The Ultimate Guide To Referral Rewards

Incentives are the key to a powerful referral program.

Not surprisingly, people are motivated by the rewards they can get. Plus, it's easier to convince friends and family when the perks are worth it.

That said, choosing the best referral reward is complicated. Entrepreneurs have to weigh in the pros, cons, and costs of various reward types. Would more customers budge if you offer a discount or store credit? Are double-sided incentives more effective? There are a lot of factors to consider.

Now, how can you choose your referral rewards? In this piece, we'll share how you can pick the best referral rewards.

Who should get the incentives in your referral program? Most rewards systems fall in either one of these three categories: one-sided or double-sided rewards programs.

Let's dive in and discuss the difference between the two.

One-sided referral rewards offer perks to either the brand advocate or the referred friend—but not to both parties.

Brand advocates who join your referral program have experienced using your products and services. While they can organically promote your product among their network, a good incentive can speed up the process and guarantee that they'll make the effort.

Rewarding brand advocates guarantees that they will act as salespeople for your business. A Nielsen report found that 92 percent of customers trust their friends and family more than other forms of advertising. Hence, incentivizing them increases your customer base and boosts brand awareness.

This rewards system also increases customer retention and loyalty. People are more likely to patronize brands that give them perks for getting their loved ones onboard.

For example, Ibotta's referral program for Thanksgiving rewards brands advocates with $50 for referring five friends. Although they offer a generous reward, brand advocates can receive it only when they get a group of friends onboard.

Referral programs can also reward referred customers once they make their first purchase. These perks may be in the form of discounts, exclusive products, freebies, or store credits.

However, since brand advocates don't get any incentives, the results may remain low. Even if they love your products, sharing them with others isn't a priority.

Despite the drawbacks, this rewards system may be effective for businesses that offer expensive products or a subscription-based model. A good discount or incentive will motivate referred customers to make a purchase and eventually become long-term customers.

For example, Hellofresh lets customers send a week of free meals to four friends with free shipping.

The brand advocates receive a reward for a successful referral and referred friends get discounts off their first purchase. Not only that, businesses also get more paying customers.

It's a win-win-win situation!

Now, how can you launch a referral program? In this guide, we'll share the tips that you need to succeed.

Double-sided referral programs incentivize both brand advocates and referred customers, making them appropriate for all types of businesses.

Chances are, providing both parties with a reason to opt-in to the referral program will likely lead to higher chances of success. Brand advocates are more likely to talk about the product with their network. Likewise, new customers will try it out because of the additional perks on their first purchase.

Korean beauty brand Soko glam encourages brand advocates to refer their friend to get $10. In turn, their friend also gets $10 off their first purchase. It's a win-win situation.

The rewards you offer may vary depending on your business model. Retail stores that depend on repeat purchases may offer discounts or store credits. However, those that rely on a subscription-based model may offer a free month in exchange for referring friends.

Which type of referral reward is suitable for your business? Let's take a look at the pros and cons of each referral reward type.

Everyone loves cash. Customers are motivated to get money whether it's an easily affordable $10 or $50.What sets it apart from other types of rewards is scalability. People can get triple the rewards for referring 3 friends, or recommend it to their social network and get 50x more the amount. It's kind of similar to giving out a small commission for every successful sale that your referral advocate generates.

Invest company Acorns offers a $200 reward in exchange for referring four friends. To get customers to act fast, it is only available for a limited time.

Discounts and store credits are a beneficial reward for businesses that want to attract repeat purchases.

Unlike a cash reward, store credits or discounts can also be used when purchasing from your business. Not only can you turn the referred friend into a customer, but brand advocates will likely return to your website and make a purchase.

Store credits or discounts are also key to motivating first-time customers to try the product themselves. A recommendation from a trusted friend could get your product on people's radar, but a sweet discount could seal the deal.

For example, the Bombas referral program encourages brand advocates to refer their friends to get $20 while referred friends get a 25% off discount on their first purchase.

Do note that these rewards aren't appropriate for businesses that rely on one-time purchases such as mattresses or cars. Since people are less likely to make another big purchase, the coupon isn't as tempting.

Due to the popularity of the subscription model, a free month is a good incentive. The perks may encourage customers to stay loyal to the brand, while referred friends can try the product for the first time. If you manage to get a customer, you can rely on their recurring purchases for months or years to come.

