

• Set up your referral program with incentives (ideally a product-related gift, not money) for both the person making and receiving the referral:

  • To encourage people to make multiple referrals, set up a tiered system where people get progressively larger gifts for the number of people they refer

  • As part of the data tracked for your customers, including spending habits and types of purchases, keep track of referrals they make and whether they came to your company through a referral. This should help you confirm whether your referred customers are converting, spending, and referring more than other customer segments

• To make it as easy as possible for someone to make a referral, offer pre-filled messages people can send out.

• Target referred customers by sending notifications or emails encouraging them to refer others. Focus your messaging on sharing their positive experience with others (e.g. A friend introduced you to us - pay it forward and share your experiences with others) or the benefits the person they refer receives (e.g. Give your friend $10 off when you refer them to us)

• Ask for referrals after positive experiences, like a completed purchase or service milestone, when your customer is likely to have the best impression of your brand.

🔍 Study type

Online experiments, field experiments, and market observations (analyses across 13 industries and 23 companies, with 51.7 million customers)

📖 Research

Referral Contagion: Downstream Benefits of Customer Referrals. Journal of Marketing Research (2024)

🏫 Researchers

• Rachel Gershon. University of California, Berkeley

• Zhenling Jiang. The Wharton School, University of Pennsylvania

Remember: This is a new scientific discovery. In the future it will probably be better understood and could even be proven wrong (that’s how science works). It may also not be generalizable to your situation. If it’s a risky change, always test it on a small scale before rolling it out widely.

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