For example, music streaming service TIDAL encourages customers to refer a friend to receive a free month of TIDAL. Likewise, referred friends receive 30 days of TIDAL Premium.

Providing customers exclusive products that they won't find anywhere else is another way you can earn a referral. This can be a signed paperback or themed merchandise that will never be available in-stores. But remember that even if novelty may pique people's interest, it also has to be useful and relevant to your target audience.

For example, Sephora's referral program lets customers earn 100 Beauty Pas Points that they can use to get rewards. Moreover, the top 50 brand advocates can get a gift box worth $150 while the top 10 brand advocates can snag a curated gift set.

The sweet offer definitely encourages beauty influencers to share their referral code on their social media channels.

Referral rewards don't just have to benefit the referee and referred friend. Some incentives could involve donating to a charitable organization. For some, it is worth the effort because a notable cause will benefit. Not only can they feel good about their donation, but they can also make a positive impact.

Another option is to give customers the choice to receive a referral reward or donate the proceeds. This way, customers can pick their preferred incentive.

Nonprofit software Keela gives brand advocates a chance to either get $75 off their subscription or a $75 donation towards a nonprofit.

Third-party gift cards from big companies are also a popular referral reward. This gives customers the freedom and flexibility to choose their preferred item. Plus, customers can also offer gift cards to their family or friends.

Most valuable gift cards are from top retailers. CNBC reports that the top gift cards include iTunes, Starbucks, Walmart, Victoria's Secret, Target, Amazon, and Best Buy.

A good tip is to pick gift cards that are related to your business. For instance, a bakery could offer a Starbucks gift card and a beauty brand could offer a Victoria's Secret or Target gift card. Top retailers usually let entrepreneurs purchase gift cards in bulk at affordable prices.

Mattress company Tomorrow Sleep offered a $75 Visa gift card to referees while first-time customers get $100 off their mattress.

Small businesses may not be able to afford appealing rewards on a tight budget. Hence, another option is to host a contest and offer a grand prize.

A big reward such as a free trip could be the talk of the town in your customer community. And of course, you only have to spend one time to afford the grand prize. You can also set a time limit so people will participate immediately.

For example, the Huckberry referral program hosted a 5-day referral contest. Winning referrers could get a first class free round-trip airplane ticket and a carry-on packed with gear. Meanwhile, the runner-ups would receive free in-store credit.

Of course, referral rewards will cut off a portion of your profit margin. That's exactly why you must factor in the cost of distributing en masse.

A good rule of thumb is to determine the customer lifetime value and cost of acquisition. Preferably, the reward should be worth 10% to 20% of the price of your product.

For instance, if your product is worth $100, then you can give a cash reward or discount valued at $10. Generous entrepreneurs may offer bigger rewards, but it's not worth it if you don't breakeven from the cost of running your referral program.

A business with a subscription-based model should also consider the average customer lifetime value. You could offer a free three months of subscription for first-time customers. However, it won't be worth it if a good chunk of your customer base don't usually stick around.

At this stage, you likely have a few referral incentives in mind. Now, it's time to iron out the details.

The first step is to identify the triggers for your referral reward. Will brand advocates get a reward for boosting sign-ups? Or will they get the reward only after the referred customer makes a purchase?

To stay on the safe side, start by rewarding brand advocates and referred customers after they made a purchase. This ensures you get something in return. However, you can also let brand advocates earn points or credits based on the sign-ups or clicks they generate through promoting your referral program.

Alternatively, other businesses don't offer a consistent referral reward. Brand advocates may get valuable rewards for their first referral. As they get more customers onboard, the rewards depreciate in value.

For example, the Evernote referral program encourages customers to refer three friends to get three months of their Premium plan. Afterward, they can encourage more friends to earn 5 points towards a free subscription.

The incentives you pick will make a big impact on the results of your referral program.

Begin by planning your rewards system. You can either reward friends or brand advocates—or even both parties. Once you've made a decision, make a list of incentives that could motivate your target audience. Don't forget to factor in the cost and customer lifetime value because you want to make sure you're profiting from the program too.

A good rule of thumb is to give discounts, free subscriptions, or store credit if you're a business that relies on repeat purchases. Otherwise, businesses that depend on a one-time premium purchase can opt for cash or gift cards. Small businesses on a tight budget can also host a contest to motivate their customer base. If you want to make your referral program feel exclusive, you can also offer custom products.

Hopefully, this guide helped you evaluate potential referral rewards for your business.

Now, how will you reward customers?